Credit Ratings Q FINANCIAL UPDATE QUARTERLY REPORT OF THE U.S. SHAREHOLDER-OWNED ELECTRIC UTILITY INDUSTRY

Transcription

1 Credit Ratings Q FINANCIAL UPDATE QUARTERLY REPORT OF THE U.S. SHAREHOLDER-OWNED ELECTRIC UTILITY INDUSTRY

2 About EEI The Edison Electric Institute is the association of U.S. shareholderowned electric companies. Our members serve 95% of the ultimate customers in the shareholder-owned segment of the industry, and represent approximately 70% of the U.S. electric power industry. We also have 79 international electric companies as Affiliate members and more than 190 industry suppliers and related organizations as Associate members. About EEI s Quarterly Financial Updates EEI s quarterly financial updates present industry trend analyses and financial data covering 69 U.S. shareholder-owned electric utility companies. These 69 companies include 58 electric utility holding companies whose stocks are traded on major U.S. stock exchanges and eleven electric utilities who are subsidiaries of nonutility or foreign companies. Financial updates are published for the following topics: Dividends Stock Performance Credit Ratings Construction Rate Case Summary Fuel SEC Financial Statements (Holding Companies) FERC Financial Statements (Regulated Utilities) Business Segmentation (Holding Companies) For EEI Member Companies The EEI Finance and Accounting Division is developing current year and historical data sets that cover a wide range of industry financial and operating metrics. We look forward to serving as a resource for member companies who wish to produce customized industry financial data and trend analyses for use in: We Welcome Your Feedback EEI is interested in ensuring that our financial publications and industry data sets best address the needs of member companies and the financial community. We welcome your comments, suggestions and inquiries. Contact: Mark Agnew Director, Financial Analysis (202) , magnew@eei.org Aaron Trent Senior Financial Analyst (202) , atrent@eei.org Future EEI Finance Meetings 44th EEI Financial Conference November 1-4, 2009 Westin Diplomat Resort & Spa Hollywood, Florida EEI International Utility Conference March 14-16, 2010 London Hilton on Park Lane London, United Kingdom For more information about EEI Finance Meetings, please contact Debra Henry, (202) , dhenry@eei.org Investor relations studies and presentations Internal company presentations Performance benchmarking Peer group analyses Annual and quarterly reports to shareholders Edison Electric Institute 701 Pennsylvania Avenue, N.W. Washington, D.C

3 The 69 U.S. Shareholder-Owned Electric Utilities The companies listed below all serve a regulated distribution territory. Other utilities, such as transmission provider ITC Holdings, are not shown below because they do not serve a regulated distribution territory. However, their financial information is included in relevant EEI data sets, such as transmission-related construction spending. Allegheny Energy, Inc. (AYE) ALLETE, Inc. (ALE) Alliant Energy Corporation (LNT) Ameren Corporation (AEE) American Electric Power Company, Inc. (AEP) Avista Corporation (AVA) Black Hills Corporation (BKH) CenterPoint Energy, Inc. (CNP) Central Vermont Public Service Corporation (CV) CH Energy Group, Inc. (CHG) Cleco Corporation (CNL) CMS Energy Corporation (CMS) Consolidated Edison, Inc. (ED) Constellation Energy Group, Inc. (CEG) Dominion Resources, Inc. (D) DPL, Inc. (DPL) DTE Energy Company (DTE) Duke Energy Corporation (DUK) Duquesne Light Holdings, Inc. Edison International (EIX) El Paso Electric Company (EE) Empire District Electric Company (EDE) Energy East Corporation Energy Future Holdings Corp. (formerly TXU Corp.) Entergy Corporation (ETR) Exelon Corporation (EXC) FirstEnergy Corp. (FE) FPL Group, Inc. (FPL) Great Plains Energy Incorporated (GXP) Green Mountain Power Corporation Hawaiian Electric Industries, Inc. (HE) IDACORP, Inc. (IDA) Integrys Energy Group, Inc. (TEG) IPALCO Enterprises, Inc. Kentucky Utilities KeySpan Corporation Louisville Gas and Electric Maine & Maritimes Corporation (MAM) MDU Resources Group, Inc. (MDU) MGE Energy, Inc. (MGEE) MidAmerican Energy Holdings Company Niagra Mohawk Power Corporation NiSource Inc. (NI) Northeast Utilities (NU) NorthWestern Corporation (NWEC) NSTAR (NST) NV Energy, Inc. (NVE) OGE Energy Corp. (OGE) Otter Tail Corporation (OTTR) Pepco Holdings, Inc. (POM) PG&E Corporation (PCG) Pinnacle West Capital Corporation (PNW) PNM Resources, Inc. (PNM) Portland General Electric Company (POR) PPL Corporation (PPL) Progress Energy (PGN) Public Service Enterprise Group Inc. (PEG) Puget Energy, Inc.* SCANA Corporation (SCG) Sempra Energy (SRE) Southern Company (SO) TECO Energy, Inc. (TE) UIL Holdings Corporation (UIL) UniSource Energy Corporation (UNS) Unitil Corporation (UTL) Vectren Corporation (VVC) Westar Energy, Inc. (WR) Wisconsin Energy Corporation (WEC) Xcel Energy, Inc. (XEL) * Puget Energy was acquired by Puget Energy LLC on February 6, Puget Energy LLC was formed by a group of infrastructure investors led by the Macquarie Group.

4 Companies Listed by Category (as of 12/31/08) Please refer to the Quarterly Financial Updates webpage for previous years lists. iven the diversity of utility holding company corporate G strategies, no single company categorization approach will be useful for all EEI members and utility industry analysts. Never-theless, we believe the following classification provides an informative framework for tracking financial trends and the capital markets response to business strategies as companies depart from the traditional regulated utility model. Regulated Mostly Regulated Diversified 80%+ of total assets are regulated 50% to 80% of total assets are regulated Less than 50% of total assets are regulated Categorization of the 58 publicly traded utility holding companies is based on year-end business segmentation data presented in 10Ks, supplemented by discussions with company IR departments. Categorization of the 11 non-publicly traded companies (shown in italics) is based on estimates derived from FERC Form 1 data and information provided by parent company IR departments. The EEI Finance and Accounting Division continues to evaluate our approach to company categorization and business segmentation. In addition, we can produce customized categorization and peer group analyses in response to member company requests. We welcome comments, suggestions and feedback from EEI member companies and the financial community. Regulated (44 of 69) ALLETE, Inc. Alliant Energy Corporation Ameren Corporation American Electric Power Company, Inc. Avista Corporation Central Vermont Public Service Corporation CH Energy Group, Inc. Cleco Corporation CMS Energy Corporation Consolidated Edison, Inc. DPL, Inc. DTE Energy Company Duquesne Light Holdings, Inc. El Paso Electric Company Empire District Electric Company Energy East Corporation Great Plains Energy Incorporated Green Mountain Power Corporation IDACORP, Inc. IPALCO Enterprises, Inc. Kentucky Utilities KeySpan Corporation Louisville Gas and Electric Maine & Maritimes Corporation Niagara Mohawk Power Corporation Northeast Utilities NorthWestern Energy NSTAR NV Energy, Inc. PG&E Corporation Pinnacle West Capital Corporation PNM Resources, Inc. Portland General Electric Company Progress Energy Puget Energy, Inc. Southern Company TECO Energy, Inc. UIL Holdings Corporation UniSource Energy Corporation Unitil Corporation Vectren Corporation Westar Energy, Inc. Wisconsin Energy Corporation Xcel Energy, Inc. Mostly Regulated (19 of 69) Black Hills Corporation CenterPoint Energy, Inc. Dominion Resources, Inc. Duke Energy Corporation Edison International Entergy Corporation Exelon Corporation First Energy Corp. FPL Group, Inc. Integrys Energy Group MGE Energy, Inc. MidAmerican Energy Holdings NiSource Inc. OGE Energy Corp. Otter Tail Corporation Pepco Holdings, Inc. Public Service Enterprise Group, Inc. SCANA Corporation Sempra Energy Diversified (6 of 69) Allegheny Energy, Inc. Constellation Energy Group, Inc. Energy Future Holdings Hawaiian Electric Industries, Inc. MDU Resources Group, Inc. PPL Corporation Note: Based on assets at 12/31/08

5 Q Credit Ratings HIGHLIGHTS ntwenty-four ratings actions 10 upgrades and 14 downgrades affected 11 parent companies or their subsidiaries in Q2. nat 34 actions, ratings activity for the first half of 2009 was slightly ahead of last year s pace (at 27 actions), but well below that of the previous six years. nthe percentage of ratings actions due to upgrades has fallen from approximately 61% in , to 48% in 2008 and to 32% for the first half of The decline can be attributed in part to higher capital spending. nthe industry s average long-term rating remained a solid BBB during a quarter in which ratings activity was relatively light. COMMENTARY Twenty-four ratings actions affected 11 parent companies or their subsidiaries in Q2. At 34 actions, ratings activity for the first half of 2009 was slightly ahead of last year s pace (at 27 actions), but well below that of the previous six years (see Tables II and III). At the parent level, the industry s average long-term rating remained a solid BBB, essentially unchanged since The very high level of ratings actions in 2002 and 2003, which pushed the parent-level average as low as BBBin 2002, was spurred by a major expansion into unregulated businesses. The percentage of ratings actions due to upgrades has fallen from approximately 61% in , to 48% in 2008 and to 32% for the first half of 2009 (see Table IV). The decline can be attributed in part to higher capital spending. On a trailing-twelve-month basis, industry capex has risen from 1 Below BBB-, 11% BBB-, 18% I. S&P I. Utility U.S. Electric Credit Ratings Output (GWh) Distribution BBB, 29% At 12/31/2008r BBB-, 20% Below BBB-, 12% BBB, 23% At 12/31/2006 A or higher, 8% A-, 12% BBB+, 23% A or higher, 9% A-, 11% BBB+, 26% BBB-, 22% BBB-, 9% Below BBB-, 9% BBB, 29% Below BBB-, 18% BBB, 35% At 6/30/2009 A or higher, 6% A-, 14% BBB+, 20% At 12/31/2007 A or higher, 12% A-, 5% BBB+, 21% Note: Rating applies to utility holding company entity. Source: Standard & Poor s, SNL Financial, EEI Finance Department and company annual reports.

6 2 CREDIT RATINGS II. Credit Rating Agency Upgrades and Downgrades Positive = upgrades Negatives = downgrades Fitch Moody s Standard & Poor s Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Fitch (Up) Fitch (Down) Moody s (Up) Moody s (Down) S&P (Up) S&P (Down) Note: Data presents the number of occurrences and includes each event, even if multiple actions occurred for a single company. Source: Fitch Ratings, Moody s, Standard & Poor s III. Total Ratings Actions IV. Direction of Ratings Actions Fitch Moody's Standard & Poor's Total * * Through June 30, 2009 Note: Full year, except where noted. Source: Fitch Ratings, Moody s, Standard & Poor s Upgrade % Total Actions Note: Full year, except where noted. Source: Fitch Ratings, Moody s, Standard & Poor s

7 CREDIT RATINGS 3 V. S&P Utility Credit Rating Distribution by Company Category (at period end) 12/31/ /31/ /31/ /31/ /31/ /31/2008 6/30/2009 REGULATED A or higher 6 17% 7 19% 7 19% 6 19% 5 13% 3 8% 3 7% A- 5 14% 4 11% 3 8% 1 3% 2 5% 4 10% 6 15% BBB+ 6 17% 7 19% 8 22% 7 22% 10 26% 9 23% 9 22% BBB 6 17% 8 22% 9 25% 9 28% 8 21% 9 23% 10 24% BBB- 5 14% 5 14% 3 8% 3 9% 7 18% 9 23% 7 17% Below BBB- 8 22% 5 14% 6 17% 6 19% 6 16% 5 13% 6 15% Total % % % % % % % MOSTLY REGULATED A or higher 3 15% 2 9% 2 9% 1 4% 1 5% 1 5% 2 11% A- 2 10% 1 4% 0 0% 2 9% 3 16% 5 26% 2 11% BBB+ 5 25% 6 26% 6 27% 3 13% 4 21% 2 11% 5 26% BBB 4 20% 7 30% 9 41% 11 48% 6 32% 8 42% 6 32% BBB- 2 10% 7 30% 0 0% 1 4% 4 21% 3 16% 4 21% Below BBB- 4 20% 0 0% 5 23% 5 22% 1 5% 0 0% 0 0% Total % % % % % % % DIVERSIFIED A or higher 0 0% 0 0% 0 0% 1 9% 0 0% 0 0% 0 0% A- 2 13% 1 9% 1 9% 0 0% 2 22% 0 0% 0 0% BBB+ 4 27% 3 27% 2 18% 4 36% 3 33% 2 29% 1 17% BBB 5 33% 5 45% 5 45% 3 27% 1 11% 2 29% 3 50% BBB- 2 13% 1 9% 2 18% 2 18% 2 22% 2 29% 1 17% Below BBB- 2 13% 1 9% 1 9% 1 9% 1 11% 1 14% 1 17% Total % % % % 9 100% 7 100% 6 100% Note: At period end. Percentages may not total 100% due to rounding. Source: Standard & Poor s, SNL Financial, EEI Finance Department $40.1 billion at September 30, 2004 to $85.1 billion at March 31, As a result, in 2007, the industry entered a period of negative pre-dividend free cash flow, which will likely continue for some time. Based on a June 2009 EEI survey, we estimate shareholder-owned electric utility capex will reach $84.2 billion in 2009, $84.8 billion in 2010 and $86.6 billion in The average interest rate paid on new 10-year bonds issued by regulated utilities and holding companies has declined since the most acute phase of the financial crisis late in 2008 but remains high relative to risk-free rates. Coupons on bonds issued in Q2 averaged 6.4% versus Q1 s 6.7% and 2008 Q4 s crisis peak of 8.2%, according to EEI s research. Higher average interest expense will affect operating cash flows for many companies going forward. In this environment, relationships between companies and their regulators are especially important to utilities financial health. Companies will continue to seek timely recovery of their investments in reliability, environmental controls, and new generation, transmission and distribution investments. The importance of companies regulatory relations was underscored in each of the Q2 actions we review below. Regulatory Challenges Spur ConEd Downgrades During the second quarter, Moody s made two-notch downgrades to both the issuer and senior unsecured ratings of Consolidated Edison (to Baa1 from A2) and its subsidiaries Consolidated Edison Company of New York (to A3 from A1) and Orange and Rockland Utilities (to Baa1 from A2).

8 4 CREDIT RATINGS The actions brought Moody s ratings on Con Ed of New York into alignment with Standard & Poors (S&P) issuer and senior unsecured rating of A-. S&P last downgraded the subsidiary in March 2008, by one notch. Moody s cited weakened financial metrics for the downgrade and believes that New York utility regulators will try to minimize the impact on rates of high capital expenditures and the supply cost increases likely in a in a carbon constrained world. Nuclear Plans Contribute to Downgrades at SCANA Both S&P and Fitch downgraded parent company SCANA and its subsidiaries South Carolina Electric & Gas Company (SCE&G) and Public Service Company of North Carolina. In all three cases, the agencies downgraded the companies issuer rating by one notch, to BBB+ from A-. Both S&P and Fitch cited increased business and financial risk from SCE&G s plans to build two nuclear units. Fitch also cited a decline in credit metrics over the last 18 months, while remarking that the credit impact of any nuclear plant development will be partly offset by credit-supportive legislation in South Carolina. The state s Base Load Review Act allows utilities to recover capital costs, including a return on equity, during construction. Additionally, both S&P and Fitch expect equity issuance by SCANA to reduce the impact of capital spending on credit quality. Iberdrola Guarantee Prompts Energy East Upgrade Moody s and S&P took various actions on Spanish utility Iberdrola s U.S. subsidiaries, prompted in part by Iberdrola s announcement that it will guarantee Energy East s (EEC) parent-level debt. Moody s upgraded its rating on $1.3 billion of EEC parent company senior notes to A3 from Baa2; S&P upgraded EEC s issuer rating to A- from BBB+. S&P noted that EEC s stable ratings outlook now reflects Iberdrola s strong business profile and financial policies. Notwithstanding the credit benefit of Iberdrola s financial support, Moody s downgraded each of EEC s rated subsidiaries New York State Electric & Gas, Rochester Gas & Electric, Central Maine Power, Connecticut Natural Gas, Southern Connecticut Gas and Berkshire Gas by one notch. The agency opined that EEC is somewhat overreliant on bank credit, and said it expects weakness in key metrics to continue at both EEC and its subsidiaries for several years due to the weak economy and the companies need to finance capital spending. Moody s emphasized the importance of pending and future rate case outcomes to these companies financial performance and ability to pursue the full scope of current capital spending plans. S&P stated that its ratings on EEC s subsidiaries are VI. Credit Ratings Scales Investment Grade Moody s S&P Fitch Aaa AAA AAA Aa1 AA+ AA+ Aa2 AA AA Aa3 AA- AA- A1 A+ A+ A2 A A A3 A- A- Baa1 BBB+ BBB+ Baa2 BBB BBB Baa3 BBB- BBB- Speculative Grade Moody s S&P Fitch Ba1 BB+ BB+ Ba2 BB BB Ba3 BB- BB- B1 B+ B+ B2 B B B3 B- B- Caa1 CCC+ CCC+ Caa2 CCC CCC Caa3 CCC- CCC- Ca CC CC C C C Default Moody s S&P Fitch Source: Fitch Ratings, Moody s, Standard & Poor s C D D based mainly on each utility s stand-alone credit profile because none is a significant source of cash flow for Iberdrola. The agency upgraded Connecticut Natural Gas and Southern Connecticut Gas on continued low operating risk, relatively strong local economies and supportive regulation. It downgraded Rochester Gas & Electric on higher regulatory risk, relative to EEC s other subsidiaries, and limited growth opportunities.

9 CREDIT RATINGS 5 Upgrades at TECO and Tampa Electric Moody s and S&P upgraded TECO Energy subsidiary Tampa Electric to Baa1 and BBB, respectively, from Baa2 and BBB-, citing cost controls and rate increases that will help the company perform financially in spite of the weak economy in its service territory. At the parent level, S&P upgraded TECO Energy to BBB from BBB-, but Moody s only affirmed its ratings on TECO holding company debt, which widened the gap between holding company and utility debt from one to two notches to better reflect the structural subordination of the non-utility debt. Moody s noted that Tampa Electric expects its capital expenditures to fall, after peaking in 2009, as projects are completed and others are deferred to levels more in-line with near-term demand. Regulatory Clarity Spurs DP&L Upgrades Moody s and S&P each upgraded DPL subsidiary Dayton Power and Light Company (DP&L) to A2 and A-, respectively, from A3 and BBB. At the parent level, S&P upgraded DPL s issuer rating to A- from BBB, while Moody s upgraded DPL s senior unsecured rating to Baa1 from Baa2. Both agencies cited the Public Utilities Commission of Ohio s approval of a settlement agreement regarding DP&L s proposed Electric Security Plan, which creates regulatory clarity through at least S&P said that the agreement allows DP&L to implement a fuel recovery rider in 2010 while both agencies referred to DP&L s strong cash flow metrics. Moody s stated that DP&L has completed a significant portion of currently-mandated environmental capital expenditures and expects the company will be one of relatively few utilities achieving positive cash flow during the next several years. Moody s also said it believes that DP&L can manage any additional environmental compliance requirements at the new rating level. Ratings Analysis by Company Category Table V presents the distribution of credit ratings over time for the shareholder-owned electric utilities, organized into Regulated, Mostly Regulated and Diversified categories. Ratings are based on S&P long-term issuer ratings at the holding company level, with only one rating assigned per company. At June 30, 2009, the categories had the following average ratings: Regulated = BBB, Mostly Regulated = BBB+, and Diversified = BBB-. These averages were essentially unchanged from March 31, 2009.