Power companies should have no problem refinancing maturing debt in the near-term despite the current credit crunch, given the improvement in the sector over the past couple of years, according to a new report issued by Standard & Poor's (S&P).
"We concluded that the power sector's fundamentals have improved sufficiently during the past several years so that most, if not all, companies should be able to refinance pending maturities despite the credit markets' current unsettled nature," said S&P credit analysts in the report titled "The U.S. Power Sector Appears Well Positioned to Manage Near-Term Refinancing Requirements."
The market has improved significantly since the power crisis of 2001-2002, when many large power companies experienced rapidly declining cash flow and deteriorating investor confidence, leading to a liquidity upheaval, the S&P report said. Since then, "fundamentals have strengthened in most U.S. power markets due to improving spark spreads (the relationship between the price of electricity and the price of the fuel used for generation) and higher energy and capacity values that coincided with declining reserve margins," it noted.
"Also, accounting irregularities and escalating trading losses no longer afflict the sector, and collateral calls have meaningfully declined...Utilities and power companies have strengthened their balance sheets, attracted longer term financing for their asset base -- usually with low interest rates -- and refinanced their revolving credit facilities at higher levels for five-year terms, at tighter prices, and on very favorable conditions."
At the start of 2007, the S&P credit analysts estimated the U.S. power sector faced almost $90 billion in debt maturities between 2007 and 2009 out of its nearly $500 billion in debt outstanding.
The top five power companies with the most debt maturing between 2008-2010 are Duke Energy Corp. ($5.2 billion), AES Corp. ($4.1 billion), Exelon Corp. ($4 billion), El Paso Corp. ($3.6 billion) and Dominion Resources Inc. ($3.26 billion), the report said.
The credit ratings agency ranked the top 25 power companies in terms of refinancing requirements for 2008-2010, noting that they accounted for about 75% of the total refinancing in the three-year period. It noted that the "number of speculative-grade unregulated companies on this list has declined in the past few years."
The reasons for the lower number of speculative-grade credits on the list "vary from an improved credit profile and commensurate reduction in refinancing risk to filing for bankruptcy protection and subsequent reorganization," the S&P report said.
"In 2002 and 2003, among the top 10 companies most at risk for refinancing in the following three years were NRG Energy Inc., PG&E National Energy Group Inc., Dynegy Inc., Black Hills Corp., Calpine Corp., Mirant Corp., Allegheny Energy Inc. and Reliant Resources Inc. Four of these companies subsequently filed for bankruptcy and three have since reorganized. Others, such as Reliant and Allegheny, negotiated refinancing or extension packages, providing them time for asset values to improve as power markets recovered."
The top five companies with long-term debt maturing this year are Dominion Resources ($2.59 billion), AES Corp. ($2.13 billion), MidAmerican Energy Holdings Co. ($2.1 billion), FirstEnergy Corp. ($2 billion) and FPL Group Inc. ($1.63 billion), according to the S&P report.
S&P does not believe that investment-grade utilities will face many refinancing issues. "For instance, companies such as Dominion Resources Inc. that are flush with cash from asset sales should easily manage their relatively high short-term refinancing issues. Similarly, we do not expect Public Service Enterprise Group Inc. to refinance a $460 million trust preferred refinancing in November 2007; rather, we expect the company to rely on cash flow generated by PSEG Power LLC, its power supply subsidiary, to retire that maturity."
However, "we expect refinancing of speculative-grade maturities to be more challenging in the short- to medium-term as investors demand a higher risk premium," the report noted. The speculative-grade merchant generators facing the greatest exposure to refinancing risk are: Mirant, AES, Dynegy Holdings Inc., Edison Mission Energy, NRG Energy and Reliant Energy, S&P said.
S&P believes the power sector as a whole may take on more debt to finance capital projects in the next few years. The top 25 power companies listed by S&P spent $45 billion on capital programs in 2006 alone, "but with a strong prevailing business climate many were able to fully finance these needs and still generate free cash flow not just in 2006 but for several years prior as well," the report said. "However, Standard & Poor's estimates capital spending requirements for the sector to increase to $50 billion to $60 billion per year through 2009. These expenditures represent a competing use of operating cash and will often require additional debt issuance."
What does the future hold? "We believe that refinancing risks for the power sector will remain relatively muted. However, the recent extraordinary period of enormous liquidity enjoyed by borrowers that drove spreads down to historic levels, and the willingness to sacrifice most traditional financial maintenance and other covenants, is over. While refinancing should generally not be a concern for the sector, repricing of risk could pressure some companies' credit metrics...Nevertheless, the power sector's near- to intermediate-term refinancing obligations appear manageable."
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