The ratings trend for U.S. investor-owned electric and gas and electric utilities remains “decidedly negative,” with the average rating now at BBB+, Standard & Poor’s (S&P) ratings services said last week in a report card on U.S. utilities.
S&P said that the negative credit picture can be traced to weakening financial profiles and increasingly constrained access to capital markets as a result of investor skepticism over accounting practices and disclosure. “Investment outside the traditional regulated utility business has increased overall business risk,” the report stated.
S&P said that this is evidenced by the development of merchant generation companies by regulated utilities and the energy trading activities needed to support them, the acquisition of midstream operations by gas distributors and pipelines and international investments.
“These events, in turn, reflect companies’ strategies to deal with an increasingly competitive market, while also seeking to enhance shareholder value,” the report said. S&P expects the negative trend to continue, “as reflected in the cascade of ratings downgrades, numerous outlook changes to negative from stable and several negative CreditWatch listings in the first half of 2002.”
Meanwhile, S&P went on to say that for regulated utilities such as transmission and distribution, state regulators “continue to exert tremendous influence” over credit quality despite the advance of deregulation in the electricity industry, “albeit at a slower pace.”
For many utilities, regulation remains supportive, the ratings agency said. However, faltering regulatory support has also contributed to several ratings downgrades, notably in Nevada. “Continuing developments serve to highlight not only the importance of regulatory support for regulated utilities, but also the risks inherent in the supply function for distributors,” S&P said.
S&P pointed out that electricity distributors have typically been viewed as the “least risky” function on the utility/energy production chain. But distributors that have been designated providers of last resort and are subjected to protracted rate freezes without assurance of energy cost recovery “could face significant financial exposure in the event of price volatility to the extent that their exposure is unhedged.”
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