Moody's Investors Service is proposing changes to its methodology for rating public power companies, which are not happy about the potential effect on their bond ratings.
Moody's statement said the changes are "in response to heightened concern regarding comparability." In particular, the rating agency wants to better evaluate liquidity and the capacity to handle bad economic conditions.
The American Public Power Association and Large Public Power Council complained the changes would have the opposite effect. "We think it's going to raise more questions than create answers, more uncertainty than understanding," said Mark Crisson, president and chief executive of the APPA.
The changes are not about factors that haven't been considered before. Rather, Moody's is proposing to move them into the key financial metrics used to evaluate a utility's position. "We're not jettisoning the current metrics but further drilling down," said Chee Mee Hu, managing director of project finance at Moody's.
There are three calculations involved — debt service coverage, off-balance-sheet obligations, and cash on hand.
Crisson said the specific changes would be better dealt with in a more subjective way. "You can be very precisely wrong about something. It's better to be roughly right," he said.
The first proposed change is in the "adjusted debt service ratio." Most public power utilities transfer a part of their surplus earnings to a city or county government, typically in the range of 5% to 8%. The payments have been "at the bottom of the waterfall" of cash flow, to Hu said.
But Moody's said the payments are regular, predictable, and not really discretionary. The proposed changes would move the payments to "the top of the waterfall" as an expense.
In their response, the APPA and the LPPC said that the vast majority of public power bonds are senior to the transfers, which can be adjusted. "Transfer payments serve as a buffer that can be reduced in difficult times," they said.
The second proposed adjustment is to the "fixed obligation charge coverage ratio." Many public power utilities finance generating capacity with other utilities in partnerships called joint power agencies. The JPA's bonds are off the balance sheet of the utility, but it will have a "take or pay" contract requiring regular payments. Currently, those are classified as operating expenses. Moody's said all required contract payments should be moved on to the balance sheet as debt service costs.
The power companies argued that only the part of its payments that go to service JPA bonds should be classified as debt service.
The third change is the "adjusted days cash on hand ratio." Moody's proposed to eliminate the equivalent of payments the company would have to be making to have a fully cash-funded one year reserve of debt service payments. The APPA and LPPC statement contended funds restricted for debt service and general operating funds are not the same thing and shouldn't be mixed. Crisson pointed out that none of the other ratings agencies is making similar changes.