Fitch: Credit Implications for Commodity Cost Recovery for U.S. Utilities

Business Wire, Feb 15, 2006

NEW YORK -- Fitch Ratings has published a report analyzing the credit risks associated with commodity cost recoveries for U.S. utilities. Current procedures to adjust tariffs to reflect fluctuations in fuel and power costs differ significantly in both timing and effectiveness, and rate adjustment implementation is subject to regulatory and political risks. These risks are magnified in the current environment of high energy prices. While policy changes in worst case scenarios could result in significantly reduced cash flow, liquidity constraints, and isolated insolvencies (especially for distribution utilities), a more gradual deterioration of creditworthiness as legislators and regulators attempt to minimize rising consumer rates is also a concern.

A utility's ability to weather high and rising commodity costs is influenced by many related factors. These include the state's market structure, rules regarding power procurement and provider of last resort obligations, the utility's resource mix relative to its load requirement, access to adequate liquidity, and the state's regulatory/ political environment. Within this context, effective and timely commodity cost-adjustment mechanisms provide utilities with greater assurance of ultimate recovery in a rising energy price environment.

Distribution utilities with effective contractual or regulatory mechanisms in place that transfer commodity price risk to suppliers or ratepayers are generally perceived to have relatively low commodity risk profiles. Nonetheless, these companies are particularly vulnerable to potentially adverse legislative/regulatory changes during a period of extended high and volatile prices. Conversely, integrated utilities with less effective or absent cost recovery mechanisms often have alternative capabilities, such as efficient operation of low-cost coal or nuclear generating plant and hedging operations to offset the potential negative impacts of detrimental commodity cost recovery policy outcomes.

The report provides an analysis of various utility energy cost-recovery mechanisms and a sub-sector analysis for integrated electric utilities and pure electric distributors.

Fitch will hold a teleconference on Wednesday, Feb. 22, 2006 at 11:00 a.m. EST to discuss the report. Interested parties should call 877-241-2557 and give the title of the call as 'Fitch Ratings U.S. Commodity Cost Recovery'. In addition, Fitch will discuss its U.S. Power and Gas 2006 Outlook for Key Credits report, published Dec. 15 2006, incorporating important recent developments and their credit implications in the discussion.

The full report 'U.S. Utilities: Credit Implications of Commodity Cost Recovery' can be found on the Fitch Ratings web site at www.fitchratings.com.

Additional Fitch reports on the topic of higher commodity prices and their credit implications available on Fitch's website include 'U.S. Power and Gas 2006 Outlook,' published Dec. 15, 2005, and 'Rising Unit Costs: A Threat to Utility Sector Credit,' published Nov. 4, 2005.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.