Credit Ratings -- the USA, California,
and California's Energy Businesses
Power Association of Northern California
San Francisco, CA
October 11, 2011
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Copyright © 2011 Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.
Agenda
• Overview of credit ratings
• U.S. corporate credit quality
• Power sector credit quality
• Challenges facing the power sector 2011 and
beyond
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2.
What is a Credit Rating?
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3.
Long-Term Debt Rating Scale
‘AAA’
Highest Credit Quality
‘AA’
‘A’
‘BBB’
‘BB’
 Investment Grade
 Non-Investment Grade
‘B’
‘CCC’
‘CC’
‘SD/D’
Debt in Selective Default / Default
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4.
Standard & Poor’s Rating Analysis Methodology Profile (“RAMP”)
Country Risk
Industry Characteristics
Company Position
Business
Risk
Profitability / Peer Group
Comparisons
RATING
Accounting
Governance, Risk Tolerance,
Financial Policy
Cash Flow Adequacy
Financial
Risk
Capital Structure
Liquidity/Short Term Factors
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5.
Business and Financial Risk Profile Matrix
Source: Standard & Poor’s “Criteria Methodology: Business Risk/Financial Matrix Expanded,” published 5/27/09.
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6.
Global Corporate Average Cumulative Default Rates (1981-2010)
(%)
Rating
AAA
1
0
2
0.04
3
0.17
4
0.3
5
0.44
--Time horizon (years)-6
7
8
9
10
0.57 0.62 0.72 0.82 0.92
AA
0.04
0.09
0.2
0.34
0.46
0.61
0.74
0.85
0.93
1.03
1.11
1.19
1.26
1.32
1.39
A
0.09
0.24
0.42
0.63
0.85
1.09
1.38
1.64
1.92
2.22
2.48
2.69
2.89
3.07
3.3
BBB
0.27
0.73
1.21
1.86
2.56
3.27
3.9
4.55
5.19
5.81
6.4
6.88
7.36
7.87
8.39
BB
1
3.02
5.47
7.77
9.8
11.85
13.6
15.21 16.68 17.94 18.97
19.9
20.69 21.35
22.1
B
4.77
CCC/C
28.31 39.25 45.51 49.42 52.35 53.65 54.79 55.64 56.94 57.87 58.73 59.65
60.6
61.43 61.43
Investment grade
0.14
0.38
0.65
3.44
3.69
3.94
4.19
Speculative grade
4.61
9.14
13.17 16.42 19.01 21.19 23.02 24.57 25.99 27.27 28.36
29.3
30.15 30.88 31.63
All rated
1.85
3.72
10.67 15.78 19.79 22.84 25.26 27.25 28.86 30.26
5.4
1
6.81
1.36
7.97
1.74
8.99
2.1
9.85
2.44
2.79
31.6
3.14
12
1.04
13
1.1
14
1.23
15
1.37
32.79 33.76 34.64 35.44 36.27
4.46
10.61 11.31 11.96 12.52 12.99 13.42 13.82 14.23
Source: Standard & Poor’s “2010 Annual Global Corporate Default Study And Rating Transitions,” published 3/30/11.
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7.
11
0.98
Majority of Non-Financial Corporate Issuers Speculative Grace
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8.
Speculative-Grade Default Experience And Forecast – A Fragile Recovery
We Expect The Speculative-Grade Default Rate To Fall
U.S. Corporate Speculative-Grade Default Rate And 12-Month Forward Forecast
Shaded areas are periods of recession as defined by the National Bureau of Economic Research.
Source: Standard & Poor’s Global Fixed Income Research; Standard & Poor’s CreditPro®.
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9.
Credit Quality: The Nation and California
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10.
Power Sector Credit Quality:
The Nation and California
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11.
Rated Energy Universe
Oil & Gas
E&P
Midstream
Energy
Oilfield Services
Energy / Power
Retail
Distribution
Regulated
Utilities
Merchant
Power
-Electric
-Gas
-Water
-Renewables
•Solar
•Ethanol
•Project
finance/independent
pwr
Oil Refining
E&P = Exploration and production
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12.
Integrated
Ratings Profile of the U.S. Energy Sector
Utilities
AA
BB 1%
4%
Midstream Energy
A
34%
B CCC
9% 1%
A
11%
BB
26%
BBB
61%
BBB
53%
E&P
CCC
7%
A
5%
Oil Refining
BBB
11%
A
18%
B
46%
B
46%
BB
31%
Note: Utilities includes both gas and electric companies
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13.
BBB
12%
BB
24%
Merchants Credit Quality Under Pressure
9.2
2/28/2011
8.2
12/31/2010
6/30/2010
3/31/2010
$/MMBtu
7.2
6/30/2009
4/29/2011
6.2
8/31/2011
5.2
4.2
Jul-2020
Jul-2019
Jul-2018
Jul-2017
Jul-2016
Jul-2015
Jul-2014
Jul-2013
Jul-2012
Jul-2011
Jul-2010
Jul-2009
3.2
Source: Henry Hub Forward Prices, Platt’s,
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14.
Major Merchant Energy Companies 2008 v. 2011
2008
Business
profile
Financial
profile
2011
Corporate
credit rating
Business
profile
Corporate
credit rating
Vulnerable
Aggressive
D/--/--
Weak
Highly
leveraged
B/Stable/--
Weak
Highly
leveraged
B/Stable/--
Vulnerable
Highly
leveraged
CC/Watch Neg/--
Weak
Aggressive
BB-/Stable/--
Vulnerable
Highly
leveraged
B-/Negative/--
Weak
Highly
leveraged
B-/Stable/--
Weak
Highly
leveraged
CCC/Negative/--
Weak
Aggressive
B+/Stable/B-2
Fair
Aggressive
BB-/Stable/B-2
Weak
Aggressive
B+/Stable/--
Weak
Highly
leveraged
B/Stable/--
Calpine Corp.
Dynegy Holdings Inc.
Edison Mission Energy
Energy Future Holdings Corp.
(formerly TXU Corp.)
Financial
profile
NRG Energy Inc.
Mirant Corp.
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15.
Project Finance: Renewables Development May Take a Breather
 Three major incentives are expiring
 Department of Energy Loan Guarantees (Sep 2011),
 Investment tax credit (ITC) cash Grants (Dec 2011)
 Wind production tax credits (PTCs) (Dec 2012)
 Fiscal conditions in US and Europe may affect support for renewables funding
 Demand has been slow to respond to price declines
 Wind at $1000/kW now and Solar at $1/Watt by end-2011
 Utility-scale projects can’t respond quickly and many utilities have reached RPS targets
 High reserve margins and low commodity prices
 Rooftop solar will grow and Fukushima is a positive
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16.
Investor-Owned Electric Utility Ratings Western U.S.
Company
CALIFORNIA
Edison International
Southern California Edison Co.
PG&E Corp.
Sempra Energy
San Diego Gas & Electric
California Indpt Sys Operator Corp.
WESTERN U.S.
Arizona Public Service Co.
Avista Corp.
El Paso Electric Co.
Hawaiian Electric Co. Inc.
IDACORP Inc.
Idaho Power Co.
Nevada Power Co.
NorthWestern Corp.
NV Energy Inc.
PacifiCorp
Pinnacle West Capital Corp.
PNM Resources Inc.
Portland General Electric Co.
Public Service Co. of New Mexico
Puget Energy Inc.
Puget Sound Energy Inc.
Sierra Pacific Power Co.
Texas-New Mexico Power Co.
Tucson Electric Power Co.
*Ratings are as of Sept. 29, 2011.
Rating*
BBB-/Stable/-BBB+/Stable/A-2
BBB+/Negative/-BBB+/Stable/A-2
A/Stable/A-1
A/Stable/-BBB/Positive/A-2
BBB/Stable/A-2
BBB/Stable/-BBB-/Stable/A-3
BBB/Stable/A-2
BBB/Stable/A-2
BB+/Stable/-BBB/Stable/A-2
BB+/Stable/-A-/Stable/A-2
BBB/Positive/A-2
BB/Positive/-BBB/Stable/A-2
BB/Positive/-BB+/Stable/-BBB/Stable/A-2
BB+/Stable/-BB/Positive/-BB+/Stable/B-2
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17.
Credit Risks for Electric Utilities
• Capital spending needs are high
• Electric demand remains soft
• Retail electric rates are rising, even as natural gas prices fall
• Uncertainty regarding environmental regulation
• Need to maintain financial strength
– Continued rate case activity required in many states
– But declining authorized return on equity
– Bonus depreciation benefits to cash flows tail off in 2012
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18.
The San Francisco Utilities and Infrastructure Team
Anne Selting, Director
anne_selting@standardandpoors.com
415-371-5009
Swami Venkataraman, Sr. Director
Swami_Venkataraman@standardandpoors.com
415-371-3071
Tony Bettinelli, Associate
tony_bettinelli@standardandpoors.com
Grace Drinker, Associate
grace_drinker@standardandpoors.com
415-371-5045
Ben MacDonald, Associate Director
415-371-5005
ben_macdonald@standardandpoors.com
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19.
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