The pace and scale of negative rating actions in the United States utility industry (electric, gas, pipeline, and water companies) have significantly diminished following a tumultuous three years, according to a report published Thursday by Standard & Poor’s Rating Services (S&P).

Since Jan. 1, S&P recorded only 21 downgrades of holding companies and operating subsidiaries, compared with three upgrades. In the second quarter alone, there were just four downgrades and one upgrade.

Although several firms were placed on CreditWatch with negative implications or had their outlooks revised to negative from stable, S&P cited potential upward credit improvement for a few companies.

In dramatic contrast to this year’s first six months, in 2003 there were 88 downgrades and eight upgrades during the same period. “Most of the negative rating actions were the result of familiar themes: the erosion of key financial parameters, liquidity concerns, merger and acquisition activity, adverse regulatory decisions, and investments outside the traditional regulated utility business,” said S&P credit analyst Barbara Eiseman.

Notwithstanding moderation in the swiftness and severity of rating downgrades, any significant upturn in ratings quality is unlikely in the near term given the large number of negative outlooks and negative CreditWatch listings, S&P said. In addition, acquisition activity in the sector has increased, and is likely to weigh on credit quality over the intermediate term.

Moreover, despite the industry mantra of “back to basics,” longer-term competition for capital and investor interest may encourage issuers to engage again in growth strategies that could erode credit quality.

The average rating for the power industry and energy sector as a whole remains solidly entrenched in the mid “BBB” category.

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