A recurring question pondered by utility finance personnel is why mortgage records as to bonded and bondable property don’t seem to match the company’s balance sheet. More precisely, assuming the company can issue mortgage bonds to the extent of a percentage of Unbonded Property, net of retirements (take, for example, a 60% Bonding Ratio), why do the company’s mortgage accounting records indicate an amount of Unbonded Property that is often substantially less than an amount equal to the company’s net utility plant minus 166 ⅔% of the sum of (a) the aggregate principal amount of bonds then outstanding and (b) the aggregate principal amount of retired bonds available as a basis to issue new bonds? One would think that, if the original deal between the company and the bondholders was that the bondholders would get a 40% collateral cushion, this cushion should approximate 40% of net utility plant. But it is often far more.
There are several factors that contribute to the discrepancy. This note will discuss them in summary fashion and explore possible solutions to the problem.
It should be noted as a preliminary matter that, under current accounting principles, utility plant includes items that do not represent physical facilities that are owned by the utility, such as facilities that are leased and not owned. Accordingly, in any comparison of mortgage accounting records to utility plant in the general accounting records, items that do not represent physical utility facilities that are owned by the company should be excluded and are assumed to be so excluded for purposes of this note.
