OREANDA-NEWS. The record low natural gas prices reported yesterday will continue to benefit most public power and electric cooperative issuers, Fitch Ratings says. Fuel and interest costs are among the largest expense items incurred by public power utilities. Higher interest rates could offset some of the price benefits over the long term. Yesterday's rate action should have only limited effects in the near term.

We expect low natural gas prices to support strong operating margins and provide headroom for rate increases necessary to mitigate other escalating costs and, in some cases, lower total charges to ratepayers.

On Tuesday, natural gas prices fell to levels last seen in 1999. Fitch lowered its 2016 forecast assumption for US natural gas earlier this year to $3.25/mcf, reflecting increasingly efficient US shale production and lagging demand growth. Fitch's longer term price forecast was lowered to $3.75/mcf from $4.50/mcf, with stress case prices falling below $3.00/mcf in most years. Operating efficiencies have also driven Fitch's 2016 base case price for crude oil to $60/bb. Although oil-fired generation accounts for less than 1% of total US energy production, prices will continue to influence natural gas fundamentals and, to a lesser extent, electricity consumption.

Yesterday the Federal Open Market Committee voted to set the new target range for the federal funds rate at 0.25% to 0.5%, and forecasted a rate of 1.375% by the end of 2016. Short-term rates at this level will not have an impact on public power issuers as the median ratio of variable rate debt to total debt totals only 9.0% for the entire Fitch-rated portfolio of public power issuers. Nearly all of the debt issued throughout the sector since 2009 has been fixed rate, including 98% of 2015 issuance through June.

Although a steep, unexpected rise from current levels remains a longer term concern for the sector, prudent hedging strategies typically adopted by most public power issuers and relatively stable capital structures should protect margins and coverage metrics against any sudden upward price movement over the near term.