TODAY THE ELECTRIC UTILITY INDUSTRY HURTLES TOWARD massive restructuring. This fervor is not surprising as it appears society has become convinced that market forces can work better than a...
Business & Money
In the event of a bankruptcy filing, the inter-company lender would get in line with outside creditors to pursue its claim against the bankrupt affiliate, which is most often ranked as a general unsecured claim. Fitch does believe it is possible to have some benefits of cash management centralization while avoiding the potential pitfalls. "With effective limits on the participants, shared money pools can reduce the group's costs and outside borrowing levels but still preserve distinctions in the credit of participants for ratings purposes."
Moody's: LDCs All Over The Map
Many credit ratings agencies have pointed out that, to date, many utility cash management pools are as diverse as their ratings. Some experts believe that the new FERC order, in bringing more transparency to utility cash operations, may lead to a standardization and greater clarity of the risks inherent in certain utility cash pools. This may be necessary as Moody's credit analyst Edward Tan, in a report, finds that while natural gas local distribution companies, "perform the same purchasing, storage, and distribution business throughout the country, they differ as to their methods of cash management.
"The practices vary as widely as their credit ratings, reflecting both the degree of regulatory supervision and operating guidelines as well as individual company policies and philosophies with respect to whether to separate the cash of their regulated utilities from the non-regulated affiliates and if so, the degree of their cash operation," he writes.
According to Moody's, in a group of 32 LDCs, 13 used cash money pools while 19 did not. Of these 13, seven were in a combined money pool containing utility and non-utility companies and six in separate utility and non-utility money pools. The three "A"-rated companies having one combined money pool are Washington Gas Co., National Fuel Gas Co., and Laclede Gas Co. Tan believes these companies have different mitigants in place that appear to limit the credit risk of their utilities. He notes that many state regulators do not require a strict separation of cash operating systems between the utilities and non-utility affiliates.
Most "A"-rated companies, however, appear to have taken a more pro-active approach toward ensuring the protection and separation of funds belonging to the different legal entities. Moody's, S&P, and Fitch all agree that how companies deal with their internal systems is also indicative of their operating philosophy. In fact, the approach taken by FERC-regulated utilities toward handling their cash is a factor in credit and investors' evaluation, they say.
Reference: Cash Management Programs
Cash management programs include all agreements under which funds in excess of the daily needs of the FERC-regulated entity, along with the excess funds of the entity's parent, affiliated and subsidiary companies, are concentrated, consolidated or otherwise made available for use by other entities within the corporate group. Such programs concentrate affiliates' cash assets in joint accounts for the purpose of providing financial flexibility and lowering the cost of borrowing.
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