Fitch puts five energy firms on credit watch negative

By the OGJ Online Staff

HOUSTON, Dec. 20 -- In a new blow to the beleaguered energy industry, credit rating agency Fitch IBCA Thursday put five energy -related companies, including AES Corp., UtiliCorp United Inc., Teco Energy Inc., Mirant Corp., and Xcel Energy Inc., on credit watch negative.

Fitch said it took action because of recent negative events and adverse market sentiment affecting the energy sector. Market capitalization of the entire sector has been reduced, the agency said, and access to funding sources in the bank and capital markets for near and intermediate term liquidity needs is less assured than in the past.

A spokesman for Minneapolis-based Xcel Energy said the action came as a "surprise," and the company "takes it credit rating very seriously. We will work with them to address their concerns," said Ed Legge. "It's important to note this is an industry wide issue. These are very unusual times in the independent power producer sector."

Fitch said it doesn't see any of the companies in circumstances comparable to Enron Corp., which collapsed after a loss of market confidence. But it said, "The change that is under way in asset valuations and access to capital will place a burden on these entities. Financial management practices, including leverage and liquidity policies, will need to be reassessed given the expected operating environment."

Fitch said lenders may demand additional credit enhancements, such as collateral, that could place downward pressure on senior unsecured debt ratings. To the extent the companies resort to asset sales to free up resources, asset valuations and the liquidity of asset dispositions will be reduced by a shortage of buyers who can readily finance an acquisition, Fitch said.

Fitch said each of the five companies derives a significant portion of its earnings and cash flow from the merchant energy business and/or has an aggressive capital expenditure program or pending acquisition. Some face large debt maturities over the next 6 months. Fitch said the companies also have debt leverage that is relatively high for their respective rating categories.

With respect to AES, Fitch said the action reflects the company's tight liquidity situation in the next 6 months as a result of current unfavorable capital market conditions for the energy sector and concerns about concentration of dividends from Latin American subsidiaries and weak earnings prospects in the UK.

Negative market sentiment
Given the current negative market sentiment towards the energy sector and AES's depressed stock price, Fitch said the company may encounter difficulty in accessing funding. Since the Latin American subsidiaries have contributed nearly 35% of its total parent cash flow in 2001, the agency noted, any further deterioration in the region's already depressed economy could delay or reduce expected dividends from the region. Fitch said it will review AES' plans and resolve the ratings watch in the next several weeks.

The credit rating agency said it put Mirant on the list because of the Atlanta-based company's consolidated leverage, a weaker profit environment over the near term for merchant generation and wholesale marketing and trading, and some concern about the concentration of dividend sources from Asian emerging markets Fitch said it is not concerned about Mirant's near-term liquidity.

The ratings watch for TECO Energy reflects the company's exposure to NEPCO, an indirect subsidiary of Enron, the engineering and procurement contractor on several of TECO's merchant generation projects, Fitch said. Enron's Chapter 11 filing allowed the banks to stop funding the NEPCO-related projects, Fitch said.

While TECO is negotiating with the banks, Fitch said the "source of funding is still uncertain." Fitch said it had already been looking for TECO to raise equity to strengthen its balance sheet. However, the ratings agency noted TECO doesn't have any significant trading and marketing exposure.

Fitch attributed the rating action for UtiliCorp United to higher business risks and an increased capital investment program resulting from termination of the Kansas City company's plan to spin off Aquila, its wholesale energy trading and marketing subsidiary, and its offer to acquire the 20% public ownership.

The ratings watch for Xcel Energy reflects the potential heavy capital needs of NRG Energy Inc., Xcel's nonregulated subsidiary and the possibility that Xcel may have to provide funding or credit support on behalf of its subsidiary, Fitch said.

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