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S&P: Utility Ratings Stable, Regulators Key to Capital Needs

Utility credit ratings stayed unchanged in the fourth quarter last year, and they will continue on that track this year, according to a report released Friday by Standard & Poor's Ratings Services. Its title summarizes the rating agency's conclusion that all is calm: "Despite Demands for Increased Capital Spending U.S. Utility Ratings Should Remain Stable."

Since its last quarterly assessment of the utilities as a group -- electric, natural gas and water providers -- in an Oct. 25 report, S&P has made no rating changes, up or down, among utilities nationwide. Overall, 21 utilities were upgraded last year, and 20 had their ratings lowered.

"A general refocus by the industry in recent years on restoring balance-sheet health and selling noncore business operations has enhanced [the utilities'] ability to withstand the pressure that substantial capital spending will bring," according to S&P credit analyst Richard Cortright.

The S&P report stressed the utility sector still faces the need for "higher capital spending" tied to a combination of increased reliability and environmental requirements.

A wild card could be how state regulators respond to the utilities need to recover capital expenditures to address shrinking reserve margins and aging infrastructures, the S&P report emphasized. The rating agency said it expected most utilities to seek pre-approvals for what collectively will be billions of dollars in new capital outlays.

"With 57% of the industry carrying a stable outlook, we expect rating changes to remain low in 2007," said Cortright, who added that one element that could change this outlook would be another ramp up in merger/acquisition activity, which was dampened late last year with the failure of two high-profile mergers.

Last year was the first since 1999 that upgrades in utility ratings outnumbered downgrades, albeit by one. Rates are expected to generally trend upward, not only because of the capital spending pressures, but because of the general revitalization of the wholesale power sector, as reported Tuesday in the Wall Street Journal.

"As with the utility sector, we have not changed any ratings in the merchant power sector since our last report card," the S&P report stated. "What could change this in 2007 and beyond is a general consolidation among merchant generators, which we expect will occur despite the failure of Mirant Corp.'s proposed hostile takeover of NRG Energy Inc. in 2006."

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