Fitch predicts more gloom for US energy companies

US power and gas companies face another grim year in 2003 as liquidity risk, market weakness and litigation and regulatory concerns seem set to continue, according to a new report by rating agency Fitch.

The report, ‘Fixing the machine? US power and gas sector challenges’, noted that high profile events in 2002 – including improper trading practices, accounting irregularities, and management oversights – are likely to further depress investor appetite and increase liquidity risk. The report also said these events exacerbated a number of structural weaknesses in the sector, such as the level of cash volatility, high debt leverage and poor liquidity management.

In 2002 Fitch made 113 rating downgrades, affecting one in four companies in the sector, and only four upgrades. “Multiple downgrades have accounted for a lot of the statistical damage,” said Richard Hunter, group managing director of Fitch’s US global power group. “Half the actions involve issuers' ratings being dragged down by problems elsewhere in their corporate group, while multiple downgrades at just nine groups accounted for 40% of negative actions.” Of those nine, Dynegy and Williams were each downgraded four times.

The report added that less than 15% of the companies that Fitch covers face near-term liquidity threats. A quarter of companies in the sector are on either rating watch negative, or have a negative rating outlook.

Fitch said a number of steps need to be taken to repair the damage done this year. Companies need to reduce leverage, improve trading practices, execute master netting agreements to reduce collateral needs, and improve financial disclosure, Fitch concluded.