Public power utilities have serious reservations about proposed new financial metrics for public power issued by Moody’s Investors Service, American Public Power Association, and the Large Public Power Council (representing the largest municipal systems, such as Los Angeles Department of Water and Power and Phoenix-based Salt River Project) said in comments to the credit rating agency earlier this year. It would be "in the best interest of both issuers and investors that Moody’s refrain from implementing the new methodologies," which segregate public power from the rest of mainstream municipal finance and "will raise more uncertainty than understanding," they said.
"It is difficult to understand how either investors or issuers are better served by the creation of different metrics for different classes of municipal bonds that are otherwise viewed similarly by investors," APPA and LPPC said. The proposed new metrics would create different and unequal approaches for public power credits relative to the majority of other municipal bond issuers, they said.
"The public power community does not support any changes in ratings methodology that will be applied unequally across the overall municipal finance industry," APPA and LPPC said. While a desire to compare public power utilities to other sectors of the electric utility industry is understandable, "investors will be better served by comparing public power to the other enterprises in which they invest—such as the broader base of municipal revenue bonds," the associations said. "Creating a unique methodology for public power has as much potential to confuse as to inform the investor."
There are a great many similarities between public power credit structures and those of various other municipal revenue bonds (such as those of municipal gas or telecommunications utilities), so it "is very difficult to understand how separate metrics and methodologies for these similar enterprises will be valid or helpful," they said.
"Moody’s should continue its practice of relying on a mixture of quantitative and qualitative assessments, and resist the impulse to fine tune key metrics only as they apply to the public power sector," APPA and LPPC said. "The key metrics should remain the same across the municipal finance industry."
APPA and LPPC also objected to Moody’s proposal to use the "Adjusted Debt Service Coverage Ratio"—which treats transfers to municipal governments as an operating expense—as the key coverage metric. The vast majority of public power bond resolutions place debt service payments as a senior payment obligation, plus some utilities can reduce or terminate the transfers if need be, they said. "Given this legal structure, the existing, traditional debt service coverage calculation should serve as the key coverage metric for public power and other revenue-based credits that make governmental transfers."
The associations also expressed concern about the Fixed Obligation Charge Coverage Ratio proposed by Moody’s. The ratio’s denominator "is a measure of debt service costs, so it should include only those contract payments, or portions thereof, that go toward payment of debt service," APPA and LPPC said. The denominator "should not include any other operating or capacity charges that are subject to reduction if the asset is not performing or operating."
Moody’s proposal to adjust its calculation of days of cash on hand "based on the level of debt service reserves mixes assets that have two separate purposes and is not a useful way to measure liquidity," APPA and LPPC said.
—Robert Varela is director of editorial services for the American Public Power Association. Reprinted with permission from Public Power Weekly.