New York, October 22, 2001 – Moody’s Investors Service expects the credit quality of the US electric utility industry to remain at its current A3 rating level throughout the coming year.
This overall stable outlook, however, belies shifts in credit risk throughout the industry as deregulation continues despite the credit crisis at the two California utilities earlier this year.
“Though slowed or stopped in some states by the events in California, deregulation continues to prompt generation asset transfers, spin-offs and mergers and acquisitions, albeit at a slower pace recently,” reports Moody’s Mo Ying Seto, Senior Vice President and one of the authors of Moody’s new Electric Utilities Industry Outlook. “As formerly integrated utilities shed generating assets, they are redistributing risk, not creating or eliminating risk, for the new entities as a whole.”
Moody’s reports that while the US power industry on balance has held at the A3 level during the past year, there have also been 29 rating upgrades and 71 rating downgrades in a peer group of 121 rated issuers, showing that credit quality in the industry has not been tranquil despite the overall stable average rating.
“Some transmission and distribution utilities that have divested their generating assets at well above book value indeed garner higher ratings as they reduce the business risk associated with the merchant power market,” Seto explains. “But this risk has in reality just been moved onto the acquirer/purchaser of these assets, and the move is a zero sum game in terms of risk for the industry.”
Less Capital Access
The crisis in California has also placed some restraints on the industry’s access to capital, Moody’s observes. While companies continue to raise funds for sound capital investments within the industry, Moody’s notes that the terms and conditions for companies that are exposed to supply risk have tightened.
“The California calamity casts an intense spotlight on the supply risk of utilities in every state,” says Seto. “Moody’s is confident that safeguards should be adequate in other states that are deregulating to prevent a similar huge gap developing between the price of purchased power and what utilities can change.”
“Still,” she adds, “Moody’s acknowledges that some supply risk remains.”
She cites Nevada and New Mexico as examples of states that have postponed deregulation after the California crisis. Some states such as Pennsylvania, New York, and New Jersey she says are moving towards deregulation at a slower and more measured pace.
Possible Overbuild
With the California crisis highlighting supply issues, Moody’s is also concerned that the current flurry of new “greenfield” power generation development is to an overbuild.
“Moody’s ratings anticipate such peakings in the supply cycle, and an overbuild alone should not threaten them” says Seto. “Some companies, however, are much better positioned to handle an overbuild than others.”
She also foresees independent power companies renewing their interest in international expansion as greenfield development opportunities in the US grow limited. Because such previous forays were damaging to some issuers, she would expect any similar moves to factor negatively into certain ratings.
Overall, given their challenges, Moody’s does not expect the average rating of the independent power companies to increase over the near term, although, as track records develop, individual ratings may move up or down.
Moody’s is also concerned about the risks inherent in the energy trading business.
“The large profits of the past year are unlikely to be repeated on a regular basis,” says Seto. “We will be watching this segment with particular scrutiny, because, while energy trading can offer an opportunity for high earnings growth, it also poses a risk of extreme loss.”
Moody’s publishes its Electric Utilities Industry Outlook to coincide with the annual EEI Financial Conference, to be held this year in New Orleans from October 29th through October 31st. At the conference on the 29th, Moody’s will be hosting its 4th Annual Breakfast/Investor Briefing, with A Dialogue with Moody’s Power Analysts: Placing Companies in Context as this year’s topic. Its extensive Power Company Sourcebook will also be available.
