Public Power - January/February 2009 - (Page 10)

10 Questions cost recovery through locally set rates, is a real positive. The concern is how high rates can get without political challenge. At this point in time, there have been few examples of utilities not getting the full amount of rate increases that they requested, and debt service coverage margins have been relatively stable. Debt service coverage is one factor that is important, as are liquidity ratios. If the recession continues to slow demand, how this is managed will be another potential pressure point for utilities. projects. The expectation is that those BANs will be taken out by longer-term bonds in a year or so. That’s been done because the short-term notes are able to get lower interest rates. So, the concern is whether there will be lower interest rates in the longer-term markets for bonds to take out those notes. In the past month, access to the longerterm bond market has been primarily for higher-rated credits, the better quality credits. The Municipal Electric Authority of Georgia, for example, entered the market yesterday [Nov. 18] and got a pretty favorable rate —higher than the prior rates that they were getting, but still they were able to achieve market access. Los Angeles (rated Aa3) [issued bonds] and one of the first ones was South Carolina Public Service Authority, which is rated Aa2. I believe their issue was $600 million and they got very favorable rates on that transaction. But both of those credits are at the higher end of credit quality—the market may be beginning to open up for utilities in the mid-A range. Whether that holds is a broader question. What 5 toshould public power utilities do now protect their creditworthiness? Clearly, to continue to strengthen their internal liquidity. Maintain strong relationships with their governing boards to make sure the types of decisions that are made protect the financial condition of the utility. Longer term, something we focus quite a bit on is the power resource plan, given all the challenges that are out there today, with greenhouse gas emissions and volatile gas pricing, whether or not to enter into new nuclear projects – what fuel to use. These are very daunting questions that need a serious evaluation. Dan Aschenbach Dan Aschenbach is senior vice president of Moody’s Investors Service. Jeanne LaBella interviewed him on Nov. 19, 2008. 3 kinds of difficulties have public What power utilities encountered in financial markets since the dramatic developments of late September and early October, when the federal government had to bail out Wall Street firms? They’ve been handled adequately at this point. The key has been that public power utilities have had access to liquidity and have not gotten too far into the types of debt instruments that have created more problems. Even in the case of interest rate swaps, as an example, while utilities have taken advantage of this type of instrument in debt management, it hasn’t been over the top. There’s been a more prudent use of these types of financing strategies. Part of that comes from the nature of public power systems that are governed by local boards— there is sort of a prudency-first approach, I guess. There were a few public power utilities that had a fair number of auction rate securities –those were the first debt instruments to fail. Most of that problem has been resolved. The interest cost of debt has increased, but not substantially enough to create rate pressure. 1 impact is the turmoil in the What credit markets having on public power utilities? Public power utilities have managed their debt quite well through this period. They have corrected issues with auction rate securities and interest rate swaps to reduce interest rate risk. The biggest challenge right now is the issuance of bonds for new projects. Access to the long-term debt market is still tight and there are a number of fairly large generation projects that are still on the boards. 2 seen several reports from ratings I’ve companies announcing an upgrade in credit quality for public power issuers. Are these upgrades just coincidental or are public power bonds especially attractive against other investment options? Given the current credit markets, we haven’t upgraded any. Public power credit quality outlook remains stable. But there are some storm clouds. The volatility of fuel is one. Concern about the impact and cost of greenhouse gas emissions regulation is another. Clearly, public power systems, as unregulated utilities that have the ability to get their 10 January-February 2009 Does 4 stock prices fall, investors often 6 upthe economic downturn have When any sides for public power turn to bonds. What has happened to bond prices since early October? Interest rates have risen. A fair number of utilities have had to utilize shortterm bond anticipation notes (BANs) to finance the early stages of construction utilities? One upside: it potentially provides more time for some of these power resource plans to be implemented, given that slower demand equals less need for more generation. But that in itself is a Public Power

Table of Contents Feed for the Digital Edition of Public Power - January/February 2009

Public Power - December 2008 Contents Perspective 10 Questions Heat or Eat? Achieving Excellence in Nuclear Operations Training Grand Ambitions for Wind Power Visions of Green Carbon Trading Across The Pond Reliability Green Energy Customer Service DEED Hometown Connections Parting Shot

Public Power - January/February 2009

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