Dive Brief:

• A new report from credit ratings agency Moody's Investor Services paints a generally-stable picture of utility holding company finances, though that is heavily dependent on the extent to which revenues are generated by regulated operations.
• Due to swings in commodity prices, the firm believes merchant generation and energy trading businesses have a significantly higher risk exposure.
• While the "vast majority" of North American investor-owned utility holding companies are rated Baa, the agency concluded Exelon and Public Service Enterprise Group have the highest levels of operating risk due to their generation assets in competitive markets.

Dive Insight:

Utility holding company credit ratings are generally steady, but Moody's analysis indicates the firm sees merchant generation as a serious risk to some companies.

"We view businesses materially engaged in energy marketing and trading and merchant generation as having the highest risk profile," Moody's wrote. "Holdcos may also own and operate assets along the electricity and gas value chains that may have varying risk profiles."

The firm said renewable generating facilities "can be low risk investments" when they are backed by long-term contracts with creditworthy customers.

Moody's identified Exelon and Public Service Enterprise Group as having the "highest business risk profiles" of the 34 large holding companies examined, due to their "substantial exposure to merchant generation."

The firm said Exelon's credit profile is constrained by its higher-risk merchant power subsidiary, Exelon Generation Co., which owns unregulated nuclear generation facilities and a retail energy trading and marketing business. 

In addition, carbon emissions are fast becoming a liability that the finance industry acknowledges.

"Utilities that own generation have significantly more carbon transition risk than those that do not, although fuel mix is an important mitigant," Moody's wrote. "Utilities that do not own generation face different, but generally lower, carbon transition risks."

This is not the first analysis to conclude the merchant generation industry is in trouble. Earlier this year, a report from Wilkinson Barker Knauer LLP and the Power Research Group concluded some large generators could be "headed toward a second round of bankruptcies in less than twenty years."