fine-tuning your approach with credit agencies

Ronald Seeholzer, Edison Electric Institute

Credit rating agencies are looming large in the electric power industry’s future. As a result of the economic and market turmoil of the past few years, an unprecedented number of electric companies have seen their credit standings fall with Moody’s Investors Service, Inc., Fitch Ratings, Inc., and Standard and Poor’s.

Besides having to pay higher interest costs, an electric company that has had its credit standing downgraded could also face added collateral requirements, and may, in some cases, be unable to secure all the credit it needs, or even be unable to conduct business with certain other parties.

For one of the most capital-intensive industries in the world, turning around those ratings–and addressing the fundamentals behind those ratings–is a priority, both for the individual companies and the industry as a whole.

Company actions

To restore their credit ratings, electric companies have undertaken a variety of actions. These have included selling non-core assets, canceling acquisitions and other capital expenditures, and accelerating debt repayment. The broad result has been an exit from the speculative activities within wholesale power markets, and a renewed emphasis on operating in regulated markets.

These actions have led Fitch Ratings to assign a “stable” outlook for industry performance in 2004, although strong qualifiers were attached to this forecast. Among the issues of concern include regulatory uncertainty over who controls the transmission of electricity–the states or the federal government–and the financial risk associated with being the default electricity provider in competitive retail electricity markets. If fuel costs rise, will rate caps prevent the default provider from recovering its costs?

Industry actions

Through EEI, electric companies as an industry have also begun working with the rating agencies to improve credit standings. One factor that has influenced the rating agencies’ credit evaluations has been the advent of competition at the wholesale and retail levels. Not all companies have entered the competitive markets, and those that have are participating at different levels. This has made it more difficult for the rating agencies to judge, or value, the risks of any one particular power company versus another. This, in turn, has also made it more difficult for a power company to predict the ratings it will receive, both now and into the future.

EEI wants to work with the credit rating agencies to identify ways communication and relationships can be improved in a mutually beneficial manner. For help in this effort, EEI has turned to its newly formed Wall Street Advisory Group (WSAG).

According to Mayo A. Shattuck III, chair of the EEI committee directing the WSAG, and chairman, president, and CEO of Constellation Energy Group Inc., “The WSAG has identified some specific areas where it can make a difference. These include disclosure practices and rating agency methodologies and communications with issuers. In the broadest sense, we are trying to create a dialogue between the industry and the Wall Street community to restore investor confidence.”

The WSAG comprises a diverse assembly of Wall Street firms, including investment bankers, and debt and equity analysts from both the

The WSAG was instrumental in setting a meeting that took place in mid-April between industry chief financial officers (CFOs) and the credit rating agencies. From this meeting, both the CFOs and the rating agencies agreed to improve the quality, the quantity, and the transparency of information being exchanged. Specific areas of focus going forward include greater discussion on the regulatory and legislative issues that impact credit quality.

Besides the direct effort underway with the credit rating agencies, the industry has also taken steps to restore the industry’s fundamentals. Measures taken here have included developing a nationwide standard, or master, contract for trading power, and a companion

EEI is also working with the financial community to improve the industry’s accounting and reporting practices, and to solidify its corporate governance practices. Activities here include regular dialogues with the Securities and Exchange Commission on expanded Sarbanes-Oxley responsibilities, and the creation of a guide to improve corporate governance and financial reporting in the energy and utility industry. The guide offers a roadmap to the many requirements of the legislation, and a resource to enhance both corporate governance and investor confidence in the specialized electric utility industry.

Electric companies are strengthening their balance sheets. Through EEI, they are also improving communication and relationships with the rating agencies and restoring confidence in the industry. After the financial turmoil the industry has experienced during the past few years, these steps are essential to building the strong credit ratings that are necessary for the electric power industry to grow to meet the needs of its customers in the future.

Seeholzer is director, business services and finance with EEI. More information on the Edison Electric Institute can be found at www.eei.org.

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