In a new report comparing five of the top diversified energy companies in the United States with investment-grade credit ratings, Standard & Poor’s Ratings Service (S&P) found that while the differences were many, all share qualities worth noting, and all contrast “sharply” with several peers that saw their ratings dive in the past year.

For its comparative analysis, the eight-page research report reviewed Exelon Corp., (A-); Public Service Enterprise Group Inc. (PSEG), (BBB); Duke Energy Corp. (BBB+); Dominion Resources Inc. (BBB+); and American Electric Power Inc. (AEP), (BBB). “Although the differences amongst the companies are more numerous than their similarities, some shared traits are obvious and worth noting,” it said. Those traits include:

These companies, said analysts, “contrast sharply with some other diversified energy companies that have lost their investment-grade ratings within the past year, including The Williams Cos. Inc., El Paso Corp., Dynegy Inc., Reliant Resources Inc. and Mirant Corp.” Their ratings dropped, said S&P, “in part because they lacked a large or large enough regulated business to counterbalance risk, and they have inadequate financial flexibility.”

All of the investment-grade energy companies “began life as integrated electrics,” and then naturally expanded into merchant power generation. “But they have done so with varying levels of commitment, different strategic approaches and disparate competitive advantages. AEP and Dominion have more clearly articulated regional strategies, whereas Duke, Exelon and PSEG have taken a more national approach.”

However, because of the volatile environment, within the past 18 months the companies have undertaken some “strategic shifts and higher execution risk,” noted analysts. “Most notably, AEP and Duke have both dramatically reduced their trading and marketing operations and brought in new management. Both…had anticipated that their trading operations would provide ever increasing profits and growth, but these plans were squashed last year.”

However, in contrast, Dominion’s Clearinghouse “appears to be expanding,” noted S&P. “In some respects, Dominion is well placed to pick up where other companies have exited because, as a relatively new entrant, they do not share the taint that has hurt so many of their trading competitors.”

The least risky merchant strategy has been followed by Exelon and AEP and “to a lesser extent,” PSEG. “Exelon is considerably less exposed to price and volume risk because approximately 75% of its generation is sold back to the utilities under contracts. AEP’s exposure in Pennsylvania and Ohio is similarly structured…Still, if AEP and Exelon did not have excess supply, they would be more exposed.” PSEG, through subsidiary PSEG Power, “has lost its formal tether to its New Jersey utility. Public Service Electric & Gas Co. now purchases power from winning bidders on an auction system.”

Analysts noted that all five companies engage in energy marketing and trading, “but with different commitments and scale.” Although AEP and Duke, which were running two of the largest energy trading operations in North America less than a year ago, have now pulled back, but remain in the mix. “This is because it is not possible to have a merchant energy strategy and not engage in marketing and trading since asset optimization becomes a prerequisite and no longer a strategic choice.”

Not surprisingly, said analysts, “none of the five companies is aggressively pursuing further electricity restructuring in their respective service territories. Rather, if they can, diversified energy companies today are pleased to be able to rely upon their regulated business components. These business segments strongly support their investment-grade credit ratings.”

To access the full report, visit S&P’s RatingsDirect web site at www.standardandpoors.com.

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