For the first time since it began conducting sector outlooks, Moody’s Investors Service has downgraded the regulated utility sector from stable to negative. The new outlook reflects a surge in financial risks in the sector as more individual companies in the regulated space funnel funds to debt.

Using an analysis of 42 of the largest U.S. utility and power holding companies and 102 utility operating companies with at least 10 years of financial data, Moody’s concluded in a June 18 report that the outlook clearly points to a “declining financial trend” in the sector. The trend is a function of “higher holding company debt levels incurred in the last few years” as a result of lower cash flows, and “a lower deferred tax contribution to cash flow going forward due to tax reform.”

The credit rating agency’s downgrade is mostly rooted in “degradation” of key financial credit ratios. These include the ratio of cash flow from operations to debt; funds from operations (FFO) to debt and retained cash flow to debt; as well as certain book leverage ratios.…

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