Fitch Ratings: U.S. Wholesale Energy Markets Prepare For A Tough 2003.

Business Editors

NEW YORK--(BUSINESS WIRE)--Dec. 17, 2002

The Fitch Ratings Global Power group has published its U.S. Power & Gas Sector Outlook for 2003, outlining the agency's expectations for the 315 power and gas utilities rated by Fitch in the U.S. While the study confirms market expectations of a tough year ahead in wholesale energy markets, Fitch notes that the power sector includes many companies entering 2003 with stable prospects.

"If you characterize the events of 2002 as a multi-car crash on the highway, then it is important to remember that the majority of drivers on the road make it home after a highway pile-up, albeit shaken, and with a new respect for the rules of the road," said Richard Hunter, Managing Director, Fitch Ratings. "The majority of our integrated utility and distribution network issuers still have stable outlooks on their ratings. The sector that has caused most concern this year -- the diversified & merchant energy companies -- accounts for only 10% of the issuer base, but has picked up most of the column inches in press coverage."

Nonetheless, it seems that bad parents make bad drivers. "Almost 40% of the parent companies for our utilities do have a Rating Watch Negative or Rating Outlook Negative status," said Robert Hornick, Senior Director, Fitch Ratings. "That's a lot higher than the figure for the utility operating companies -- approximately 24%, and distribution networks -- around 15%, and a lot of the negative pressure for the parents comes from wholesale market issues."

Thus, while core utilities can continue to perform strongly, improvement in the wholesale sector remains important, for the power sector and for the capital markets. The diversified & merchant energy companies account for roughly $1 in every $5 of capital markets debt maturing between 2003 and 2010. This excludes the bank lending market, which has significant exposure to the merchant sector, particularly in 2003 maturities. Add to this exposure to project finance debt in the generation sector, and the grim outlook for 2003 remains a cause for concern. "The attitude of bank creditors to the merchant energy companies with large maturities in 2003 will be key in determining how many companies enter bankruptcy," said Ellen Lapson, Managing Director, Fitch Ratings. "Many creditors may form the opinion that keeping these companies alive through waivers and consensual restructurings will be the most productive approach." The pledging of assets, as has been the case with Calpine Corp, The AES Corp., Williams Companies and others during 2002, will likely remain a key feature, and Fitch will be providing enhanced recovery analyses in the New Year. "Giving security over assets can be the only choice left for some companies," said Hunter, "while it avoids insolvency and default, the negative implications for existing creditors have obviously seen ratings on unsecured obligations fall sharply in these cases."

Fitch's study notes more stability in the gas pipeline and public power sectors. For gas pipelines, the common theme of exposure to parent misdeeds for some companies is joined by regulatory issues. "Clarity on the current case brought by the Federal Energy Regulatory Commission against El Paso Corp. will be a watershed in the current wave of regulatory challenges," said Ralph Pellecchia, Senior Director, Fitch Ratings, "We hope to see a resolution on the El Paso case by Spring 2003." Public power has remained virtually unscathed by the volatility in the IOU and merchant energy sectors, although Fitch continues to monitor for fall-out affecting the nation's municipal and state power utilities.

The 42-page report analyzes the exposure of Fitch-rated companies to the four key risks for 2003 -- wholesale market exposure, regulatory/litigation challenges and refinancing risks -- and lists the companies most and least affected. This is complemented by updated analysis on 22 individual groups, including American Electric Power Co., Calpine Corp, Constellation Energy Group, Duke Energy Corp., Edison International, Mirant Corp., Public Service Enterprise Group, Sempra Energy and TXU Corp. Full current lists of Fitch's coverage by sub-sector and Outlook are also provided.

The report is available on the Fitch Ratings web site at 'www.fitchratings.com' from the 'Global Power' sector page under 'Highlight Reports', or by contacting the U.S. Ratings Desk at 1-800-893-4824.