Electric, gas, pipeline and water utilities finally can rest a little easier after a significant decrease in the pace and scale of negative rating activity by credit rating agencies in 2004, Standard & Poor’s (S&P) said in a new report titled “U.S. Utility Downside Rating Actions Moderated Significantly in 2004.”

The collapse of Enron Corp. and the decline of the merchant energy sector came during a period of significant credit rating changes. There were 147 rating changes (139 downgrades and eight upgrades) in 2003, an unprecedented 197 rating changes (182 downgrades and 15 upgrades) in 2002, and 110 rating changes (81 downgrades and 29 upgrades) in 2001.

But after that tumultuous period, last year was relatively calm. There were only 33 downgrades of holding companies and operating subsidiaries, compared with 18 upgrades, during 2004, S&P said. In the fourth quarter alone, there were nine downgrades and six upgrades.

“In addition, the actual number of outlook changes and new CreditWatch listings, while still predominately negative, declined dramatically in 2004,” said S&P credit analyst Barbara Eiseman.

The emergence of stabilizing conditions occurred as a result of “stronger balance sheets, increasing free cash flow, improved liquidity, large common stock issuances, expectations of sustained profitability and a back-to-basics approach whereby certain companies sold their riskier, unregulated assets,” the agency said in its report.

Several other themes surfaced in 2004, including the rising importance of regulatory decisions in some states, the increase in merger and acquisition activity, lower interest rates and attractive debt capital markets.

State ratemaking processes have become more prevalent in driving ratings. For example, regulatory rulings were meaningful factors in the downgrades of DTE Energy Co. and IDACORP. S&P noted that opposing views on electric restructuring issues, regional transmission organizations and merchant power generation have led to more regulatory uncertainty.

Despite the positive trends in 2004, “challenges associated with weak credit metrics and stagnant power markets in many regions pressure certain issuers’ financial performance,” S&P added.

The average rating for the U.S. power industry and energy sector as a whole remains solidly entrenched in the mid-‘BBB’ category, S&P said. The ratings distribution has not changed much over the past 12 months, with about 48% of the sector carrying ratings in the ‘BBB’ category and roughly 35% rated ‘A-‘ and higher.

However, the percentage of companies with speculative-grade ratings has marginally declined to 17% versus 18% one year ago, reflecting six entities coming out of bankruptcy.

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