The Committee of Chief Risk Officers (CCRO) said Thursday that it has developed — with the participation of Standard & Poor’s Ratings Services (S&P) — a model framework designed to standardize and clarify best practice methodologies for assessing the financial liquidity strengths of energy companies.
The CCRO composed a position paper with recommendations aimed at S&P’s Liquidity Surveys. The committee said that the current version of the survey has imposed what many energy company financial and risk officers assert is “an unfair and unrealistic assessment of liquidity requirements.”
The position paper addresses five primary factors influencing liquidity requirements. They are adequate assurance, market stress scenarios, operating cash flows, rating migration and netting of accounts receivables with accounts payables.
“While every energy company’s finances are unique, a new financial liquidity framework that more realistically reflects a company’s liquidity requirement will improve transparency for trading partners and credit rating analysts,” said CCRO Financial Liquidity Working Group Co-Chair Andrew Sunderman, vice president and chief risk officer at Williams Companies.
The committee noted that many of the recommendations could be incorporated into S&P’s quarterly Financial Liquidity Survey request as early as the first quarter of 2005. The CCRO added that in most cases, the best practice methodologies detailed in the paper result in a significant reduction in collateral assessments versus the current version of S&P’s approach.
“Standard & Poor’s is open to considering CCRO’s analysis as part of our independent and objective framework for measuring liquidity adequacy of energy companies,” said S&P energy analyst Toby Hsieh. “We will carefully review the recommendations with an eye towards making changes to our framework where appropriate.” S&P said it expects to publish interim comments on some of the issues raised in the CCRO paper within the next several days.
In developing the paper, Khalid Abedin, the other CCRO Working Group Co-Chair and vice president of Credit Risk Management for Baltimore-based Constellation Energy, said the working group focused first on evaluating historical commodity price data to develop market stress scenarios that represent stressed commodity price market conditions more effectively than assessments now widely used.
“We compiled results of a CCRO-survey to support our premise that contracts with ‘adequate assurance clauses’ should require significantly less than 100% collateral,” Abedin said.
CCRO Executive Director Bob Anderson said the energy industry and ratings community are in brand new territory here. “The robust analysis and practical recommendations jointly developed by this working group will prove exceptionally valuable to investors, energy companies, and rating agencies alike,” he said. “I believe we’ll see more such stakeholder collaboration from CCRO projects in the future.”
The CCRO said that energy companies that were most active in this working group included CCRO members Williams, Constellation Energy, El Paso, Cinergy, PSEG, and APS, with Avista Corp. among the guest participants in this effort.
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