OREANDA-NEWS. December 16, 2015. Fitch Ratings says in a new report that its sector outlook for the U.S. Utilities, Power and Gas sector remains stable, reflecting a continuation of a favorable macro backdrop for utilities with low interest rates, declining natural gas prices, and broadly supportive state regulation. Fitch expects elevated capex trends at electric utilities to temporarily subside, alleviating pressure on credit metrics.

At the margin, however, negative rating pressure emanates from aggressive deal-making, Fitch's dim outlook for wholesale power prices, an uncertain sales outlook, and longer-term ramifications of the Clean Power Plan (CPP).

Fitch expects the consolidation trend in the sector to continue as companies look to offset weak demand and declining returns. Reducing exposure to unregulated businesses for select diversified utilities and an emerging trend of electric-gas convergence are other drivers. The increased use of acquisition debt, rising transaction premiums (around 48% for the last-announced Duke Energy/Piedmont Energy deal) and regulatory concessions and pushbacks (Exelon-Pepco) are primary credit concerns. These are only partially mitigated by the scale and geographic diversity the target company brings to the combined entity.

Low natural gas prices have been a boon for utilities, providing headroom in retail rates to push for rate increases to recover other infrastructure investments. We recently cut our long-term gas price to USD3.50 per thousand cubic feet (mcf), from USD3.75/mcf, reflecting pricing pressure in the eastern U.S., from low-cost shale gas. However, wholesale power prices, which are highly correlated with natural gas, have fallen materially this year with little respite in sight, in Fitch's view. This, combined with weak electricity demand and robust reserve margins in most nonregulated markets, is underpinning Fitch's negative outlook for the competitive generation companies within the overall sector.