Credit Ratings3 min read
Predictive analytics, automation and advanced technologies have led to some major changes in the way that credit rating agencies work. It used to be as simple as looking at historical financial performance, but not anymore. More than ever, rating agencies are relying on advanced technologies and automation to analyze trends and better determine where organizations are heading. They are not just looking at where organizations are right now, they are predicting where those organizations are going to be years from now.
Does the change in analytic focus affect how AMP should approach and evaluate finances? Does it affect how our members should forecast and manage financial performance? If we already have a good credit rating, do we really need to do anything? The answer is yes.
Given these new norms inside the financial industry, it is critically important that public power adapt. Simply doing what it takes to maintain a good credit rating is not enough. Entities, such as AMP and our member communities, must be proactive and consistent in seeking out ways to increase their creditworthiness.
Consider our recent completion of the hydroelectric projects, for example. Rating agencies were very cautious in their ratings of AMP and the bonds that we sold because of those projects — as credit ratings agencies tend to be during the construction phase of any large project. However, once the projects were completed, we expected the credit rating agencies to recognize our success by adjusting the project credit ratings accordingly, but until recently, that upward adjustment did not come to fruition. Justifiably, the agencies wanted to see some historical operations data (capacity factor, annual MWh output, etc.) on overall equipment performance — both by test performance and construction performance — and more recently, agencies are forecasting performance and scoring projects participants on a weakest link basis.
Recognizing this and understanding that the financial health of a utility is as critical as the health of its infrastructure, AMP has increased our expertise and expanded our program offerings in regards to the financial services we offer members. In recent years, we have brought on experienced, high-performing staff members to develop and manage programs designed to assist members with financial review and credit rating establishment, improvement and management.
AMP initiated our Finance and Accounting Subcommittee and member credit-scoring program in the early 2000s because the industry was moving away from a bilateral and cost-based model to a more commodity-driven structure. Additionally, the Board of Trustees and management were trying to move to a more asset-based portfolio due to rising prices (2004–2006). Through the past decade, we have modified our policy to mimic rating agency changes and still today, it remains a strong tool. Recently, AMP has made it a goal to make our program stronger, but this will take input and help from our members.
I encourage our members to look at their financial performance and consider how it might be improved. Consider conducting an audit of capitalization policies and operating reserves, a study of rates and cost-of-service, or a reassessment of financial goals. AMP’s financial services guided by expert staff and affiliates, such as Hometown Connections, can assist in these endeavors.
This issue of Amplifier is our Annual Services Guide. Throughout the magazine are descriptions of the many valuable services that AMP provides for our members, and I would like to steer your attention to our financial services. AMP provides financial education forums and services to assist members through financing capital projects. Our “on-behalf-of” financing program is unmatched in its ability to assist members seeking to finance electric utility projects.
I encourage you to peruse the many services outlined in the pages that follow and think about how they might benefit your community and electric utility. Do not hesitate to reach out to us if you would like more information, the AMP Services Guide includes contact names.
It is critical that we work together and be proactive regarding our collective financial health. If we all give these issues the attention that they deserve, as a group, we can better affect our overall credit ratings and outlooks. Remember: credit ratings affect financing costs — the better credit ratings we obtain, the better the financing rates will be for all of our projects.
AMP is conducting this same review with the rating agencies. Recently we participated in a rating methodology review/transparency review with Moody’s Investors Service. Last year we concluded a complete overview of our line of credit facility. In addition, through discussions with a bank syndicate, we were able to talk through ideas on how AMP can increase ratings to better enhance our member systems.
AMP is very proud of our members and their efforts in our credit scoring program. Our goal is to get more members to make minor adjustments to enhance their credit.