US Utilities' Refinancing Needs Should Be Manageable

As global credit markets contract, borrowing rates skyrocket, and otherwise fundamentally creditworthy lenders and borrowers eye each other with suspicion, liquidity and counterparty risk become the preeminent credit concerns, according to a report published by Standard & Poor's Ratings Services titled "The U.S. Utility And Power Sector Appears Well Positioned To Manage Refinancing Requirements" on RatingsDirect.

Regulated electric and gas utilities and power companies have not been immune to the devastatingly rapid consequences of negative market sentiment.

Recent high-profile events like the almost overnight loss of investor confidence in Constellation Energy Group Inc. (BBB/Watch Dev/A-2) that coincided with the final days of Lehman Brothers Holdings Inc. (not rated) and the sudden termination of a "sleeving" arrangement (a guarantee by one party, including the posting of collateral, to support specific obligations of another party) between Reliant Energy Inc. (B+/Stable/B-2) and Merrill Lynch & Co. Inc. (A/Watch Dev/A-1) have raised concerns about the industry's overall ability to handle stress.

However, the underlying credit fundamentals of the utility and power industry do not support these concerns, at least in the short to medium term.

"That's the conclusion we reached after we reviewed the cash position, pending debt maturities, and available revolving credit capacity of the investor-owned electric, gas, and water utilities and the merchant power industry," said Standard & Poor's credit analyst Richard Cortright.

Although the utility industry's credit quality and that of diversified power companies is solidly investment grade and our near-to-intermediate-term outlook is stable, continued deferral of costs coupled with the current recessionary economic conditions and the associated uncertainty of U.S. and global financial markets will erode financial metrics.

If these conditions continue for an extended period, they could threaten ratings.