Utility credit quality improving

Utility credit quality improving, but hurdles remain, S&P says

Washington (Platts)--3May2004


The credit quality of US electric and natural gas utilities is improving,
Standard & Poor's said Monday after comparing details of first-quarter 2004
financial results with the same quarter in 2003 and the last two years. S&P
said the number of rating changes on holding companies and operating
subsidiaries dropped to 17 downgrades and two upgrades in the first-quarter ,
from 50 downgrades and three upgrades in Q1 2003. During Q1 2004, S&P issued
ratings downgrades for Duke Energy, DPL, Constellation Energy Group, and UGI
Utilities and upgraded the credit rating of PNM Resources. The number S&P's
negative credit outlooks remains high and increased to 34% as of March 31,
2004, from 31% in Q1 2003. Positive outlooks total 2%. Stable outlooks are
held by about half of the industry. S&P said its negative outlooks are mainly
the result of eroding financial profiles, weak competitive positioning,
refinancing risk, investment in unregulated activities, volatility in the
wholesale power market, and acquisitions of financially weaker companies.

S&P added that the regulated segment of the industry is witnessing a key
dynamic--re-emergence of state regulators--just as the companies are preparing
rate filings after years of imposed rate freezes prompted by either
deregulation or legislation. Regulators will be an especially high hurdle in
states where utilities want to build needed power plants, but where rates are
currently low, the ratings agency said. The outlook for the competitive
segment of the power industry is largely negative and will likely stay that
way for sometime, S&P said. Merchant power generators still face the same
issues that caused their widespread credit deterioration in 2002 and 2003
--high natural gas prices and excess generating capacity. The only exceptions
are merchant coal and nuclear plants, both benefiting from higher margins in
regions where natural gas is setting the electricity price, and generators who
have long-term contracts selling power to their affiliated utilities.

This story was first published in Platts real-time news and market reporting
service Platts Electricity Alert (http://electricityalert.platts.com ).