Timely and balanced regulatory decisions have returned to center stage in the assessment of credit ratings for various U.S. utilities, according to the latest analysis by Standard & Poor’s Ratings Services. For the immediate future, upgrades and downgrades of ratings should stay relatively balanced, S&P said in its “Industry Report Card: U.S. Electric/Water/Gas.”

In contrast, credit trends in the merchant energy segment of the electric industry have not changed much in the past six months, according to the S&P report, which concludes that most of the credit improvement has come from “successful refinancings and completion of strategic asset sales and not from improved industry fundamentals.”

A combination of regulatory rulings and ongoing efforts to boost share repurchases and raise dividends will weigh in heavily in the establishment of future utility ratings, said Andrew Watt, an S&P analyst, who noted that the regulatory rulings particularly have returned to be “a dominant factor” in assisting companies’ credit quality.

“These decisions will be critical for an industry that in many jurisdictions is nearing the end of an extended transition period and will be making significant capital investment in infrastructure during the next several years,” Watt said.

As a result, Watt said S&P is “closely monitoring these actions,” particularly given the fact that many of the U.S. utilities still have financial profiles that the rating agency considers “weak.” He characterized the companies as being “susceptible to negative rating actions,” if their credit deteriorates any further.

S&P’s report, nevertheless, noted that there are nearly twice as many “stable outlooks” as “negative” ones in the utility sector right now, with about 8% of the sector having “positive” outlooks. “Therefore, there should be more rating stability over the near to intermediate term, with somewhat of a negative bias in rating actions,” Watt said.

While more stability has come back to more traditional utilities, the ones that have continued to have what S&P called “merchant energy exposure” still face “volatile cash flows and regulatory uncertainty.”

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