It’s been a long time coming, but former merchant energy giants like Aquila Inc., CMS Energy Corp., Reliant Resources Inc., Dynegy Inc. and Xcel Energy appear to be stabilizing as they improve their liquidity and pay down debt, according to two reports by Standard & Poor’s Ratings Services (S&P).

In a new report, “U.S. Non-Financial Credit Quality Constrained,” analysts noted that “in a very positive development, the severe liquidity crunch that has bedeviled this sector may be easing.” Noting that many of the former major players had recently refinanced their bank facilities, S&P said they now have “substantially greater flexibility.” Analysts noted that “when considered together with companies’ decisions to unwind their nonregulated strategies, the ability to refinance imminent bank facility maturities may begin to slowly restore shattered investor confidence.”

Although S&P said it expects the negative ratings trend to continue this year, “the number of negative actions is not expected to equal that of last year’s avalanche.”

S&P’s utility credit ratio for the first quarter was 14 to 1 (14 downgrades and 1 upgrade), compared with the 4Q02 of 26 to 1. “For all 2002, the credit ratio was 9.4 to 1, up from 5.6 to 1 in 2001. Currently, there are nine companies on CreditWatch with negative implications and three with developing implications. The outlook for this sector is 3% positive, 64% stable, 30% negative and 2% developing.”

In a separate report on CMS released on Thursday, S&P analyst William Ferara said that the Dearborn, MI-based company and its primary operating subsidiary, Consumers Energy Co. (both rated “BB-“), have shown moderate improvement in recent weeks. The companies raised $1.4 billion in various financings (split $850 million at the parent and $550 million at the regulated utility), which along with expected asset sale proceeds, will address financing requirements through the third quarter of 2004.

“Along with the pending sale of its CMS Panhandle Pipeline unit, the company has effectively improved its liquidity position and lengthened out its debt maturity schedule,” wrote Ferara. “This affords the company some time to focus on its longer-term strategic initiatives of deleveraging and strengthening its core operations.” CMS is expected to soon close the sale of Panhandle to Southern Union Panhandle, a newly formed unit of Southern Union Co. and AIG Highstar Capital LP, for bout $1.8 billion.

“The sale is consistent with CMS Energy’s intent to improve its liquidity position and deleverage its balance sheet by selling assets to bolster its financial profile,” Ferara said. He added that the company “should be able to continue its financial improvement due to the recently announced sale of its natural gas and electric trading books and Centennial pipeline interest, as well as through additional planned asset sales. Once completed, the ultimate effect could be a more stable credit profile for the company.”

Ferara noted that CMS ratings are supported by the business and financial profiles of its holding company, Consumers, which is expected to represent about 80% of cash flow once the asset sales are completed. “An aggressively financed, higher-risk global portfolio of nonregulated energy projects offsets the favorable attributes of this regulated utility.” CMS’s negative outlook “reflects challenges including executing additional planned asset sales, maintaining an adequate liquidity position, restoring investor confidence and generating cash flow and reducing debt sufficient enough to produce credit protection measures commensurate for its current rating.”

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