S&P Global Ratings rates not-for-profit retail electric utilities using its "U.S. Municipal Retail Electric And Gas Utilities: Methodology And Assumptions" criteria, published Sept. 27, 2018, on RatingsDirect. These 187 utilities are spread throughout the U.S. (see chart 1) and range from systems with fewer than 10,000 customer accounts to those with more than 1 million (see chart 2).

Chart 1

Chart 2

Chart 3

Rating Distribution

The 'A' category dominates

Chart 4 shows the rating distribution of the not-for-profit retail electric utilities as of Nov. 30, 2023. The median and modal rating is 'A+', consistent with recent years. The medium-investment-grade rating on most utilities reflects our view of their generally healthy operations and finances amid utility-specific and industrywide challenges.

Chart 4

No 'AAA' ratings, but investment-grade the norm

Chart 5, which consolidates ratings by category, shows that no utility has a 'AAA' rating.

Chart 5

We have not assigned a 'AAA' rating to any retail electric utility because of inherent sector risks related to power supply and delivery; the public's, consumers', and regulators' increasing focus on power plant fuels and emissions; tension between rate affordability and financial metrics; and exposure to impactful external factors such as weather events and wildfires that utilities continue to work to effectively mitigate.

Sources of electricity generation have negative attributes. Combustion of fossil fuels, including coal and natural gas, to produce electricity yields greenhouse gases, which exposes utilities reliant on these sources to decarbonization mandates. The mining of coal and drilling for natural gas can also negatively affect natural resources. Nuclear power has repeatedly faced substantial construction challenges and cost overruns, and produces radioactive waste and its attendant disposal challenges. While hydroelectric generation is free of greenhouse gas emissions, it faces other environmental issues related to fish and wildlife and depends on hydrological conditions. Wind and solar generation depend on weather conditions, resulting in intermittency, and dispatch does not frequently align with consumer demand. Wind and solar also require a large land (or sea) footprint, and so are often built far from load and need new transmission lines. Battery energy storage systems, which are in their infancy, are not capable of storing electricity for long durations and require expensive metals whose mining presents environmental issues.

As with the generation resource mix, there are trade-offs between rates and financial performance. The utilities we rate--often departments of city governments--want to keep rates affordable to satisfy customers. These customers may even vote for the body that oversees the utility, such as a city council. However, keeping rates affordable may conflict with achieving stronger financial metrics, including debt service coverage and liquidity, particularly during economic downturns.

Finally, external factors that are sometimes beyond the control of electric utilities to effectively mitigate, such as weather (which is becoming increasingly extreme), state and federal laws and regulations, and geopolitics, can materially affect those entities. In recent years, wildfires, hurricanes, and winter storms have negatively affected utilities in our rated universe. (For more information see "A Storm Is Brewing: Extreme Weather Events Pressure North American Utilities Credit Quality," published Nov. 9, 2023.) While utilities can take steps to reduce the potential damage from these weather events, such events are unpredictable, no utility is immune, and mitigation measures often do not fully extinguish vulnerabilities. Likewise, divining which state and federal decarbonization initiatives will be binding for utilities can complicate long-term planning. Even geopolitics are relevant given that many utilities rely on commodities, such as natural gas, whose price is partly determined in world markets. Utility risk management programs, including such practices as system redundancies, weatherization, and hedging arrangements, can provide some cover against external factors but are not absolute.

While none of the utilities is rated 'AAA', all but one have investment-grade ratings because they have a long track record of meeting financial obligations in full and on time, and we expect this will continue based on the broad adoption of institutionalized policies and procedures including long-term planning, cost recovery, and hedging of fuel and power costs. The utilities benefit from professional management of an essential service, rate-setting autonomy in most cases, and service areas that are largely immune from competition.

Electricity is essential to health and safety, and people expect uninterrupted access. This creates an environment where utility, city, and other leaders work to balance their respective utilities' long-term health with affordability and access to capital markets. Most of the utilities focus exclusively on serving electricity to their customers and do not enter side businesses that could jeopardize utility health. (Some utilities have telecommunication/internet systems that can add to financial risk in instances where these systems compete with other providers in the service area. For more information see "Not-For-Profit Utilities' Broadband Investments Require Enhanced Risk Management," published April 17, 2023.)

Most not-for-profit retail electric utilities have rate-setting autonomy. This means management can adjust rates to achieve sufficient financial metrics without having to enter into an adversarial rate-setting process with a state or federal government body. Nevertheless, management is mindful of the affordability of rate increases, particularly in inflationary periods. For those utilities without rate-setting autonomy, we believe regulators have been supportive in approving rates to cover legitimately incurred costs. (For more information see "North American Utility Regulatory Jurisdictions: Some Notable Developments," published Nov. 10, 2023.) Moreover, with a few exceptions, the utilities we rate do not compete with other electric providers in their service areas, allowing them to change rates without fear of immediately losing customers.

The only speculative-grade utility in our rated universe is Trinity Public Utilities District, based in California. In 2022, we lowered the rating to 'BB+' from 'BBB+' because the district's liquidity position materially deteriorated amid elevated wildfire risk and the district was unable to procure wildfire insurance, leaving it potentially exposed to future liabilities. (For more information see our report published Aug. 23, 2022.)

Rating changes in 2023

Table 1 shows the three ratings raised in 2023 (through Nov. 30); the Santa Clara rating had a positive outlook at the time of rating action. Marshall, Santa Clara, and the Templeton Municipal Light and Water Plant each improved its three-year fixed-charge coverage (FCC) average, resulting in the rating actions.

Table 1

Table 2 shows the seven ratings lowered in 2023. Three--Hopkinsville Electric Plant Board, Morgan City, and Pinal County Electric District No. 4--had negative outlooks at the time of the rating action.

Table 2

Outlooks

Outlooks indicate stable ratings in the near term with some exceptions

The dominance of stable outlooks, as shown in chart 6, means we do not anticipate substantial rating movement in the near term. However, an increasing number of delinquent and uncollectible accounts indicates financial pressures on electric utilities and their consumers.

Chart 6

Of the 13 utilities with a negative rating outlook, two are in Pinal County, Ariz., where drought persists. The drought could negatively affect irrigation revenue as agricultural activity subsides and could reduce the availability of low-cost hydroelectricity. The other utilities with a rating outlook other than stable have credit-specific circumstances and cannot be broadly categorized. Table 3 shows the utilities with rating outlooks other than stable.

Table 3

Key Metric Medians

Assessing operations and finances: Enterprise and financial profiles

In determining credit ratings, we analyze utilities' enterprise profiles (EPs) and financial profiles (FPs). The EP evaluates utilities' operations, including rates, power supply assets, and service area economy. The FP examines utilities' financial health, including FCC, liquidity, and debt. The EP and FP are scored on a six-point scale where '1' is the strongest assessment.

Chart 7 shows the median EP and FP scores by rating. As expected, weaker ratings are generally associated with higher (worse) median EP and FP scores. In addition, the EP and FP scores are correlated: Operational and financial health tend to move in tandem. (In chart 7 and all the charts that follow, we exclude the lone 'BB+' rating in our rated universe.)

Chart 7

Operational metrics: Differences across the rating distribution

In determining EPs, we consider various utility operational characteristics and demographics of the service area, including the number of electric customer accounts, customer concentration, and rate affordability. These characteristics generally show distinct patterns by rating, although we caution that no one characteristic is determinative. Rather, the amalgam of quantitative and qualitative characteristics determines our ratings.

Chart 8 shows the median number of electric customer accounts by rating, with utilities that have more accounts generally having higher ratings. We believe the number of customer accounts both directly and indirectly affects utility performance. Directly, a utility with more customer accounts has greater economies of scale, allowing the utility to produce or purchase power at a more favorable rate and spread fixed costs over a larger customer base. Indirectly, a utility with more customer accounts is likely to have a more experienced and sophisticated management team.

Chart 8

Chart 9 shows the median top 10 customer revenue as a percentage of total operating revenue by rating. We believe that customer concentration is a weakness. The slowdown or closure of a few leading customers could significantly reduce a utility's revenue, limiting the utility's ability to pay fixed costs--such as debt service--that must be paid regardless of sales.

Chart 9

Chart 10 shows the median weighted-average revenue per kilowatt-hour as a percentage of the state average retail rate by rating. The revenue per kilowatt-hour data comes from the U.S. Energy Information Administration. All else equal, we view favorably utilities with lower rates because they tend to have greater rate-raising flexibility to respond to increases in power production and procurement costs and are better able to retain and attract customers. Chart 10 shows that the median rate for 'AA+' to 'A+' rated utilities is below the state average, the median rate for 'A' and 'A-' rated utilities is above the state average, and the median rate for 'BBB+' to 'BBB-' rated utilities is below the state average. The low rates among low-investment-grade credits may reflect the inability of these utilities to raise rates, even if doing so is needed to improve cost recovery and liquidity, as a result of weak median household effective buying income (EBI) in the service area.

Chart 10

We note that a utility's weighted average rate does not directly measure rate affordability. We have seen many utilities raise their all-in rates over the past couple of years as operating and capital expenses have increased. The U.S. Energy Information Administration reports that 2022 saw the largest increase in residential electricity bills in real terms at 5% since data collection began in 1984. In our credit rating analysis, we consider delinquencies and uncollectibles metrics--which median household EBI in the service area affects--for rate-raising flexibility.

Chart 11 shows the median household EBI in service areas as a percentage of the national level by rating. Across the highest ratings, median household EBI differ little. However, median household EBI clearly deteriorates at the bottom end of the rating distribution. In our view, higher income levels are favorable because they generally make it easier for utilities to raise rates when doing so is necessary, ultimately translating into better financial metrics. In addition, utilities that operate in areas with higher income levels have fewer delinquent and uncollectible customers, resulting in greater recovery of billed revenue and less bad debt expense.

Chart 11

Financial metrics: Overall stability from 2020 to 2022

In determining FPs, we consider various utility financial characteristics, including FCC, liquidity, available reserves, and debt to capitalization. (Besides unrestricted cash and investments, available reserves include undrawn portions on committed lines of credit that can be applied to general corporate purposes.) Table 4 shows the medians of these metrics across the utilities over the past three years. The metrics support the relatively high ratings in the rated universe and demonstrate remarkable stability.

Table 4

The stability of FCC across the years reflects rate-setting autonomy and the prevalence of power cost adjustment mechanisms, which allow utilities to quickly adjust retail rates when the cost of purchasing power or fuel changes. This is crucial to maintaining balance between revenue and expenses given that fuel and electricity purchases are utilities' largest costs.

Fuel and wholesale electricity costs were elevated in 2021 and 2022, resulting in increased operating costs for utilities. Table 4 demonstrates the impact: Median available financial reserves increased by 32% over the period, yet days' liquidity decreased by 5%. We note that fuel and wholesale electricity costs have moderated in 2023.

Debt-to-capitalization ratios have not materially changed over the past three years. We note that as renewable resources increasingly dominate electricity generation projects, not-for-profit retail electric utilities have shied away from owning these assets because they have historically been unable to use the tax credits. Our leverage ratios do not capture generation resources for which utilities contract through power purchase agreements. (The Inflation Reduction Act, signed into law in August 2022, changes the status quo and allows not-for-profit retail electric utilities to monetize the tax credits. For more information see "U.S. Inflation Reduction Act Emphasizes Affordability; Credit Implications Across Sectors Are Mixed," published Aug. 18, 2022.) Furthermore, the federal government's future climate policy remains uncertain, making utilities cautious about spending significantly on long-lived assets that might be forced to retire because of decarbonization mandates before they reach the end of their useful lives. Yet the obligation to provide reliable power remains, spurring investment in thermal generation to support growth and complement intermittent resources.

Financial metrics: Differences across the rating distribution

Utilities' FP characteristics show distinct patterns by rating, although we again caution that no one characteristic is determinative.

Chart 12 shows the median three-year FCC average by rating, with utilities that have stronger FCCs generally having higher ratings. FCC is an S&P Global Ratings calculation that treats off-balance-sheet debt service and imputed capacity payments to power suppliers as debtlike rather than as operating expenses to reflect the utility's funding of suppliers' recovery of their capital investments in generation resources. FCC measures a utility's ability to pay its debt service and debtlike obligations from adjusted net operating revenue and therefore is an important factor in our assessment of a utility's health. FCC provides comparability among utilities that finance owned generation and utilities that outsource all or a portion of their supply portfolio.

Chart 12

Chart 13 shows median days' liquidity in 2022 by rating, with utilities that have greater liquidity having higher ratings for the most part. Days' liquidity, which we calculate by comparing utilities' available reserves to operating expenses, allows for a direct comparison across utilities of different sizes. We believe creditworthiness is improved when utilities have sufficient financial cushion for an uncertain future, including the possibility of increases in extreme weather and cybersecurity threats. We view robust liquidity as a vehicle that helps protect lenders when utilities face unbudgeted costs.

Chart 13

Chart 14 shows the median debt-to-capitalization percentage in 2022 by rating. No clear pattern in median debt across the ratings emerges, except that 'BBB-' rated utilities tend to be more leveraged. We believe utilities' leverage is generally manageable, which reflects low new money debt issuance in recent years. As mentioned, the historical inability of not-for-profit utilities to monetize tax credits associated with owned renewable generation and the uncertainty of federal government climate policy, as well as minimal load growth in recent years, have somewhat hampered capital expenditures and, in turn, new money debt issuance.

Chart 14

Utilities have strong credit quality, but challenges lie ahead

Overall, most not-for-profit retail electric utilities in our rated universe have medium-investment-grade ratings or higher, with stable rating outlooks. In the near term, however, utilities are dealing with difficulties that may affect their operational and financial performance. Customer delinquencies, while generally still manageable, have increased as electricity and many other consumer goods have seen significant inflation, reducing customers' purchasing power. Extreme weather is an exposure for utilities even as they work to harden their systems. We will continue to analyze and report on the creditworthiness of not-for-profit retail electric utilities.