While there is a great degree of variation in how utility holding companies manage the cash of their regulated local gas distribution company (LDC) subsidiaries, generally the ones that maintain separate cash management programs for their regulated LDCs have higher credit ratings, according to a new report from Moody’s Investors Service.
“LDCs have cash management practices that are as diverse 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 from the regulated utility from the non-regulated affiliate,” said Moody’s Senior Analyst Edward Tan, who authored the report.
He said practices range from having the least-risky approach of requiring the utility to maintain its own cash management programs that are separate and apart from its non-regulated parent or non-utility affiliate to co-mingling cash into one “sweep” account or one money pool that the non-regulated utility then manages.
In total, Moody’s rates 38 LDCs, which have $32 billion in rated debt outstanding. Out of 32 LDCs that the agency studied for this report, 14 maintained separate cash management programs, as well as separate bank accounts for their utility and non-utility affiliates, and 10 of the 14 had “A” ratings, the highest in the group.
“Either by design, regulatory guidelines or desire to maintain operating simplicity, these companies have separate bank and cash management programs for their operating utilities,” said Tan. “While not the most flexible, their structure is the most conservative and provides for the greatest safeguards in ensuring that the utilities’ cash is retained within the utilities operating system.”
Of the 32 utilities, 13 used cash money pools, seven of which were combined money pools for both the utility and non-utility operations. The three “A” rated companies using combined money pools — generally the least safe policy — had “different mitigants to limit the credit risk to their utilities,” said Tan. “Clearly where the parent is a non-regulated entity administering sweep accounts or combined money pool accounts, there needs to be additional safety features in place to ensure that the utilities’ funds are always secure and available to the utility on demand.”
Seeking to shield regulated companies from cash-hungry parent corporations, FERC last month issued a final rule that requires regulated natural gas and oil pipelines and public utilities who participate in intra-corporate cash management pools with their parents and affiliates to submit written agreements to the agency for scrutiny (see Daily GPI, Oct. 23).
In addition to reporting the cash management agreements to the agency, regulated companies will be required to notify the Commission within 45 days after the end of each calendar quarter when their proprietary capital ratio dips below 30%, and when it returns to or exceeds that level. The final rule takes effect later this month.
Section 404 of Sarbanes-Oxley also requires independent certification of a company’s internal controls, which “may be good or bad regardless of the type of cash management program being employed,” said Tan.
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