In its annual report on the U.S. electric industry, Moody's Investors Service has concluded that the average credit rating for the industry will deteriorate from its present 'A3' level to 'Baa1' over the next two to three years. While it assigns real regulatory change a longer time frame than proposed in California and New York, Moody's believes the price of power will continue to come down, squeezing utilities' profit margins and constraining their financial flexibility.
Moody's predicts that vertically integrated utilities will disaggregate, some choosing to become distribution companies, others generating companies. The risk to bondholders, however, is that utilities will spin off or sell transmission and distribution assets, leaving their obligations secured only by generating assets, which are subject to higher operating risk and often hold questionable market value. Many high-cost electrics find regulatory, technological, and geographical barriers to market entry by competitors the only factors preventing a forced price reduction, loss of market share, or both.
From a credit perspective, Moody's said, utilities will have to be analyzed as unregulated companies operating in an open market, according to what it costs to produce their product and how they plan to market, transport, and distribute their product. The utilities most likely to maintain present levels of credit quality are those that combine low production costs and creative, customer-oriented service.
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