Climate, Cyber and Weakened Balance Sheets
Jim Hempstead and Jillian Cardona work for Moody's Investors Service.
Regulated investor-owned utilities represent critical infrastructure assets, which, in Moody's experience, default at a lower rate than Non-Financial Corporates. But a need to decarbonize amid climate change, the growing risk of cyber-attacks and weaker balance sheets increase the importance of regulatory and governmental support.
Moody's looks at regulated electric and gas utilities as critical infrastructure, meaning they represent the backbone of a functioning economy. As a result, we think governments and regulators will provide extraordinary assistance or intervention in order to support these businesses during times of extraordinary distress. Likewise, given the essential nature of these assets, utilities are popular targets for cyber threats, and because the production of power is carbon-intensive, regulators focus on the sector as a key to mitigating the effects of climate change.
Moody's is looking to provide more transparency in how we incorporate climate, cyber and other key risks in our credit analysis. While the risks may be rising, a supportive regulatory environment is the best mitigation to protect against a fall in credit quality, which makes regulated utilities an asset class that should be relatively resilient to financial shocks.