Counter-Party Credit Risk Assessment and Enforcement Strategies
Explore the key provisions and updates in the Credit Risk Assessment and Enforcement process as outlined in ERCOT's public documentation. Learn about the financial scoring models, protection of counter-party credit scores, and the MISO-based model results. Understand the changes to financial ratios, sector results, and more. Stay informed on the mechanisms for adjusting unsecured credit limits and monitoring credit quality to mitigate risks effectively.
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4. Counter-Party Credit Risk Assessment and Enforcement Mark Ruane Director, Settlements, Retail and Credit CWG / MCWG ERCOT Public October 16, 2020
Credit Risk Assessment and Enforcement Draft NPRR 2 ERCOT Public
Credit Risk Assessment and Enforcement Updated draft NPRR key provisions Reorders Section 16 credit monitoring language Credit scoring provisions qualitative assessment and financial scoring model Financial scoring details to be in a separate OBD Financial score updated quarterly Representative qualitative considerations Qualitative assessment may be updated at any time Annual review of financial scoring parameters by CWG / MCWG 3 ERCOT Public
Credit Risk Assessment and Enforcement (cont.) Counter-Party credit scores are Protected Information In the event of deterioration of credit quality, provisions for Change to Unsecured Credit Limits, Change to TPE, or Designation as an unreasonable credit risk TPE adjustment mechanism Five Bank Business Day Notice before changes to TPE or Unsecured Credit Limit 4 ERCOT Public
Credit Risk Assessment and Enforcement MISO-based financial scoring model 5 ERCOT Public
Credit Risk Assessment and Enforcement Financial Scoring Models Updated using 2019 Counter-Party financial data For both testing models, revised data reduced the fit of the model score to the agency rating for rated entities. Therefore Market Participants prior to implementation should be comfortable that the financial ratios and weights are reasonable. Changes to weightings and sector results follow. 6 ERCOT Public
Credit Risk Assessment and Enforcement MISO-based model score results by ERCOT-defined segment: 2018 financial data (both classes). Public Power Non-Public Power Model Load + Gen Load + Gen CRRAH All Load Trader Gen CRRAH All All CPs Count Average Median Max (worst) Min (best) Stdev. Skewness 9 8 17 33 128 3.14 2.69 6.98 1.00 1.78 0.52 21 32 22 236 3.43 3.31 6.98 1.00 1.64 0.31 253 3.35 3.27 6.98 1.00 1.63 0.39 2.41 2.42 3.49 1.84 0.55 0.61 1.97 1.54 4.27 1.27 0.94 2.10 2.20 1.90 4.27 1.27 0.79 1.14 4.23 3.73 6.91 1.34 1.68 0.10 3.87 3.86 6.30 1.31 1.28 -0.04 3.51 3.69 6.34 1.00 0.97 0.11 3.35 3.44 5.25 1.00 1.32 -0.04 Note that lower scores indicate higher credit quality. Scores can be duplicated when different CPs have same guarantor. 7 ERCOT Public
Credit Risk Assessment and Enforcement MISO-based model score results by segment: 2019 financial data, calibrated using 2018 financial data Public Power Non-Public Power Model Load + Gen Load + Gen CRRAH All Load Trader Gen CRRAH All All CPs Count Average Median Max (worst) Min (best) Stdev. Skewness 9 8 18 32 130 3.01 2.75 6.99 1.00 1.59 0.23 24 33 25 244 3.31 3.34 6.99 1.00 1.48 0.07 262 3.25 3.26 6.99 1.00 1.47 0.13 2.37 2.44 3.20 1.82 0.48 0.40 2.29 1.52 4.69 1.25 1.33 1.31 2.48 2.05 4.94 1.25 1.12 1.14 4.03 3.87 6.91 1.34 1.44 0.25 3.29 3.12 6.19 1.00 1.25 0.56 3.53 3.42 5.78 1.00 0.92 -0.15 3.66 3.96 5.58 1.00 1.22 -0.64 Note that lower scores indicate higher credit quality. Scores can be duplicated when different CPs have same guarantor. 8 ERCOT Public
Credit Risk Assessment and Enforcement MISO-based model score results by segment: 2019 financial data, calibrated using 2019 financial data (both classes). Public Power Non-Public Power Model Load + Gen Load + Gen CRRAH All Load Trader Gen CRRAH All All CPs Count Average Median Max (worst) Min (best) Stdev. Skewness 9 8 18 32 130 2.68 2.55 5.67 1.00 1.38 0.21 24 33 25 244 3.00 3.22 5.72 1.00 1.32 -0.06 262 2.93 3.15 6.99 1.00 1.39 0.15 1.40 1.27 2.08 1.00 0.39 0.51 2.50 1.00 6.99 1.00 2.59 1.44 2.00 1.06 6.99 1.00 1.86 2.28 3.65 3.53 5.72 1.77 0.94 0.09 3.29 3.20 5.26 1.00 1.34 -0.07 3.28 3.53 5.60 1.00 1.07 -0.20 3.18 3.52 5.26 1.00 1.21 -0.28 Note that lower scores indicate higher credit quality. Scores can be duplicated when different CPs have same guarantor. 9 ERCOT Public
Credit Risk Assessment and Enforcement MISO Model Results Comparison 80 70 60 50 40 30 20 10 0 1 2 3 4 5 6 7 2018 data 2019 data calibrated on 2018 2019 data calibrated on 2019 1 0 ERCOT Public
Credit Risk Assessment and Enforcement MISO-based model weightings, calibrated using 2018 financial data. Non-Public Power Public Power Ratio Category Liquidity Liquidity Liquidity Liquidity Weight Ratio Weight EBITDA/Interest expense Cash Earnings/Debt Service Free Cash flow/Total Debt Quick Ratio 0% 0% 24% 0% Days Cash/SGA+Interest Expense Debt Service Coverage Equity/Total Assets Times Interest Earned Cash/Current Liabilities CFFO/Total Debt Capex/Sales Total 0% 0% 49% 51% 0% 0% 0% 100% Debt/Total Capitalization Short Term Debt/Total Debt Leverage Debt/Net Fixed Assets Debt/TNW Leverage 1% 0% 29% 0% Leverage Leverage Return on Sales Return on Assets Operating Margin Return on Equity Performance Performance Performance Performance 1% 0% 14% 31% Total 100% 1 1 ERCOT Public
Credit Risk Assessment and Enforcement MISO-based model weightings, calibrated using 2019 financial data. Quantitative Ratios Non-Public Quantitative Ratios Public Ratio Type Liquidity Liquidity Liquidity Liquidity Leverage Weight Ratio Weight EBITDA/Interest expense Cash Earnings/Debt Service Free Cash flow/Total Debt Quick Ratio Debt/Total Capitalization Short Term Debt/Total Debt Leverage Debt/Net Fixed Assets Debt/TNW Return on Sales Return on Assets Operating Margin Return on Equity 0% 0% 28% 0% 32% 0% 0% 6% 3% 0% 31% 0% 100% Days Cash/SGA+Interest Expense Debt Service Coverage Equity/Total Assets Times Interest Earned Cash/Current Liabilities CFFO/Total Debt Capex/Sales Total 0% 0% 47% 53% 0% 0% 0% 100% Leverage Leverage Performance Performance Performance Performance Total 1 2 ERCOT Public
Credit Risk Assessment and Enforcement MISO-based model ratio bounds. Non-Public Power Public Power Ratio Category Liquidity Liquidity Liquidity Liquidity Min Max Ratio Min Min EBITDA/Interest expense Cash Earnings/Debt Service Free Cash flow/Total Debt Quick Ratio - - - - 9.00 8.00 0.50 1.25 Days Cash/SGA+Interest Expense Debt Service Coverage Equity/Total Assets Times Interest Earned Cash/Current Liabilities CFFO/Total Debt Capex/Sales - 143.89 0.03 2.05 677 1.80 0.83 2.00 0.01 0.01 0.66 0.01 0.01 0.01 Debt/Total Capitalization Short Term Debt/Total Debt Leverage Debt/Net Fixed Assets Debt/TNW Leverage 0.01 0.01 0.01 0.01 0.70 1.00 2.00 12.99 Leverage Leverage Return on Sales Return on Assets Operating Margin Return on Equity Performance Performance Performance Performance NA 0.01 0.01 0.01 16.00 6.00 30.00 15.00 1 3 ERCOT Public
Credit Risk Assessment and Enforcement ERCOT financial scoring model 1 4 ERCOT Public
Credit Risk Assessment and Enforcement ERCOT model score results by segment: 2018 financial data Load + Gen Load Trader Gen CRRAH All Count Average Median Min (worst) Max (best) Stdev. Skewness 33 128 3.69 3.30 0.61 6.86 1.95 0.26 30 32 30 253 3.14 2.44 0.05 6.86 1.71 0.83 2.42 2.20 0.93 5.79 1.15 1.70 2.26 2.20 1.17 5.00 0.75 2.29 2.49 2.58 0.05 5.48 1.03 0.53 3.18 2.46 1.43 6.60 1.51 1.04 Note that higher scores indicate higher credit quality. Scores can be duplicated when different CPs have same guarantor. 1 5 ERCOT Public
Credit Risk Assessment and Enforcement ERCOT model score results by segment: 2019 financial data, calibrated using 2018 financial data Load + Gen Load Trader Gen CRRAH All Count Average Median Min (worst) Max (best) Stdev. Skewness 32 130 6.08 6.01 1.18 10.00 2.12 0.13 33 34 33 262 5.22 4.44 1.02 10.00 1.93 0.81 4.24 4.05 1.39 8.06 1.26 0.94 4.40 4.25 3.59 5.69 0.55 0.83 4.13 4.15 1.02 6.81 1.00 -0.20 4.70 4.00 2.48 10.00 1.73 1.51 Note that higher scores indicate higher credit quality. Scores can be duplicated when different CPs have same guarantor. 1 6 ERCOT Public
Credit Risk Assessment and Enforcement ERCOT model score results by segment: 2019 financial data, calibrated using 2019 financial data Load + Gen Load Trader Gen CRRAH All Count Average Median Min (worst) Max (best) Stdev. Skewness 32 130 5.53 6.59 0.31 10.00 3.44 -0.12 33 34 33 262 4.00 2.21 0.31 10.00 3.24 0.73 2.85 1.48 0.41 10.00 2.62 1.70 1.83 1.48 0.89 4.77 0.85 1.57 2.05 1.59 0.89 5.91 1.29 1.73 3.32 1.80 0.98 10.00 2.83 1.33 Note that higher scores indicate higher credit quality. Scores can be duplicated when different CPs have same guarantor. 1 7 ERCOT Public
Credit Risk Assessment and Enforcement ERCOT Model Results Comparison 120 100 80 60 40 20 0 1 2 3 4 5 6 7 8 9 10 2018 data 2019 data calibrated on 2018 2019 data calibrated on 2019 1 8 ERCOT Public
Credit Risk Assessment and Enforcement ERCOT model weightings calibrated using 2018 financial data. Ratio Working Capital/Sales Cash/Assets Current Ratio EBITDA/Interest expense Debt Service CFO/Sales FCF/Debt Total Debt/Total Capital Leverage Equity/Assets EBITDA/Sales Net Income/Assets Total Assets Tangible Net Worth Sales/Assets Alternative Metric 1 Alternative Metric 2 Category Liquidity Liquidity Liquidity Weight 0% 0% 40% 8% 0% 0% 16% 6% 20% 10% 0% 0% 0% 0% 0% 100% Debt Service Debt Service Leverage Profitability Profitability Size Size Activity Total 1 9 ERCOT Public
Credit Risk Assessment and Enforcement ERCOT model weightings calibrated using 2019 financial data. Ratio Working Capital/Sales Cash/Assets Current Ratio EBITDA/Interest expense Debt Service CFO/Sales FCF/Debt Total Debt/Total Capital Leverage Equity/Assets EBITDA/Sales Net Income/Assets Total Assets Tangible Net Worth Sales/Assets Alternative Metric 1 Alternative Metric 2 Category Liquidity Liquidity Liquidity Weight 8% 19% 58% 0% 0% 0% 0% 12% 4% 0% 0% 0% 0% 0% 0% 100% Debt Service Debt Service Leverage Profitability Profitability Size Size Activity Total 2 0 ERCOT Public
Credit Risk Assessment and Enforcement ERCOT model ratio bounds Ratio Working Capital/Sales Cash/Assets Current Ratio EBITDA/Interest expense Debt Service CFO/Sales FCF/Debt Total Debt/Total Capital Leverage Equity/Assets EBITDA/Sales Net Income/Assets Total Assets Tangible Net Worth Sales/Assets Category Liquidity Liquidity Liquidity Min Max (5.00) 5.00 (10.00) (5.00) - 10.00 10.00 5.00 Debt Service Debt Service Leverage Profitability Profitability Size Size Activity (1.00) NA NA NA NA 2.00 2 1 ERCOT Public
Credit Risk Assessment and Enforcement Discussion / next steps 2 2 ERCOT Public
