While the refinancing needs of leading U.S. merchant energy companies have diminished to $58 billion from a peak of $90 billion in November 2002, players in the sector continue to grapple with uncertain market rules and regulation, litigation risk and low power prices in many regional power markets, according to a report published last Thursday by Standard & Poor’s Ratings Services (S&P).

“The ability to refinance maturities is still a concern for the credit of many of the companies that have business models that have high business and financial risk,” said S&P credit analyst Arleen Spangler.

Of the original $90 million peak of refinancing needs, $12 billion has been either discharged in bankruptcy or is still under bankruptcy court supervision, while $20 billion has been successfully refinanced in the debt capital or bank markets through equity offerings or has been paid out from asset-sale proceeds.

S&P believes the reduction in refinancing needs is driven by three factors. First, asset sales have generated significant funds to repay debt; second, debt has been discharged by the bankruptcy process and/or turned over to lenders who now own several assets; and third, refinancing packages have been attained.

While it appears from the data examined in the report that many of the players in this sector have stabilized their capital structure, S&P still has negative outlooks on 15 of the 23 companies discussed. This is primarily driven by the uncertainty that remains in the business model of merchant power, by the high leverage that still exists at many of these entities, and by the overhang of litigation, in certain cases.

S&P said that there may not be improvement in ratings for these companies until there is more clarity as to what the sustainable cash flow from merchant power may be, and that those cash flows can support these entities’ existing capital structures.

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