Fitch Sees Signs of Utility, Merchant Sector Recovery in 05

Two years after the "credit inferno" in late 2002, there are "broad signs" of industry recovery for both the utility and energy merchant sectors, Fitch Ratings said in an outlook report for 2005 issued Thursday.

In a five-page report, ratings analysts said that the near-term outlook for investor-owned electric utilities and affiliated generating companies looks "stable" in 2005, while the outlook for diversified energy merchants "has shifted to positive from stable." The improved outlook for the merchant sector "reflects successful refinancings in 2004 that enabled most of these companies to extend debt maturities and eliminate near-term liquidity concerns but should be seen against the precipitous decline in ratings during 2002 and 2003."

The report noted that the public power utilities "were largely immune" from the problems in the rest of the sector and their ratings outlook remains "stable."

The sector recovery has been aided by both internal and external factors, analysts said. "Across all subsectors, a combination of low interest rates and easily accessible bank and capital markets have enabled companies to lower interest expense, strengthen their balance sheets and improve liquidity by arranging multi-year bank credit facilities." The report said that in particular, the "improvement in the bank market has been remarkable, with five-year revolving credit facilities once again available for investment-grade utilities and multi-year credit facilities also available for selected speculative-grade issuers.

The pace of refinancings within the regulated utilities slowed this year, "indicating a lack of further opportunities" after a lot of activity in 2003. However, the merchant sector "should have continued opportunities" to fix the balance sheets and reduce interest charges in 2005.

The analysts expect capital expenditures overall to increase over the next five years and above current industry projections, with new investments in electric transmission and distribution systems, as well as in natural gas storage and liquefied natural gas terminal facilities. Utilities also will face higher costs to meet new environmental standards for sulfur dioxide, nitrogen, mercury and greenhouse gases, they noted.

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