The PJM Interconnection (PJM) said Sept. 7 that Moody’s Investors Service had upgraded PJM’s and PJM Settlement’s issuer ratings to Aa2 from their previous Aa3.
“The identical ratings of the two entities reflect the symbiotic nature of their operations and the existence of cross guarantees,” Moody’s said Sept. 6. The rating outlook for both issuers is stable.
Moody’s said the upgrades were prompted by PJM’s financial performance, which has been stronger than the other regional transmission operators (RTOs) it rated. Moody’s also said it considered PJM’s breadth, depth, and essential nature of its function, as the operator of one of the oldest and largest electric systems in the country.
“I think the stability of our membership and their agreement with PJM’s commitment to repay debt as quickly as possible are key factors in this step higher in the investment grade credit ratings,” said Suzanne Daugherty, senior vice president, chief financial officer and treasurer. “The rating also takes into account our risk management guidelines, which provide collateral protection for the members’ transactions on the system.”
The rating reflects the robust and predictable nature of cash flows that are generated via tariff rates approved by the Federal Energy Regulatory Commission (FERC). That cash flow provides timely cost recovery as well as the funding of PJM’s financial reserve.
“For the past few years, PJM has demonstrated cash flow credit metrics that are stronger than its RTO peers,” Moody’s said in its Sept. 6 findings.
“For example, for the year ending December 2015, we calculate PJM’s ratio of cash flow from operations excluding changes in working capital (CFO Pre-WC) to adjusted total debt to be above 40%,” Moody’s said. “This metric is consistent with a score of “Aaa” for this factor in our rating methodology for regulated electric and gas utilities with low business risk. By comparison, our calculated ratio for the Electric Reliability Council of Texas, Inc. (ERCOT, Aa3 stable) is about 30% and for the Midcontinent Independent System Operator, Inc. (MISO, A1 stable) is about 20%,” Moody’s said.
“The service fees collected by PJM are very modest in comparison to the gross revenues the RTO processes for transactions within the system, such as for the sales of energy and capacity, transmission services, transmission congestion, ancillary services, etc.,” Moody’s said.
In 2015, gross billings for PJM market services were approximately $42.6bn as compared to about $269m of PJM service fees, Moody’s said. “PJM’s ability to use first-in cash from member billings to cover its fees, and an operating agreement that requires members to share the costs of any default, provide significant protection in the event of non-payment,” said the ratings service.
During 2015, approximately 61% of PJM’s operating expenses were billed to 21 members that were for the most part investment grade, or in some cases provided a guarantee from an investment grade affiliate, Moody’s said.