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RATINGS ACTIVITY SLIGHTLY AHEAD OF LAST YEAR’S PACE Twenty-four ratings actions affected 11 parent companies or their subsidiaries in the second quarter. 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. At the parent company level, the industry’s average long-term rating remained a solid BBB, essentially unchanged since 2004. The high level of ratings actions in 2002 and 2003, which pushed the parent-level average as low as BBB- in 2002, was spurred by a major expansion into unregulated businesses. The percentage of ratings actions due to upgrades has fallen from approximately 61 percent in 2005-2007, to 48 percent in 2008, and to 32 percent for the first half of 2009. The decline can be attributed in part to higher capital spending. On a trailing 12-month basis, industry capex has risen from $40.1 billion as of September 30, 2004, to $85.1 billion as of March 31, 2009. 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 Edison Electric Institute (EEI) survey, EEI estimates shareholderowned electric utility capex will reach $84.2 billion in 2009, $84.8 billion in 2010, and $86.6 billion in 2011. 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 the second quarter averaged 6.4 percent versus the first quarter’s 6.7 percent and the fourth quarter’s crisis peak of 8.2 percent, according to EEI’s research. Higher average interest expense will affect operating cash flows for many companies going forward.
RATINGS ACTIVITY SLIGHTLY AHEAD OF LAST YEAR’S PACE
Twenty-four ratings actions affected 11 parent companies or their subsidiaries in the second quarter. 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. At the parent company level, the industry’s average long-term rating remained a solid BBB, essentially unchanged since 2004. The high level of ratings actions in 2002 and 2003, which pushed the parent-level average as low as BBB- in 2002, was spurred by a major expansion into unregulated businesses.
The percentage of ratings actions due to upgrades has fallen from approximately 61 percent in 2005-2007, to 48 percent in 2008, and to 32 percent for the first half of 2009. The decline can be attributed in part to higher capital spending. On a trailing 12-month basis, industry capex has risen from $40.1 billion as of September 30, 2004, to $85.1 billion as of March 31, 2009. 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 Edison Electric Institute (EEI) survey, EEI estimates shareholderowned electric utility capex will reach $84.2 billion in 2009, $84.8 billion in 2010, and $86.6 billion in 2011. 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 the second quarter averaged 6.4 percent versus the first quarter’s 6.7 percent and the fourth quarter’s crisis peak of 8.2 percent, according to EEI’s research. Higher average interest expense will affect operating cash flows for many companies going forward.