TEXT-Moody's on U.S. investor-owned electric utilities

(The following statement was released by the rating agency)

Jan 12 - The underlying fundamentals for the U.S. investor-owned electric
utility sector remain intact with solid credit metrics and a supportive
regulatory environment, says Moody's Investors Service in a new report on the
sector. The 2009 industry outlook report also identifies some of the material
intermediate and longer-term challenges facing the electric utility sector.
"While we foresee no significant changes to state support of authorized
recovery mechanisms associated with costs and investment at this time, rising
business and operating risks may stress the industry's credit profile longer
term," said Moody's Public Infrastructure Finance Group Managing Director Larry
Hess, a co-author of the report. "The risk will become more obvious if some
fundamental changes hit the sector sooner than expected which could include
mismanaging liquidity sources or new Federal legislation"
Other challenges faced by investor-owned electric utilities, he said, include
the need to replace and refurbish aging infrastructure; an aging labor force
and a growing pension burden; and the potential for new CO2 emission
legislation. In addition, the report notes how major financial institutions
have been exiting commodity markets, representing an intermediate-term risk as
contract expirations occur amid higher capital costs while managing hedging
activity becomes more challenging.
"These issues might have a significant impact on overall credit quality for the
sectorespecially if they materialize more quickly than expected," said Jim
Hempstead, a Senior Vice President and co-author of the report. "Our concern is
that the sector is caught flat-footed. Still, we believe the sector has ample
time to revise, adjust and amend corporate finance policies and long-term
corporate strategies ahead of changing market conditions."
According to the Moody's report, the biggest intermediate-term challenge for
the sector will be to balance a utility's financing needs with its
infrastructure investments. The rating agency recommends a balanced mix of
debt, preferred stock and common equity as an appropriate financial strategy
for companies within a solid, investment-grade sector with over a century of
operating experience.
"Given the sheer magnitude of the implications for the sector," said Hempstead,
"we remain befuddled as to why utilities are not more aggressive with their
balance-sheet strengthening programs."
Significant environmental legislation, including measures covering carbon
emissions, is the "wild card" in Moody's fundamental outlook, as such laws are
the industry's most significant long-term risk as they come with uncertain
costs, framework and implementation timeframe.
Although such new laws may be introduced soon, it will likely take time before
they are enacted and the details of implementation are fully worked out.
In contrast to utilities owned by a government, investor-owned utilities are
subject to state regulations that cover how operating and other costs are
recovered by the investors with a reasonable rate of return -- a regulatory
framework that Moody's considers a fundamental credit positive.
"None of these issues are new to the sector and all of these challenges and
risks must be managed and addressed through the regulatory framework," said
Hempstead. "We foresee little long-term risk from mismanagement of the
increasing social mandates that exist between utilities and their constituents,
including customers, employees, investors, lenders, regulators and
legislators."
The report, "Industry Outlook: U.S. Investor-Owned Electric Utilities," is
available at moodys.com.
(New York Ratings Team)