Florida Municipal Electric AssociationFlorida Municipal Power Agency Annual Conference The Financial

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Florida Municipal Electric
Association-Florida Municipal Power Agency Annual
Conference- The Financial Outlook for Public
Power Utilities

• Presented by
• Dan Aschenbach
• Senior Vice President,Global Infrastructure

July 16, 2009
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Agenda

• Moodys Public Power Sector Outlook
• Key Credit Strengths
• Key Challenges Through 2010
• Florida Municipal Electric Utility Credit Quality
• Strategies for Good Bond Ratings
• Conclusion

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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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Could the Credit Outlook Change to Negative?

• Liquidity Pressures
• Unintended Consequences
• Beyond Recession
• Legislative or Regulatory Intervention

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Moodys Public Power Credit Ratings
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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 or in Florida. 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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Moodys Economy Com. Assessment of Economic
Trends

• Grim job losses in recent months stem from last
  fall's financial panic, when worried businesses
  slashed inventories, investment and hiring.
• As fear subsides, production and spending have
  stabilized, and real GDP growth is expected to
  resume during the current quarter.
• The recession is winding down just as February's
  fiscal stimulus bill reaches maximum impact
  policymakers should gauge its effectiveness
  before deciding whether to launch another
  stimulus round.
• All the government's economic success to date
  will not bring recovery unless more is done to
  stem rising home foreclosures
• Given all this, the near-term outlook will be
  characterized at best by a U-shaped cycle with
  1.3 growth in GDP in 2010

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Moodys. Economy Com.- Floridas Economic Outlook

• Florida's economy will deteriorate throughout
  the year before growth returns in 2010. Risks are
  weighted to the downside. Adverse feedback loops
  in the labor and housing markets could intensify,
  and a financial event could undermine consumer
  and business confidence. Longer term, the states
  strong demographic and economic fundamentals will
  promote well above-average growth

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Recession Impact on Public Power Electric
Utilities

• Demand is down in 2009 by single digits but not
  all related to recessionweather 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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Senate Panel Delays Action on Climate Change Bill

• WASHINGTON (Reuters) - The primary U.S. Senate
  committee responsible for writing climate change
  legislation will delay its work until September,
  Senate Environment and Public Works Committee
  Chairman  Barbara Boxer said on Thursday.
• Boxer, who earlier this week said she wanted her
  committee to finish writing its portion of
  legislation mandating reductions in carbon
  dioxide emissions before an early August recess,
  told reporters that instead, "We'll do it as soon
  as we get back" in September.
• The delay could be a setback to President Barack
  Obama, who wants quick congressional action on a
  climate change bill.

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G8 Failure to Agree on Specific Greenhouse Gas
Cuts Dims Prospects for Senate Passage of Climate
Bill

• In a blow to prospects for Senate passage of a
  climate change bill, emerging economies-notably
  China and India-this week refused to agree to
  specific targets for reducing greenhouse gas
  emissions. The Group of 8 industrialized nations,
  including the United States, agreed on a
  nonbinding goal of limiting global temperature
  rise, but did not commit to any percentage
  reductions in emissions.Public Power Daily July
  10, 2009

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Uncertainty Example 1 Los Angeles Announced It
Will End Use of Coal Fired Power

• By 2020, LADWP announced plans to move from 40
  coal-fired generation replacing it with
  efficiency measures and renewable energy
• Deputy Mayor David Freeman said in a July 2009
  statement that There is no way you can bring
  in renewable energy and not have rate impact when
  you replace coal. Reuters
• Los Angeles voters in March 2009 turned down a
  referendum to build 1400 MW of solar because of
  the cost

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Uncertainty Example 2

• 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 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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Credit Challenge More Rate Shock to Come-
Political Risk Next?

• Electric rate hikes might shock customers
• Many customers made themselves heard last
  December with protests over Progress Energy
  Florida rate hikes of nearly 25 percent during
  the depths of the recession. Tampa Tribune
• FPL seeks 31 percent rate hike
• Florida's largest power company says it needs
  to raise customers' base rates 31 percent to
  offset rising expenses and flat sales, but
  consumer advocates argue that the increase is
  excessive in a struggling economy. If approved,
  Florida Power Light's base rate hike will
  generate 1 billion next year and 1.3 billion in
  future years, allowing the company to increase
  its plant's fuel efficiency, the firm contends
  Sarasota Herald

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FMEA Residential Bill Comparison, May 2009

• IOU Average - 121.56/1,000 kWh
• Municipal Average- 133.79/1,000 kWh

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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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Florida Public Power Electric Utilities Credit
Ratings

• FMPA (All-Requirements ) A1
• Gainesville Aa2
• Jacksonville Beach A1
• JEA Aa2
• Key West A2
• Kissimmee A1
• Lakeland A1
• Lake Worth A2
• Leesburg A2
• Ocala A1
• OUC Aa1
• Reedy Creek A3
• Tallahassee Aa3
• Vero Beach A1
• Winter Park A1

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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
Municipal Electric Utility Financial
Metrics-Southeastern U.S. Municipal Electric
Utilities

• 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 84 days (median)
• 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 Moodys informed of strengths and challenges
• Periodic meetings and updates
• Ongoing Credit Surveillance

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Questions?
Thank you.