Fitch said in the report that it didn’t anticipate downgrading the utilities as a result of near-term pension deficits because of a series of mitigating factors:
- US utilities regulated on a cost-of-service basis may be able to apply for higher tariffs to recoup increased pension funding
- most plans’ asset values were particularly low when they were measured in late 2002 and have rebounded significantly in 2003
- an underfunded pension plan does not necessarily imply that cash contributions will be required immediately. In many cases, several years can elapse before a plan sponsor may be forced to reduce pension deficits
- for many companies, the funding deficit is not material relative to cash flow.
Some statistics also can easily overstate the magnitude of the problems. The Fitch study indicates that 86% of defined benefit pension plans were underfunded, when computed according to generally accepted accounting principles (GAAP).
The median funding gap, however, at 21% was below that for a number of other heavily-unionized US corporate sectors rated by Fitch, such as Automotive (See Fitch: Auto Sector Pension Gap $30B Plus by YE 2002 ) and Airlines (See Fitch: Airlines’ Pension Picture ‘Most Dire” ), and only slightly above the underfunding average for the S&P 500 at year-end 2002 of 18%. Also, in striking contrast to both the US Automotive and Airline sectors, Fitch notes that approximately 30% of power & gas company pensions remain near or fully funded.
Some of the companies with the highest level of underfunding also enjoy the highest stability of income streams and low debt leverage, which both combine to limit the credit impact of current pension deficits, according to Fitch. Not only that, but many of the lower-rated unregulated businesses, given their relatively recent inception, are also more likely to have the majority of employees in defined contribution, rather than defined benefit plans.
While pension commitments do not represent the same threat to utility credit quality that they have created for other industrial sectors, changes in funding levels and the manner in which these will be addressed will both need to be monitored over the coming years, Fitch researchers said.
The US Utility Sector Pension Funding study is available at http://www.fitchratings.com/corporate/reports/report.cfm?rpt_id=179158 (Free registration required).