Environmental regs retain hold on credit ratings

By Kathleen Davis, Associate Editor

How a company reacts to environmental regulations may not be the largest factor in assessing credit ratings, but for Fitch, it is becoming a more significant one.

In one of their latest global power reports, entitled “Effect of Environmental Regulations on the Electric Power Industry: U.S., EU, Australia, and New Zealand,” the company examines the regulatory climate in each region, specifically focusing on whether a company’s cash flow can survive in said climate. Fitch believes that the components of a power company’s environmental compliance plan can, in turn, affect the company itself.

Orli Almog, a New York analyst for Fitch who worked on the report, told EL&P that because the regulatory climate in the U.S. is still evolving within the area of environmental regulations, hard-hitting truths about the direct connections between compliance and credit risk are still a bit lost in the mire.

“The environmental regulatory climate in the U.S. is still relatively uncertain until the administration and the EPA propose legislation that would establish a flexible, market-based program to reduce emissions of SO2, NOx and mercury from electric power generators. Such legislation would provide greater certainty about the regulatory future-for all but CO2-so that plant managers and owners would feel more comfortable about installing more energy efficient systems to produce power,” Almog stated.

Almog pointed out that while the timing for comprehensive federal regulation is unclear, geographical regions (like the Northeast in particular) as well as states and individual companies are looking to be proactive in the environmental arena. However, Almog stated that such measures are all guesswork until the federal government gives those companies the actual regulatory framework.

“The question then becomes are these companies moving ahead too quickly? Are they making changes that may be unnecessary? Are they not moving quickly enough? There’s still a lot of ambiguity,” Almog said.

“On the positive side, it’s nice to see companies voluntarily taking the initiative and moving forward, instead of pushing it off to the side and simply waiting,” she added. (Almog stated that companies with a large portion of coal-fired generation are especially proactive in addressing impending environmental regulations.)

Almog also believes that plans for environmental compliance will be a growing element in a company’s credit rating.

“It’s certainly becoming more of a factor, which, of course, is what prompted [Fitch] to look into it in more detail,” she said. “Specifically we want to know if environmental compliance could affect a company’s ability to meet their financial obligations. It could be an issue.

“Then again, environmental compliance is just one of many factors involved in determining a rating, and while I wouldn’t say it has been able to truly change the direction of a company’s rating, it is something that we feel requires more study,” she added.

“The major conclusion of this report is that there are still a lot of unknowns,” Almog stated. “The news is changing every day, but as the regulations become more clear, environmental compliance could move toward the forefront and have a more significant influence on credit quality.”

Orli Almog can be reached via e-mail (orli.almog@fitchratings.com) or phone (212-908-0894). The report can be found on Fitch’s website (www.fitchratings.com).


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