Determinants of Credit Ratings in Investor Owned Utilities

Open Access
Author:
Danik, Connor
Area of Honors:
Energy, Business, and Finance
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • Seth Adam Blumsack, Thesis Supervisor
  • Farid Tayari, Faculty Reader
  • Seth Adam Blumsack, Honors Advisor
Keywords:
  • Investor Owned Utility
  • Credit Ratings
Abstract:
The utility industry is considered stable. Although utilities work with regulators to recover their costs, there is a wide variation in a utility’s creditworthiness. Utilities who consistently recover their costs have higher credit ratings and are stronger financially. A credit rating is not only important to investors, but also relevant to the public. Credit ratings are important because they affect the cost of financing. Utilities who have lower credit ratings face higher costs of debt. As a result, this affects a utility when it has to invest in infrastructure and make other adjustments to the grid. These costs eventually get passed down to ratepayers and it is in the best interest of investors and the public for utilities to have strong credit ratings. This paper analyzes what factors contribute to an investor owned utility’s credit rating from 2012 to 2017. Using the Edison Electric Institute (EEI) as a resource for credit ratings, we selected different financial and operational factors that determine a credit rating. Some of the areas that we focused on were profitability, debt, regulator relationship, fuel, and customer diversity. After reviewing the different credit rating agency (CRA) guidelines, these were the five factors that were shared. Using econometric models and two regressions, this analysis shows that the regulatory environment, interest coverage, and return on equity (ROE) help determine a company’s credit rating. It also shows that having a diverse fuel portfolio is beneficial to achieve higher credit ratings. In addition, using fuels such as coal and oil, which have a higher environmental impact, does not guarantee a lower rating. However, companies who suffer the lowest credit ratings have a high concentration of coal. Furthermore, improving the interest coverage ratio and regulator score seems to be the most important factor for companies to achieve higher ratings.