Like a physician with her stethoscope at the outset of a check-up, astute shareholders and directors should use the level and trend of a utility’s market-to-book ratio (MtB) as one of the first...
Business & Money
Business & Money
FERC's ruling on cash management programs will introduce new transparency into how utilities manage their cash.
On Oct. 22, the Federal Energy Regulatory Commission (FERC) ruled that FERC-regulated entities must file their cash management agreements with the commission and notify the commission within 45 days after the end of each calendar quarter when their proprietary capital ratio drops below 30 percent, and when it subsequently returns to or exceeds 30 percent.
FERC's ruling comes in response to analysis that found "severe record keeping deficiencies" by some FERC-regulated entities. In fact, results of the investigation found: 1) cash management agreements generally were not formalized in writing; 2) the terms of programs and the interest associated with loans were not documented in writing; and 3) it was unclear whether interest had been paid to subsidiary companies by the parent companies.
This problem has led credit rating agencies like Fitch Ratings to warn that consolidated cash management accounts and failure to document fund transfers among affiliated companies as intercompany loans could be factors contributing to a U.S. bankruptcy court's decision to consolidate a solvent company in the bankruptcy proceeding of its affiliate.
Moreover, FERC's chief accountant found that utilities had $16 billion in cash management accounts at the time, and now $25.2 billion, according to a recent analysis.
The big three credit ratings agencies-Standard & Poor's, Moody's and Fitch Ratings-have taken a strong interest in this ruling, which aims to protect financial abuses such as when Enron Corp., in the weeks leading up to its bankruptcy filing, tapped its two regulated natural gas pipeline affiliates for $1 billion to stave off a liquidity crisis.
As S&P credit analyst Todd A. Shipman explains in a research note, "The FERC rule has credit rating implications in that it raises the possibility that FERC regulatory oversight could rise to a level that would support an analytical judgment that FERC-regulated entities covered by the new rule are insulated from their parents, and thus could support a ratings differential.
"The elements that determine whether regulatory insulation exists are numerous and complex. … The strongest case for regulatory insulation exist when there are tight, statutory restrictions on cash or asset transfers with real consequences for violations, coupled with active, preemptive oversight."
But Shipman doesn't believe that FERC went far enough in its order. He says FERC should have imposed a minimum common equity balance of 30 percent and a requirement that the pipeline and its parent, for example, maintain investment-grade credit ratings in cash management programs with affiliates. Shipman says that even a minimum equity balance is not particularly protective (it would not support even an investment-grade rating at a typical pipeline business risk score), but at least it would introduce credit-related discipline into the regulatory mix.
Because of this and a view that FERC oversight has been viewed as less than sufficient to justify insulation, Shipman says, "It seems clear to Standard & Poor's that the new rule falls short of providing the requisite insulation to justify any ratings separation for utilities regulated primarily by FERC."