Only one energy company, Empire District Electric Co. of Joplin, MO, had its credit ratings downgraded during the last quarter, while three other major energy companies were upgraded, Standard & Poor’s Ratings Services (S&P) said Monday in a second quarter report. The ratings firm called it the “strongest surge” in years.

Continued improvement and stability in the utility and merchant power sectors will be determined by several key factors, including merger and acquisition (M&A) activity and regulatory rulings, S&P noted in its report.

“The utility and merchant power sectors’ credit quality for the rest of 2006 will depend largely on a few significant factors, including fuel cost recovery in a high fuel-price environment, M&A activity, and regulatory rulings regarding post-transition market structures,” S&P credit analyst Richard Cortright said.

“Key decisions that regulatory commissions must make regarding the end of lengthy rate freezes and industry transition periods will also affect future credit quality for both [utility and merchant] power sectors,” he said.

In the latest quarter, S&P said some of the key factors included “more organic developments, such as improving financial performance and business strategy revisions” among electric, gas, pipeline, and water utilities. The overall outlook for the quarter is summarized in S&P’s report “U.S. Utility Second-Quarter Upgrade Surge Is Strongest in Years.”

The Williams Companies Inc., El Paso Corp. and Northern Border Partners were the companies getting higher ratings during the quarter. S&P’s report cited Williams as demonstrating “improved financial metrics principally from deleveraging,” along with improved operating performance. For El Paso, the rating agency liked the company’s “refocused strategy” on its core pipeline and oil/gas exploration and production operations, which S&P thinks have stabilized its financial position.

Separately on Monday, S&P affirmed the ratings and “stable” outlooks for MDU Resources Group Inc. and its merger partner Cascade Natural Gas Corp. (“BBB+/stable/A-2). It also said Nicor’s tentative agreement with the staff of the and Exchange Commission Enforcement Division in the settlement of an anticipated civil action, including a $10 million fine, was “credit neutral.” But the rating agency expressed “greater concerns” about a pending Illinois Commerce Commission review of Nicor’s questionable gas cost accounting for performance-based rate-setting purposes.

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