RATE UNBUNDLING: ARE WE THERE YET?
FEBRUARY 15, 1996
Emily Eisenlohr, a Moody's senior electric utility analyst. "We certainly look at a lot of quantitative data for doing ratings. But within this environment in particular, we need to look at the regulatory environment within the state and what ongoing mechanisms will affect the rating of the utility. Usually the asset sales are part of the solution, the transition, but they're not the whole story."
But Sabatelle says the U.K. offers one model analysts could look at (em also Australia. "We've rated there," he says, adding that it's fair to say distribution and transmission companies could withstand higher levels of debt than integrated utility companies.
Under the "new" business, cash flows are predictable. Competition shouldn't affect the business for some time. "They'll be cash cows, frankly," the analyst says. "The real risk for investors will be how the utility replaces the earnings that they will have lost from the sale of their generating assets."
Brian M. Youngberg, analyst at Duff & Phelps Credit Rating Co., says there's no model at his firm to evaluate the divested utilities.
"The number of calculations will kind of remain the same," Youngberg says. "We'll probably just kind of look at them from a different perspective. Will a T&D company be more comparable to a gas distribution company?"
Youngberg says it will be more difficult in the future to compare companies quantitatively because each company will be so different. That's why analysts will look at overall business risk profiles and the qualitative aspects of the company (em where they're going, how they're doing competitively and if they still are in generation.
Grading on the Curve
At Fitch, Fetter insists that auctions probably won't substantially influence bond ratings anytime soon. But for those companies buying generation, there's more risk. A company like PG&E, for instance, whose affiliate (U.S. Generating Co.) is getting into unregulated power production on the East Coast, will be scrutinized.
Holding companies and utilities generally are protected from the gambles taken by their subsidiaries or affiliates, say Sabatelle and Youngberg.
Sabatelle says holding company investors are vulnerable because of the holding company's debt. Like Fetter, he says success comes down to company strategy, and international forays. As for unregulated ventures...
"I think it's fair to say utilities in general haven't had a terribly strong track record in diversifying into other non-regulated businesses," Sabatelle says. "So the only fly in this ointment is the reinvestment risk."
Youngberg, who analyzes Southern California Edison, among other utilities, suggests a utility is separated somewhat from risk by affiliates. "It's kind of an exclusive (em what they do outside SoCalEd, it's kind of like there's a firewall between the two," he says.
Dan Scotto of Bear Stearns Securities Corp. says since the auctions returned prices above book value, analysts have been sent back to the drawing board to re-examine impacts on credit ratings.
"There are people saying we'll have discounts to book value and how will those be handled by regulators?" he says. "And it sort of created some regulatory risk here that needed to be resolved. But as it's