american public power association 2009 business and financial conference the financial outlook for...

American Public Power Association 2009 Business

and Financial Conference

The Financial Outlook for Public Power

September 15, 2009Dan Aschenbach, Senior Vice President

American Public Power Association 2009 Business and Financial Conference

2

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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© 2009 Moody’s Investors Service, Inc. and/or its licensors and affiliates (collectively, “MOODY’S”). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. Under no circumstances shall MOODY’S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY’S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY’S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling.

Moody’s Investors Service, Inc. (“MIS”), a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Shareholder Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

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