No Ratings Actions Due to Underfunded Pensions for Utilities

In its special report giving an update of pension funding in the US utility sector, Fitch Ratings says the median funding levels have risen from 79% in 2002 to 86% in 2004.   The firm did express concern that the funding levels did not improve more considering the significant recovery in investment indices.   Due to modest returns in the past year, Fitch expects the funding levels to drop in 2005.

Ari Kagan, Director for the Fitch Ratings Global Power group gave a few reasons no ratings actions were likely: “Utilities regulated on a cost-of-service basis may be able to apply for higher tariffs to recoup pension expenses, and an underfunded pension plan does not necessarily imply that cash distributions will be required immediately. In many cases, several years can elapse before a plan sponsor may be forced to reduce pension deficits. Furthermore, in many cases, the funding deficit is not material relative to cash flow,” he said in the report.

Kagan said that pensions are less burdensome in the Utility sector than in the Automotive and Airline sectors, but funding levels will nevertheless need to be monitored in the coming years.

Fitch also notes in its report that other post-retirement employee benefits (OPEB) costs have risen in the past several years, and probably will continue to rise due to rising health care costs.   It notes that this is not of as great concern as pensions, though, since companies have the ability to modify OPEB.

The special report entitled “U.S. Utility Sector Pension Funding Update” also addresses factors influencing contribution requirements, the effect underfunded US pension plans have on recovery prospects for other creditors in the event of bankruptcy, and potential changes pension legislation being contemplated by Congress could bring.

The report can be found  here .