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Research Announcement:

Moody's: US regulated utilities sector outlook for 2019 remains negative

08 November 2018

New York, November 08, 2018 --

NOTE: On November 29, 2018, the Research Announcement was corrected as follows: The following paragraph was added: "This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history."

Moody's Investors Service is maintaining its negative outlook on US regulated utilities for 2019 due to stalled cash flow growth stemming from tax reform, as well as increasing debt. The combination of financial pressures is expected to keep the sector's ratio of funds from operations to debt down around 15% in the year ahead.

"Stagnant cash flow from tax reform and elevated industry leverage from high capital spending will continue to weaken financial metrics in 2019," said Ryan Wobbrock, a Moody's vice president and the lead author of the report. "Regulated utilities - US 2019 outlook negative amid growing debt and stagnant cash flow."

Following the Tax Cuts and Jobs Act, regulated utilities and their holding companies are losing some of the cash flow contribution that resulted from deferred taxes. At the same time, Moody's expects industry leverage to remain elevated. Most regulated utility management teams have reaffirmed targets for capital spending and dividend growth, which will increase debt at a higher rate than cash flow grows.

Some regulatory decisions from 2018, such as increased equity capitalization allowed in Alabama, Georgia and Texas, will support cash flow generation. Other decisions have allowed utilities to offset liabilities due to the required customer rebates. Certain regulatory decisions, however, offered no new cash flow offsets, or not enough to support historically high leverage metrics.

Several utility holding companies have taken defensive measures like equity issuance, asset sales and capex or dividend reductions to improve cash flow. The majority, however, have not taken action to change their negative credit momentum, which underscores Moody's sector outlook.

Moody's outlooks for 2019 consider fundamental credit conditions that will affect sectors for the next 12-18 months.

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

Ryan Wobbrock
VP-Senior Analyst
PPIF
Moody's Investors Service, Inc.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Jim Hempstead
MD-Utilities
PPIF
Moody's Investors Service, Inc.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
SUBSCRIBERS: 1 212 553 1653

© 2018 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any rating, agreed to pay to Moody’s Investors Service, Inc. for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

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MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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