David Bodek: To sustain financial strength, utilities need to recover the elevated capital and operating costs from their customers. But, this is happening at a time that many customers are experiencing financial strains in other areas. They don’t receive electric bills in a vacuum, and this can impede rate making, and it could translate into weaker financial performance at electric cooperative utilities.
Teri Viswanath: That’s David Bodek. He’s a managing director with S&P’s rating division, and today’s discussion will focus in on how utility credit headwinds are developing for 2026.
Hello. I’m Teri Viswanath, the energy economist at CoBank, and I’m joined by Power Play’s co-host and a managing director here at the bank, Tamra Reynolds. Hey, Tamra.
Tamra Reynolds: Hey, Teri. For this program, we also have a special guest, Rob Galena, who leads our power, energy, and utilities credit group at CoBank.
Viswanath: Hey, that’s great, Tamra. I wanted to ask questions of you as a regional division leader with our electric distribution banking team, and also of Rob — questions about the credit environment that are developing this year, and have him help shed further light on the insights that David’s going to provide us. Hello, Rob, and thank you for joining the program.
Rob Galena: Hey, Teri and Tamra, thanks for having me. This conversation on the evolving credit environment that we find ourselves in and how our customer owners are meeting these challenges continues to be top of mind as we begin the year. I’m excited to be here and have this discussion.
Reynolds: Great. Let’s jump into the conversation with David.
Viswanath: We’re really excited to start off the year with David Bodek, who is the managing director at S&P Global. It’s a ratings division and sector lead for the electric, cooperative and utility division. David, first of all, thanks so much for being on our program.
Bodek: Thank you. Thanks for inviting me to join you for the podcast today.
Viswanath: As you think about the headline themes shaping the S&P Global ratings outlook for the electric co-op sector in 2026, what are the top ones that come to mind?
Bodek: Electric rate affordability has become a national political issue. In turn, because of affordability, rate-making flexibility could be diminished. Some of the strengths that we had historically associated with autonomous rate-making authority, electric rates are going up very sharply, and more so than the broader consumer price index. Utilities are engaged in a build cycle and facing higher capital and operating costs, increased tariffs, increased insurance costs, and the list goes on. From the perspective of utilities perpetuating some of the financial metrics that they have produced in the past, we see challenges facing utilities.
Reynolds: When you think about the balancing priorities between affordability on the ratepayer side and the need to collect the right amount of revenue on the utility side, what do you think about balancing that? And how are they going to have to answer to that with the commissions when that comes to bear if the cases move on this year?
Bodek: Most of the cooperative utilities that we follow have autonomous rate-making authority. Some are subject to regulatory oversight of their rates. We’re seeing whether the utilities have autonomous rate-making authority or they’re subject to rate regulation, that there’s a sensitivity to raising rates. There have been member discord issues at a number of cooperatives because of what are perceived to be high rates. We’ve seen increased reliance on rate stabilization funds to help the utilities avoid or mitigate rate increases. There’s certainly an acknowledgement by the utilities.
Those who set rates for the cooperatives have to think about access to capital. The utility industry is a very highly capital-intensive industry. Those who set rates, whether it’s a regulator or whether it’s a board, need to think about the affordability of rates for their customers versus the cost of accessing capital. Perhaps in this economic environment or this inflationary environment, it’s worthwhile absorbing a slightly higher cost of capital just to mitigate the rate increases that otherwise customers might face.
Viswanath: Also, something you’d mentioned, you teased at the top of our discussion, this fact that we are seeing load growth. We just got the NERC Long-Term Assessment out, and the organization has increased their numbers over the next 10 years from 132 gigawatts of growth to 224. We’re seeing some pretty impressive numbers. How does it impact electric cooperatives? What are your thoughts here about this?
Bodek: There are many disparate projections of load growth, but even with all the differences in the projections, the common theme is electric utilities are facing load growth. Some of that is attributable to data centers, and some of it is attributable to economic activity. One of the benefits of load growth is that there are more customers or more megawatt hours over which to spread the costs of building infrastructure to support the load growth, and that’s a mitigating factor.
But some of the capital expenditures that cooperative utilities are undertaking is not related to load growth. That includes decarbonization, storm hardening, replacing aging assets. That’s where the cost pressures can land on customers without a mitigating factor because, again, these infrastructure investments do not bring with them more megawatt hours over which to socialize the costs of the infrastructure investments.
Viswanath: Hey, hold up. There are some really important points that David is laying out for us that I really need to unpack. Tamra, you cover a few states where electric distribution co-op rates require regulatory approval. I’m thinking of Louisiana and Arizona.
Reynolds: Yes, Teri, that’s right. Those are the top two most people think about, but don’t forget about Arkansas and New Mexico as well.
Viswanath: Oh, that’s right. Hey, David seems to suggest that it doesn’t really matter whether an electric cooperative has autonomy or is subject to regulator approval. There’s pushback from the membership for all cooperatives, and that’s the position they all find themselves in. Do you agree with that assessment?
Reynolds: Yes. I think David’s not necessarily saying that they face different challenges, whether they’re self-regulated or if there’s a commission. I don’t think anyone likes to pay more for anything in their lives, especially things that feel like basic services or things that are quality-of-life driven. The fact remains everything is more expensive than it used to be.
When we think about the world around us where we’re seeing investments being made in infrastructure and we’re thinking about some of the fundamental changes we’re seeing in the electric space overall, when you think about data centers, you think about supply chain challenges, and you think about growth in these rural territories, in these rural areas — those are all things that contribute to needing to address rising costs and pressures that face there. It doesn’t matter whether you’re a co-op in Oklahoma or Texas or somebody that’s in Arizona or New Mexico. The challenges persist across the broader region, and some are exacerbated in some areas in particular.
Viswanath: That’s helpful. The two other points that David makes that, hey, Rob, I want you to address is that it might be better for our co-ops to absorb a slightly higher cost of capital just to mitigate the rate increases that these members might otherwise find themselves facing, and that costs like replacing aging infrastructure, storm hardening, decarbonization — well, they’re simply added costs. Even if we might be able to spread those costs across more electricity sales, and I’m thinking about new data center interconnection requests, that these costs for our co-ops are inescapable. Can you discuss these two issues for us?
Galena: Sure. I’ll start with the second point, those costs that you and David mentioned is inescapable, and they definitely are, but they’re adding to our liability and safety. It’s hard to argue against that benefit for members, even with the natural tension of these costs on rates. On the first point, about how to use the right financial levers when setting rates, yes, that’s a really interesting concept. I’ll try and expand on that a bit from a credit perspective.
The idea of borrowing more and the co-op absorbing the impacts of increased borrowing as opposed to maybe legacy recovery mechanisms — that might be more suitable for the membership in the current environment that we find ourselves in. I am the credit manager, and I’m not ever going to advocate for weakening credit quality. However, I’ll always advocate on what’s best for the membership and a cooperative organization as a whole, as long as it’s in a practical and prudent manner.
As a cooperative lender, we have a vested interest in our customer owners, and we want to help be a piece of the puzzle in meeting these challenges. I’m also from rural America, and I understand the impact that electric bills have on households. For an electric co-op, there might be circumstances where balance sheet capacity is strong, and there’s sufficient liquidity available, or the co-op might have a very strong rate structure.
In those circumstances, the rate pressures today can be borne by the co-op over a longer period of time instead of the membership. That’s the lead-in for the three key areas that are top of mind for my team this year as it relates to the credit environment, and I already named all three: That’s liquidity, balance sheet health, and rate structure. If you put it all together, it’s essentially financial flexibility.
Thinking about liquidity, as CapEx budgets are increasing, for all the reasons we’ve discussed, how closely is a co-op following its strategy? Has it changed at all over the last year or two with the changing capital plans? And do they still have the ability to react to events that might be unexpected in light of all these rising uses of cash? We think about liquidity from a long-term and a short-term perspective. What’s the rate structure and the rate strategy of the co-op?
Whatever the pressure point might be, whether it’s inflation, capital spending due to those inescapable costs, or investment with large C&I load growth, or all of the above, is there a way to adjust rate structures to ease the impact on members while protecting the financial profile? And then balance sheet capacity. Can the co-op maybe lower its target equity position while maintaining sufficient risk-absorbing capital? I’ll say that co-ops are really well-positioned in this and really all of these areas. Because of that, we see that our members can be strategic in pulling these levers of financial flexibility to offset some of the affordability concerns and meet the challenges we’ve discussed.
It seems simple, but credit principles are the same, even if it’s a new environment that we consider. We talk about the era of high costs, but it’s also the era of large loads, where you’re hearing how a small number of new meters can double a load profile. That’s really impactful. It provides an opportunity in lessening the burden on existing members and actually improving credit profiles, but there is a risk in these loads over a longer period of time. Are there robust financial and credit safeguards in place? What’s the rate structure? What’s the balance sheet position? What’s your liquidity profile? That’s what I’m watching this year.
Viswanath: That’s really helpful. I appreciate the insights you and Tamra bring to the table. One thing that David expands on here is he talks about the risk that we’re highlighting of these large loads. He speaks to the risk awareness mindset of the co-op management teams. Here’s what he has to say about that.
Bodek: In terms of data centers, cooperatives are sharing with us that they’re receiving expressions of interest that are sometimes multiples of their peak demand from their native customers. One of the concerns is going to be potential for overbuild. In the 1980s, there were a number of cooperatives that built in anticipation of growth that didn’t materialize. The 1980s saw erosion of financial performance at several G&T cooperatives. That remains a concern in terms of anticipatory investments that might or might not align with the realization of additional load. The cooperatives aren’t necessarily better positioned, but at the same time, we look to management and whether they have long memories of what happened in the 1980s.
Viswanath: If we think about the automotive machinery industry that we overbuilt for in the Midwest, the textile industry in the Southeast, the aluminum smelters in the Pacific Northwest, we did have write-offs of infrastructure we thought we would need, but we ultimately did not. I think you’re bringing up a really good point about concerns of overbuilding a system. And I think what you’re saying is that it’s more how the management teams are thinking about the practical aspects of making sure they don’t over-commit to infrastructure in the face of load that may not emerge. Are there any other areas that you think, not necessarily differentiators, but are common threats at the way that we approach this large-load era?
Bodek: Because of membership ownership at cooperative utilities versus investor-owned utilities, I see a greater sensitivity to protecting legacy or native load customers from potential cost shifting that could occur with the addition of large loads. Because of this, the electric cooperatives are looking at several different pathways to protect their customers. This could include large-load tariffs or passing through market costs for serving these customers. Some, in fact, might work to preclude adding data centers to their customer bases.
Reynolds: David, I want to switch gears a little bit. We’re five weeks into the new year, and we’ve already seen a pretty massive winter storm that has devastated some areas of the country. When you guys are thinking about resiliency investments and things like insurance costs, how are you evaluating what that risk looks like?
Bodek: When we think about Winter Storm Uri, and more recently, the Winter Storm Fern, it shows the importance of weatherization by utilities. Texas was particularly hard-hit, and it drove home for electric cooperative utilities the importance of weatherization. It also drove home the point of coordination between the electric utilities and the gas utilities because gas infrastructure was an Achilles heel for the electric utilities during Uri. During Fern also, we’re seeing highly elevated natural gas prices.
While outages can hurt the bottom line, it’s not just outages that are of concern. It’s the sourcing of power and gas that could erode financial performance. There are cooperative utilities that have, what I would refer to as just-in-time procurement. They have short positions, and when they see a storm event coming, whether it’s extreme cold during the winter or extreme heat during the summer, they source additional supply, but whether that supply will be available might be questionable, and the cost of that supply also could be a challenge.
Having adequate liquidity to smooth out these disruptions is also of the utmost importance for electric cooperative utilities. Insurance is becoming more costly, and that too is a concern as those costs get passed through to customers. There are so many other inflationary pressures on electric bills, and when you add in the cost of insurance, it just exacerbates the problem.
Viswanath: I want to pick up on that resiliency discussion in a little different way. David, what are your thoughts about how the resource mix is shifting for G&T cooperatives? What do you see as the biggest risk — or maybe opportunities — about some of the changes you’re seeing with regard to the type of power plants that we’re going to build in this next new build cycle?
Bodek: Teri, you’re asking a great question. There’s a lot of interest in clean resources. Clean is laudable, but it’s not necessarily technologically feasible for supporting reliability, and it might not necessarily be economical. There are utilities that are saying, “We hear you, we hear our stakeholders who favor clean resources, and we would like to pursue clean resources. At the same time, we want to provide reliable and economical energy.” I saw a recent quote from a utility executive who said, “You can’t run a modern electrical grid on wind, solar and lithium-ion batteries. You need dispatchable resources, and intermittent resources have their shortcomings.”
Viswanath: Just having the winter, seeing the gas spike, also having quite a bit of LNG that’s being developed at the moment, concerns about where we can find a safe harbor for low cost anywhere.
Bodek: If I could just add to that, in terms of LNG, moving it around the country is difficult because of Jones Act provisions. Then LNG also has a pile-on effect because much of the LNG goes abroad, which has a supply-demand impact, which makes it costlier for domestic utilities. Then going back to the focus on gas turbines, there’s been a lot of discussion in terms of resources, that data centers should “bring their own power” and to insulate the grid and other utilities from data center loads.
But at the end of the day, asking data centers to bring their own gas turbines just compounds the demand for those gas turbines, and many of the manufacturers of gas turbines have reached maximum production capacity. So whether it’s a utility or a data center that’s purchasing the gas turbines, it just creates more demand, drives price up, and that will impact utilities and their resource decisions over the coming years, and it’s also going to impact customer bills.
Viswanath: We keep coming back to this. We’re not seeing a silver lining with regard to cost. The cost seemed to be this unmovable object in the equation.
Bodek: Agreed. Because utilities are capital-intensive and because they need to recover costs from their consumers to achieve sound financial performance, they have to look to their consumers at a time that consumers are facing many financial pressures, and so the convergence of the build cycle with the economic environment is suboptimal.
Reynolds: What kind of trends are you guys observing around the G&T co-ops cost structures? A secondary question to that, we’ve seen some G&T co-ops and distribution co-ops break up over the last decade or so. How do you think that maybe challenges or changes that notion between the two organizations to maybe work more closely together in an environment where power’s a little bit more scarce?
Bodek: Wholesale prices are just going up, and it’s a direct function of the imbalance between generation resources and the demand that’s evolving. Moving to the second part of your question in terms of member discord, we’re seeing increasing instances of member discord. This includes members who have moved to pay exit fees and leave the G&T cooperatives. It also includes instances of members saying, “I want to transition from being a member to being a customer,” whereby these members are saying that, “I want to continue purchasing power from the G&T, but I want optionality over the long-term.” This is chipping away at the cooperative model on a going-forward basis.
Viswanath: David, you bring up a really good point, though, especially when we see what’s occurring in Texas. These large loads are larger in scale than the utilities or cooperatives that are serving them. Do you see that there’s a possibility that now banding together simply because of the nature of the emerging customer, the data center that we may have to provide power to, that there might be some benefit in size?
Bodek: The response to that, the points that you raise, has not been uniform. If you think of Northern Virginia Electric Cooperative, they saw the opportunity to embrace the migration of data centers to Northern Virginia and go it alone. That’s not to say that the other cooperatives within the ODEC family are not going to see data centers. In fact, the anticipation is that there is a lot of attraction to the ODEC service territory.
There are some small cooperatives that are anxious to take on or add data center loads. They’re positioned to do so because of the availability of land and water. If the data center is willing to absorb the costs of market power, buy-through power, the cooperative might not have to add resources or band together with others to develop new resources. There are concerns for some of these smaller cooperatives as they take on these large loads because of the customer concentration that they might experience.
Another concern is many of the data centers, particularly at co-location sites, enter into short-term lease agreements, and the relationship between the data center and the tenant might be short-lived. Will the cooperative serving them be left holding the bag, so to speak, in terms of stranded assets of infrastructure that they’ve put in to serve the data center? Even where the power is buy-through power, market power that the data center pays for, transmission is needed to convey that power to the data centers. And the question becomes, who’s paying for those common facilities for upsizing the transmission network? And is there going to be cost shifting there?
Reynolds: Teri, I liked your creative thought on we have to do this together, but there are certainly circumstances that are going to dictate that maybe a different path is warranted. I think that played out very clearly in a lot of the research that you pulled together. There’s definitely not one way to skin the data center cat. If you have four co-ops, there’s four ways.
Viswanath: Those are excellent points, David. I think you’ve given us a lot to think about. I want to thank you so much for your insight and time. We appreciate the work you’re doing over at S&P Ratings.
Bodek: Thank you so much for inviting me to join you today.
Reynolds: That was a terrific discussion. Rob, from a credit perspective and the outlook on lending for 2026, what are your takeaways from our interview with our S&P Ratings expert?
Galena: From a lending perspective, I see opportunity to support our members given CoBank’s inherent flexibility and how we understand these challenges, even the ones not mentioned today. What I’m hearing from David and seeing across the industry is that we are in a multifaceted and challenging time period with many factors that cause natural tension. You have rising costs, more volatile power markets due to a range of issues, rate affordability concerns and sharp load growth in certain areas.
It turns out that rate flexibility might not be as flexible as it’s been in a long time, and that can impact credit metrics and ultimate recovery horizons. Load growth can help with cost allocation and supporting members, but it’s not without risks. This means more economic activity in rural America, which is fantastic, but discipline and safeguards are still going to be critical to maintaining credit profiles. I’m really excited at the opportunity to serve our customer owners in meeting these challenges head-on.
Viswanath: Tamra, I want to know, what can CoBank do in this area? What can you and your team do to help out here?
Reynolds: I think Rob summed it up really well, that we’re really well-poised to support customers through a number of the issues and challenges that they might face, and some opportunities depending on how you’re looking at it. I think it really comes down to being a reliable, trusted partner that they can count on, and that’s something that we believe that CoBank brings to the table for the electric cooperative industry overall.
Viswanath: Hey, so sorry, partner, for putting you on the spot, but I appreciate that, and Rob, also your comments. I hope all of you have enjoyed this conversation about the credit challenges this year and will join us next month when we further explore the community benefits and costs for attracting those large loads like data centers and manufacturers. Goodbye for now.
