May 8, 2014 / 1:35 PM / in 3 years

RPT-Fitch: U.S. Utilities Face Modest Exposure to Rising Interest Rates

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May 8 (Reuters) - (The following statement was released by the rating agency)

U.S. utility companies are well positioned to manage additional cost burdens associated with an inevitable rise in interest rates, according to a new Fitch Ratings report.

The credit profile of the capital-intensive utility sector closely parallels the level and direction of interest rates. A low-rate environment has a salutary effect on a utility's credit profile as the weighted average cost of capital is reduced and revenue requirements under authorized rates of return are lowered. Interest expenses are among the largest nonfuel expense items incurred for utilities.

As short- and long-term rates move higher following the Federal Reserve's completion of tapering, Fitch expects little pressure on corresponding earnings or cash flow. Current marginal financing costs remain below the industry's average interest expense. The industry carries mostly longer-term debt issued during a time of high prevailing interest rates.

Utilities have benefited from the low interest rate environment by rolling maturing debt over. With strong capital market access, utilities have a long lead time to plan expected future financings.

Fitch believes the narrowing window on low interest rates may accelerate the moderate consolidation pace for the industry. Low interest rates have bolstered utility equity valuations, which in turn supported the rising multiples paid for acquisitions. A move to higher financing costs, particularly for leveraged transactions, will likely soften the acquisition pace.

Fitch also notes that the current capital investment cycle is at or near a peak, with environmental upgrades complete or in the latter stages of completion. Weak electricity sales growth forecasts have lowered the need for new generation and transmission, although some transmission and renewable investments will remain elevated.

The full report 'U.S. Utilities: Little Interest to Rising Rates' is available at 'www.fitchratings.com.'

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