By Jinjoo Lee
Like almost any other business, American utilities are registering lower demand for what they provide households and businesses due to the coronavirus pandemic. For example, electricity demand will drop sharply this year, led by commercial and industrial customers, according to the Energy Information Administration.
But a thornier financial issue for utilities might be the fact that businesses and households will stop paying their bills as they face financial hardship. Many utilities have stopped shutting off electricity to those that don't pay. While the stack of unpaid bills looks manageable now, it is a potentially snowballing risk investors can't ignore.
The pause on disconnections -- some pauses voluntary, some at the behest of regulators -- is a stark contrast to the 2008 recession, when shutoffs became commonplace as utilities got aggressive about collecting money from delinquent customers. This time around, regulators have ordered utilities to stop cutting off customers in 28 states and the District of Columbia, according to the Energy and Policy Institute.
As people receive their stimulus checks, they are likely to prioritize bills that cause immediate disruptions to their lives if left unpaid. Cable TV and internet, which can still be cut off, are likely to rank higher on the payment hierarchy than electricity, gas and water.
On the one hand, this newfound lenience puts utilities on better footing with regulators, who are going to give them an easier time when they seek to recover those costs later. Many utilities have built-in mechanisms to recover such costs in the future. Similarly, when a natural disaster damages transmission lines, a utility can ask the state's public-utilities commission to increase the rates it can charge customers in the future to recoup the costs of fixing them. In states including Michigan, public-utilities commissions have told utilities to start recording unpaid bills in a separate account so that they can later be reviewed for recovery.
But it also means more people are likely to stop paying. Utilities surveyed by the National Energy Assistance Directors Association have reported that arrearages -- or unpaid bills -- are increasing by anywhere between 20% and 100% compared with a year ago. Mortgage payments, an indicator of household solvency, paint a grim picture, too: Total mortgages in forbearance grew to about 7% in the week ended April 19, a marked increase from the 0.25% for the week ended March 6, according to a survey from the Mortgage Bankers Association.
Delinquencies will get worse given the lagging nature of billing cycles. While businesses and households suddenly without income may have enough saved up to cover their bills in the first month or two, prolonged lockdowns or a deep recession may exhaust them.
Whatever costs regulators allow utilities to recover will come from tacking on payments to existing ratepayers, many of whom also are under financial strain. Regulators and utilities appear benevolent now, but they won't look so good when they raise rates. Being government bodies, the larger the shortfall the more likely it is that not all of the costs will be passed on by regulators.
A look at historical data shows that the share of uncollectible bills as a percentage of operating revenues for Edison Electric Institute member utilities increased in the years following the two previous recessions. Granted, that share didn't hover much more above 0.5% in the most recent recession, and regulators were mostly willing to let utilities recover costs. But the greater sums involved in this downturn could change that.
There also is the question of short-term funding needs. Utilities typically use cash from customer bills to pay line workers and to manage their daily business. So far, most utilities are able to fill that cash hole with relatively cheap debt. A longer-lasting downturn could take that cushion away.
Considering their reputation as defensive assets, utilities are more leveraged than one might think. NextEra Energy Inc., the largest utility holding company by market capitalization, held 4.2 times as much net debt as its earnings before interest, taxes, depreciation and amortization last year, 2.6 times that of the S&P 500 index. That number was 5 for Southern Co. and Consolidated Edison. By contrast, Netflix, which isn't investment grade, sported a multiple of 3.9 times.
An understanding approach towards nonpayment is certainly needed but, without a clear picture of who is going to grab the check down the line, utility investors would do well to keep a close eye on those mounting bills.