american public power association 2009 business and financial conference the financial outlook for...
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American Public Power Association 2009 Business
and Financial Conference
The Financial Outlook for Public Power
September 15, 2009Dan Aschenbach, Senior Vice President
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Agenda
Moody’s Public Power Sector Outlook
Key Credit Strengths
Key Challenges Through 2010
Strategies for Good Bond Ratings
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Stable Credit Outlook for U.S. Public Power Electric Utility Sector
Recession and climate change policies challenge outlook
Average credit rating for U.S. investor-owned electric utilities is in Baa range with stable outlook
Public power credit quality of A2 has stable outlook
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Moody’s Public Power Credit Ratings
Public Power Utility
Number of Rated
Issuers
Median Credit Rating
Credit Outlook
Debt Outstanding
($billions)
Joint Power Agency
45 A2 Stable $31.3
Municipal Electricity
Distributors
300 A2 Stable $8.0(est.)
Largest 35 City-owned
Elec. Utilities
35 Aa3 Stable $30.7
Largest 9 State/district
utilities
9 A1 Stable $41.6
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Key Public Power Credit Strengths
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Credit Strengths
Limited default record
Generally sound financial metrics
Strong link to local government with access to fiscal support in times of stress
Past record of reliability and competitive pricing
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Credit Strengths
We do not expect the existing public power electric utility business model to change under the Obama Administration.The sector will retain the fundamental strengths of being a near-monopoly in the service area and having local governance and independent rate-setting
Utilities will likely continue to resort to more conservative debt structures with less variable rate debt exposure
We expect a longer timetable for compliance of utilities that own coal-fired generation with greenhouse gas emissions regulations because of the lack of commercial alternatives and lack of technology available for carbon capture
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Key Credit Challenges Through 2010
The Great Economic Recession
Resource uncertainty due to the scale, scope and depth of regulatory intervention on carbon
Political risk rising due to new costs related to shifting from carbon to renewable and nuclear may lead to rate resistance and weaker financial metrics
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Credit Challenge: The Great Economic Recession
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Recession Impact on Public Power Electric Utilities
Demand is down in 2009 by single digits but not all related to recession…weather driven and some demand lost due to conservation
Municipal utilities with large customers closing may be most exposed particularly if fixed costs need to be spread on smaller sales base
Still magnitude and depth of economic downturn fully unknown and there is potential for sector outlook to turn negative if revenue collections and financial metrics weaken
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Fiscal Stress of Local Governments Continues to Be One of the Major Public Power Utility Pressures
Most of the defaulted local governments (850) happened several years after the 1929 Great Depression
Today during the Great Recession unfunded pension and medical benefit liabilities present a burden not experienced in the past
Some evidence this year of increased General Fund transfers from utility to city to assist in stress
Significance of this fiscal stress issue will be dependent on recovery in economy
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Credit Challenge: Resource Uncertainty Due to the Scale, Scope and Depth of Regulatory Intervention on Carbon
Already impacts from coal disinvestment to renewable energy seen in financial and rate forecasts
Carbon cap and trade without a commercially proven capture technology or competitive alternative to coal will raise consumer prices dramatically
Is the past pollutant regulatory process prologue?
Uncertainty presents potential unintended consequences
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Uncertainty Example:
Natural gas futures at $3.353 per million BTUs on July 7, 2009
Wind economics change. Do plans for new transmission to wind farms get derailed?
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Credit Challenge: Political risk rising due to new costs related to shifting from carbon to renewable and nuclear may lead to rate resistance and weaker financial metrics
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Credit Challenge: New Nuclear Plants Increase Negative Credit Pressure
Most nuclear-building utilities suffered ratings downgrades-sometimes by several notches -during the last building cycle
Only 24 months remain before NRC expects to issue first licenses for new projects and few utilities have strengthened their balance sheets
Current lingering turmoil in credit markets, Federal loan uncertainty, and difficult rate challenges are apparent
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Location of New U.S. Nuclears
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New Nuclear Issues
Excellent safety and performance record
Design and regulatory process certainty is key
Nuclear renaissance; get first ones right
New nuclears located adjacent to existing units have strong likelihood of success
$6,000 to $7,000/KW build cost estimate could be the stumbling block
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Number One Pressure on Ratings
Will rising retail rates due to issues like recession pressures , carbon decisions and new nuclear affect willingness to maintain debt service coverage margins and levels of financial liquidity?
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Strategies for Good Bond Ratings
Maintain Liquidity and Mitigate Risk
Public Power Resource Optionality
Maintenance of Financial Metrics
Strengthen Governance Relationship In Particular as it Relates to Rates
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Know Your Risks, Identify Mitigating Actions and Maintain Liquidity-The Challenge
Evaluate risks and establish liquidity targets and communicate this
From Katrina impact on natural gas supplies to recession impacts to collateral posting on swaps-know your threat to liquidity
New costs expected to be coming so stronger balance sheet are needed
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Public Power Resource Optionality Planning
Recessions end so plan through the cycle
Resource optionality as it relates to carbon important
“Long term cost-based approach with options”
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Strengthen and Maintain Financial Metrics
Debt service coverage – 2.54 x (median for distributors)
Debt service coverage – 1.85 x (median for utilities that own generation)
Days cash on hand – 111 days (median for utilities that own generation)
General Fund Transfer – 7.1% (median)
Debt Ratio – 30.8 % (median for distributors)
Debt Ratio – 49.9% (median for utilities that own generation)
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Strengthen Governance Relationship As it Relates to Rate Setting
Best practice is keeping governing board close so rate requirements are understood
Explain pressure General Fund Transfers have on utility and rates
Rate pressure the most important credit issue
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Rating Process
Keep Moody’s informed of strengths and challenges
Periodic meetings and updates
Ongoing Credit Surveillance
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Questions?
Thank you.
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