ESG issues weigh on utility credit ratings, especially PG&E, Edison and FirstEnergy: Moody’s

By on June 3, 2021 0

Dive brief:

  • Environment, Social and Governance (ESG) the considerations have negative credit implications for nearly all electric utilities that own generation, Moody’s Investors Service said in a Tuesday report that examined 71 global holding companies.
  • Moody’s noted that in some cases, ESG considerations are “main drivers” of credit ratings and have highlighted company ratings downgrades assigned to Pacific Gas & Electric, Edison International and First Energy, because of the risks associated with forest fires in the first, and governance issues and a corruption scandal in the second.
  • “We have not defined any company with positive benefits of ESG considerations, ”said Jeffrey Cassella, a Moody’s analyst.

Dive overview:

Moody’s analysis this week represents “Wave 1,” Cassella said, as part of the company’s efforts to quantify the credit impacts of ESG issues on a wider range of businesses and entities.

Moody’s uses an asymmetric 5-point Credit Impact Score (CIS) scale to rate risk, with 1 indicating a positive impact of ESG issues and 2 being neutral. The CIS is developed by analyzing individual environmental, social and corporate governance scores.

“The intention is to gradually roll out ESG scores for all of our rated issuers, but the next wave will be utility holding companies that have no production,” he said, including transportation networks. and gas distribution companies. That set of notes will be released in the fourth quarter or at the end of the third, Cassella said.

Overall, Moody’s new report concludes that “ESG issues have a moderately negative impact on credit on most regulated utilities with production.” For some, however, it is more acute.

PG&E has received a CIS-5, which means ESG issues have a “very strong negative” impact on the rating of an issuer or a transaction. Edison and FirstEnergy have both been rated CIS-4, which means “very negative”.

“The ESG risks for these three entities have been significant in one form or another and have severely affected their ratings,” said Cassella.

There were 50 companies with a CIS-3 score, “indicating that ESG considerations have a moderately negative impact on credit ratings,” according to the report. In North America, only Berkshire Hathaway Energy Co., Hydro-Québec and British Columbia Hydro & Power Authority have obtained a CIS-2. There was no company in the report rated CIS-1, for which ESG questions would be positive.

Among environmental considerations, Moody’s said, regulated utilities with production “are most exposed to physical climate risks, as the increasing frequency and severity of extreme weather events pose potential threats to the financial performance of the sector.”

Consolidated Edison (ConEd) (CIS-3) was part of the utilities, according to Moody’s, “having a very negative exposure to physical climate risks because their service territories are located in coastal regions.” The utility, which serves New York City, ranked higher for environmental risk score and lower for governance risks.

ConEd issued a statement saying “as a coastal energy company we have factored sea level rise due to climate change into our protections and are anticipating further investments based on planned increases”. The utility says it invested $ 1 billion to strengthen its system after Hurricane Sandy in 2012, and is now spending an additional $ 100 million over four years on its power system in Westchester County.

Social risks, including waste disposal and the provision of affordable services, are moderate and largely constant across the industry, according to Moody’s.

In general, governance poses a low risk to utilities, Cassella said, due to the highly regulated nature of the industry. However, he said, there are instances where utilities appear to have taken risks for themselves.

The report notes that “FirstEnergy and Exelon have been involved in corruption scandals in their respective home states, Ohio and Illinois, resulting in their scores very negative for compliance and oversight considerations.”

Exelon Corp., which Moody’s labeled with a CIS-3, issued a statement saying an agreement with the US Department of Justice (DOJ) resolved its investigation into the holding company and utility subsidiary ComEd.

“The offending conduct has been addressed through top-notch corrective actions which include the implementation of new company-wide policies. We have reviewed these policies and controls with the credit reporting agencies,” said a spokesperson for Exelon in a statement.

In response to Moody’s report, FirstEnergy highlighted comments made on April 23 by its senior vice president and chief financial officer Jon Taylor during the company’s first quarter earnings call.

“We continue to provide rating agencies with regular updates on our activities, and we are working with them to develop a clear overview of what is needed to return. [FirstEnergy] investment grade credit ratings, ”Taylor said. “The key milestones include changes in governance and compliance within our company, the resolution of the DOJ investigation and strong credit metrics. “

Neither PG&E nor Edison responded to requests for comment on Moody’s report.

Although it seems so far that no public service has found a way to turn ESG concerns into a net positive, that could change, Cassella said. Many companies face climate risks and are making significant investments to mitigate them, he said. “Their scores could improve in this regard,” he said, as they ditch fossil fuels and invest in clean energy.

ESG issues and their impacts on credit scores can make it harder for companies to issue debt and, ultimately, those costs can pass on to the consumer, Cassella said.

“When these risks become extreme, or very significant, it could obviously impact the utility’s ability to access capital markets,” Cassella said.

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