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What is A Credit Rating?*. A Credit Rating Represents an Opinion Regarding
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Richard W. Cortright, Jr., Managing DirectorU.S. Utilities and Infrastructure Ratings
2. Final point on slide: we are a disinterested observer of behavior. We don’t care…Final point on slide: we are a disinterested observer of behavior. We don’t care…
3. What is A Credit Rating?
It Is Not a Recommendation to Buy, Sell or Hold a Security…
It Is Not an Audit of Obligors’ Financial Statements...
It is Not Intended To Stimulate Any Market Or Investor Response! Final point on slide: we are a disinterested observer of behavior. We don’t care…Final point on slide: we are a disinterested observer of behavior. We don’t care…
4. Role in the Capital Markets
Investors and Issuers Rely on a Credit Rating Because It Provides Investors, Traders and Counterparties…
An independent, objective and forward looking opinion of creditworthiness
A global benchmark that helps to price credit risk and compare credit risk among peers
5. Rationale for Adjusting Financial Statements Issuers’ Audited Financial Statements Are Not Necessarily Viewed as Representative of Analytical “Truth”
Adjustments Create a Depiction of the Economic Reality of Issuers’ Risks, Rights and Benefits
Adjustments Enable More Meaningful Peer and Period-Over-Period Comparisons
6. Principle Adjustments to Financial Statements Common Adjustments
Operating and Capital Leases (PPA Exception)
Purchased Power Agreements
Stranded Cost Securitization Financings
Hybrid Preferred Instruments
Pensions and OPEBs
Asset Retirement Obligations
Key Ratios Affected
Funds From Operations (FFO) to Total Debt
FFO to Interest Coverage
Total Debt to Total Capitalization
7. Principle Adjustments – Operating Leases Which cases is recovery of a PPA more straightforward. Do some specific examples. Which cases is recovery of a PPA more straightforward. Do some specific examples.
8. Principle Adjustments – Asset Retirement Obligations Which cases is recovery of a PPA more straightforward. Do some specific examples. Which cases is recovery of a PPA more straightforward. Do some specific examples.
9. Principle Adjustments – Pensions and OPEB Obligations Which cases is recovery of a PPA more straightforward. Do some specific examples. Which cases is recovery of a PPA more straightforward. Do some specific examples.
10. Principle Adjustments – Stranded Costs From Standard & Poor’s Encyclopedia Of Analytical Adjustments:
For Rate-Regulated Utilities, We Remove The Effects Of Debt Related To Securitization Of Stranded Costs To The Extent That Debt Is Serviced Separately By The Utilities' Customers Through Direct Inclusion In Rates.
Because Customers, Not The Utility, Are Responsible, By Statute, For Principal And Interest Payments, We Remove Debt From The Balance Sheet For Analytical Purposes.
We Also Remove Related Amounts From Revenue, Depreciation, And Interest.
11. Purchased Power Agreements --- Credit Characteristics Which cases is recovery of a PPA more straightforward. Do some specific examples. Which cases is recovery of a PPA more straightforward. Do some specific examples.
12. Debt Imputation of PPAs Debt imputation more accurately reflects the “build’ versus “buy” risks and tradeoffs
Debt imputation more accurately reflects the “build’ versus “buy” risks and tradeoffs
13. Calculation of PPA Debt Equivalent Discuss who we do not do this to. Discuss who we do not do this to.
14. What is a Risk Factor and Why is it Used?
15. Guidelines for Determining Risk Factors Recently we have relaxed our risk guidelines.
We’ll talk about details further on in the presentation.Recently we have relaxed our risk guidelines.
We’ll talk about details further on in the presentation.
16. Example – 12-Year PPA Recovered Through FAC
17. Using Results to Adjust S&P Ratios To reported interest is also added our imputed interest, calculated by multiplying the average cost of debt of the utility by the OBS amount for PPAs for each year in the contract. While we add this imputed interest expense to the FFO calculation, we reduce power purchase expenses by this much. To reported interest is also added our imputed interest, calculated by multiplying the average cost of debt of the utility by the OBS amount for PPAs for each year in the contract. While we add this imputed interest expense to the FFO calculation, we reduce power purchase expenses by this much.
18. Renewable Energy PPAs
19. Regulatory Response To This Criteria