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APPA National Conference: Financing Capital Projects in Difficult Market Conditions. Panelists: Michael Mace, Managing Director, Public Financial Mgmnt. John Murphy, Sr. Research Analyst, Fidelity Investments Karl Pfeil III, Managing Director, Fitch Ratings. - PowerPoint PPT Presentation
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APPA National Conference:Financing Capital Projects in Difficult Market Conditions
Panelists:
Michael Mace, Managing Director, Public Financial Mgmnt.
John Murphy, Sr. Research Analyst, Fidelity Investments
Karl Pfeil III, Managing Director, Fitch Ratings
Financing Capital Projects in Difficult Market Conditions
Karl H. Pfeil III, Fitch Ratings
June 15, 2009
www.fitchratings.com 3
The Credit Drivers of the Current Market Environment
> The Basic Pillars of Public Power Credit
> New Rating Considerations:
– Economic Issues
– Financial Considerations
– Environmental Credit Considerations
> Fitch Ratings’ Public Power Outlook - How Does it Stack to other Sectors?
www.fitchratings.com 4
Primary Credit Factors
1. Mgmt
2. Service Territory
3. Assets & Operations
4.Cost
Structure
5. FinancialsAnd
Legal’s Utility’s
Credit
www.fitchratings.com 5
Location, Location, Location
> Each region has distinct
characteristics affecting the utilities’
credit profile:
— Fuel supply
— Water supply
— Environmental
— Regional politics
— Service territory characteristics
— New developments
www.fitchratings.com 6
US Annual Real GDP Change - History + Projections
1.0
-3.4
-15
-10
-5
0
5
10
15
20
25
193
0
193
5
194
0
194
5
195
0
195
5
196
0
196
5
197
0
197
5
198
0
198
5
199
0
199
5
200
0
200
5
201
0
An
nu
al %
Ch
an
ge
Gross domestic product Fitch Baseline Proj Bloomberg Median Proj
2009
201
www.fitchratings.com 7
Average Annual US Unemployment Rate
9.0
10.0
0
2
4
6
8
10
12
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010%
Un
emp
loym
ed
Unemployment Fitch Baseline Proj Bloomberg Median Proj
2009
2010
www.fitchratings.com 8
Annual Change in Personal Consumption Expenditures
-3.3
0.0
-10
-5
0
5
10
15
1930
1933
1936
1939
1942
1945
1948
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008%
Ch
ang
e
Personal consumption expenditures Fitch Baseline Projection
2009
2010
www.fitchratings.com 9
Financial Considerations
www.fitchratings.com 10
Financial Ratios
> Coverage (How much cash flow cushion is there to pay the utility’s fixed obligations?)
— Debt service coverage
— Debt/funds available for debt service
> Liquidity (how much cash does the utility have relative to its operating expenses?)
— Days cash on hand
— Days liquidity on hand (includes CP capacity & lines of credit)
— Free liquidity to support variable rate debt
> Leverage (how much equity has the utility built up relative to its asset base?)
— Equity/capitalization
— Debt/funds available for debt service
> Other
— Variable rate exposure as % of capitalization
— Annual capital additions
— Five-year capital improvement plan and financial projections
www.fitchratings.com 11
www.fitchratings.com 12
Gross Variable Rate Debt/Capitalization (%)(2006-2008)
0
10
20
30
40
50
60
70
80
90
100
Issuers
%
FY 2006
FY 2007
FY 2008
www.fitchratings.com 13
Greenhouse Gas/Carbon Reductions CO2 Regulation: Not if but when
> Fitch Ratings believes that there will be a carbon law at the federal level
> Increasing number of state regulators are placing a cost on carbon in rate
making proceedings
> More traditional Wall Street investors are now looking at carbon issues
www.fitchratings.com 14
Public Power Outlook
www.fitchratings.com 15
For a Stable Sector – The Issues Are Very Complex
Economy and
Housing Declines
Economy and
Housing Declines
Rates / Regulation
Rates / Regulation
Fuel Costs
Fuel Costs
EnvironmentalRegulation
EnvironmentalRegulation New GenerationNew Generation
Increasing Capital Costs
Increasing Capital Costs
www.fitchratings.com 16
Fitch Ratings’ Public Power Credit Outlook for 2009
> The Outlook into 2009 is Stable with near-term pressures on individual credits that
could result in increased negative rating actions
> The longer-term Outlook reflects increasing negative cost pressures
> While our near-term outlook for the sector is stable, if current pressures such as
limited capital market access together with increasing economic stress that persists
long into 2009, a change in Outlook to Negative may be warranted
> Public power has historically proven itself to be a very solid investment despite past
complexities facing the industry such as deregulation, fuel price volatility, and the
corporate credit crisis
Fitch Ratings
www.fitchratings.com
Singapore
6 Temasek Blvd.
#35-03/04/05
Suntec Tower Four
Singapore 038986
+65 6336 6801
New York
One State Street Plaza
New York, NY 10004
+1 212 908 0500
+1 800 75 FITCH
Fitch Group Fitch Ratings Fitch Solutions Algorithmics
London
101 Finsbury Pavement
London
EC2A 1RS
44 20 7417 4222
What Investors Really Want!John M. Murphy, Research Analyst
Fidelity InvestmentsAPPA National Conference
June 2009
www.fitchratings.comFidelity Management & Research Co.
19
What Investors Really Want!
Research
Trading & Markets
Portfolio Management
www.fitchratings.comFidelity Management & Research Co.
20
What Research Really Needs!
Research Security
• First Mortgage• Gross vs. Net Revenue Pledge• Liquidity Facilities• Market Access Alone is NOT a Security Interest• Access to All Pertinent Deal Documents• Covenants
Disclosure• More Frequent Release of Financial Results• Derivative and Counterparty Exposures• Material Events
Transparency• Semi-Annual Conference Calls or Internet Road Shows• Access to Management via Conferences, Calls or Meetings
www.fitchratings.comFidelity Management & Research Co.
21
What Traders Really Need!
Trading & Markets Surveillance, Primary and Secondary Appropriate Spread Structure: Fixed vs. Floating Duration / Maturity Dealer Support
Date Cusip Description ST Sector INS CPN MAT OIY ParDate MoodyBidYieldOfferYieldBidYSOfferYSMullerYieldSize Dealer Initial05/14/09 927675AC VIRGIN IS P UB(HOVENSA LLC) 5.87% 07/01/22@ VI IDB 5.88 07/22 5.88 07/14 Baa3 9.92 FAKE05/14/09 927675AD VIRGIN IS P UB(HOVENSA LLC) 4.70% 07/01/22@ VI IDB 4.70 07/22 4.70 01/15 Baa3 9.95 6.46 9.73 FMR Bid05/14/09 658196S8 NC E MUNI(AGC) 5.25% 01/01/19 NC J OIN AGC 5.25 01/19 4.40 01/18 Aa2 4.20 4.05 1.20 1.05 4.47 10,000 MSCO Cu/O05/14/09 56036YBF GA GAS P ROJ (J P MC CO) 5.00% 03/15/22 GA SGAS 5.00 03/22 4.21 Aa3 5.55 5.48 2.06 1.99 5.64 4,000 SBHU MKT05/14/09 79575DVC SALT RIVER AZ 5.00% 01/01/37 AZ E&G 5.00 01/37 4.75 01/16 Aa1 4.70 4.70 0.06 0.06 4.72 10,000 SBHU Cu/O05/14/09 542690U3 LIP A NY 5.75% 04/01/39 NY E&G 5.75 04/39 5.87 04/19 A3 5.01 0.33 5.12 635 MOTC Inven05/14/09 575765MY MA MUNI WHSL(AMBAC) 5.31% 07/01/18 MA J OIN AMBAC 5.31 07/18 0.00 07/07 #Aaa FAKE05/14/09 02765UBC AMERICAN MUN OH 5.00% 02/15/38 OH J OIN 5.00 02/38 5.36 02/18 A1 5.15 0.50 5.11 330 LOOP VB Ofr05/14/09 02765UBC AMERICAN MUN OH 5.00% 02/15/38 OH J OIN 5.00 02/38 5.36 02/18 A1 5.13 0.48 5.11 330 MNGT MC Ofr05/14/09 02765UBC AMERICAN MUN OH 5.00% 02/15/38 OH J OIN 5.00 02/38 5.36 02/18 A1 5.15 0.50 5.11 340 WCHV BDSK Ofr05/14/09 033177XH ANCH AK EL MBIA 5.125% 12/1/25 AK E&G MBIA 5.13 12/25 4.24 12/15 A1 125 BLBG BW05/14/09 052414CG AUSTIN TX ELEC(AMBAC) 5.50% 11/15/14 TX E&G AMBAC 5.50 11/14 4.28 A1 2.98 640 BLBG BW05/14/09 052414EU AUSTIN TX ELEC(FSA) 5.00% 11/15/26 TX E&G FSA 5.00 11/26 4.52 11/16 Aa3 4.55 0.39 90 DRAU Inven05/14/09 052474LF AUSTIN TX USR(AMBAC) 6.75% 11/15/11 TX E&G AMBAC 6.75 11/11 6.20 WR 2.67 25 BLBG BW05/14/09 076099AW BEDFORD VA IDA 6.55% 12/01/25@ VA IDB 6.55 12/25 6.55 12/11 B2 9.50 5 BLBG BW
www.fitchratings.comFidelity Management & Research Co.
22
Evaluating Structural Relationships Over Time
Increased focus on quantitative infrastructure is necessary because municipal bond valuations are influenced by many variables.
2/3/09
Slope Z-Score Roll is… Slope Z-Score Diff is… Mty Z-Score AAA is… Mty Z-Score AAA is… Mty Z-Score AAA is… Mty Z-Score BMA is…1-2 1.47 Steep 2-5 1.03 Steep 1 -2.32 Rich 1 0.53 Fair 1 -3.68 Rich 1 -2.10 Rich2-3 0.31 Avg 5-10 2.29 Steep 2 -1.32 Rich 2 1.02 Cheap 2 0.21 Fair 2 2.46 Cheap3-4 1.36 Steep 2-10 1.71 Steep 3 -2.34 Rich 3 0.39 Fair 3 -0.38 Fair 3 2.41 Cheap4-5 1.74 Steep 10-20 3.97 Steep 5 -2.24 Rich 4 0.61 Fair 4 -0.23 Fair 5 2.45 Cheap5-6 1.93 Steep 10-30 3.97 Steep 7 -1.33 Rich 5 0.70 Fair 5 0.01 Fair 7 2.49 Cheap6-7 2.14 Steep 2-30 2.56 Steep 10 0.04 Fair 6 0.42 Fair 6 0.27 Fair 10 2.51 Cheap7-8 2.18 Steep 5-30 3.22 Steep 12 0.72 Fair 7 0.14 Fair 7 0.53 Fair 15 2.55 Cheap8-9 2.33 Steep 15 1.27 Cheap 8 0.05 Fair 8 0.74 Fair 20 2.49 Cheap9-10 2.71 Steep 20 1.79 Cheap 9 0.09 Fair 9 0.92 Fair 30 2.51 Cheap
10-11 2.95 Steep 30 1.90 Cheap 10 0.26 Fair 10 1.10 Cheap11-12 3.61 Steep 12 0.79 Fair 15 1.77 Cheap12-13 3.13 Steep 15 1.35 Cheap 20 2.02 Cheap13-14 3.78 Steep 20 1.78 Cheap 30 2.07 Cheap14-15 4.45 Steep 30 1.91 Cheap15-16 3.10 Steep16-17 3.42 Steep17-18 3.54 Steep18-19 4.20 Steep19-20 3.48 Steep
BMA/ LIBOR Ratio
Historical Calculation Period
Report Date:Municipal Relative
Value
AAA Rolls AAA Spreads AAA-BMA SpreadAAA vs. TSY AAA vs. LIBOR
Create Report
CCCCCCC
CCCCCCCCCC
CCCCCCC
CCCCCCC
CCCCCC
CCCCCCC
CCCCCC
CCC
3 Months
6 Months
9 Months
12 Months
24 Months
36 MonthsEXIT
Use Rate-Normalized ModelUse Ratio Model
5 Years9 Years
10yr AAA / TSY Ratio
0.70
0.80
0.90
1.00
1.10
1.20M
ar-
07
Apr-
07
Jun-0
7
Aug-0
7
Sep-0
7
Nov-0
7
Jan-0
8
Feb-0
8
Apr-
08
Jun-0
8
Yie
ld R
ati
o
www.fitchratings.comFidelity Management & Research Co.
23
What PM’s Really Need!
Portfolio Management Sector Weights Index Weighting Security Selection
PMV Difference ViewS MUN F MUN AZ MA MN TFR CA CA SI MI NJ OH EIM INT SHT CT MD NY PA
State GO -5.39 -5.16 -3.98 -11.14 -4.69 -5.17 -10.21 -13.34 -11.04 -12.11 -5.06 -8.75 -8.03 -27.68 0.17 0.21 -1.81 -6.11 Local GO -1.81 -4.33 -1.75 4.81 -1.71 -4.89 -3.77 -2.90 -12.07 11.38 -7.58 -8.37 -7.70 -1.26 -20.51 -9.62 7.81 -20.10 Special Tax -2.19 -2.33 -1.39 -4.12 1.06 -1.18 5.68 -2.22 -6.24 -11.04 -2.62 2.16 0.12 -0.25 -9.59 -9.13 -1.69 -3.79 Lease -0.73 -2.29 1.66 -6.19 0.13 -0.26 -1.45 -0.55 -0.58 0.35 -0.35 -0.36 0.64 1.75 -1.89 -4.76 5.65 Electric -0.59 -1.55 -0.49 6.45 -0.56 -3.61 -3.23 -1.26 -1.21 2.29 1.03 -3.92 -1.00 -0.03 -1.68 Health Care -0.89 -1.06 -3.20 -1.33 -3.04 -0.19 2.23 2.21 -1.18 -2.85 -0.98 -0.53 0.43 -0.24 -0.06 0.28 Housing -0.37 -0.54 1.75 -0.21 -6.74 -0.64 -0.98 -0.07 -0.99 -1.06 -4.30 -1.24 -0.60 -0.04 -2.56 Education -0.21 -0.21 -1.28 -0.92 -0.03 -0.89 -0.85 -0.50 -0.17 -0.36 -0.83 1.90 0.90 -1.46 1.50 IDB -0.13 -0.11 0.94 0.42 1.88 0.22 -0.42 -0.19 0.29 0.94 -0.04 0.14 1.47 -0.84 -0.13 Water 0.32 -0.11 -0.24 -0.70 -0.92 -0.07 2.90 1.15 0.11 -0.78 0.93 -0.83 -0.65 0.35 0.93 2.64 0.42 -0.27 Transportation -0.88 0.15 6.03 1.84 1.52 -0.19 -0.04 1.19 3.59 0.13 6.10 1.28 1.06 0.66 Resource Rec 0.21 0.29 0.67 0.36 4.15 0.07 -0.51 1.41 -1.54 2.53 -1.16 -1.48 1.71 2.71 0.54 2.06 0.88 4.97 Pool 0.19 0.33 -0.23 1.27 4.57 0.96 0.64 1.73 0.27 -0.23 0.70 -0.26 0.52 0.91 5.51 9.93 -2.77 4.67 PreRe -0.58 0.47 1.51 -0.08 11.67 0.46 0.60 1.77 0.03 2.91 0.19 0.76 -0.28 -1.01 Escrow 0.61 -0.11 0.63 0.68 1.95 -0.93 3.95 3.21 3.26 -0.72 0.74 0.53 2.63 1.98 3.67 0.56 4.66 XOver 2.42 0.71 4.07 0.86 1.95 10.42 4.10 4.82 -1.38 -0.49 0.29 12.46 9.81 2.14 -2.01 5.25 5.14 4.09 Tobacco 0.91 1.16 -4.38 0.88 -7.97 4.41 7.65 5.24 27.81 5.95 11.92 11.32 4.82 0.50 6.45 2.57 0.39 -2.21 Other 4.24 3.10 -6.59 3.20 -0.23 0.46 -0.64 -0.21 -0.17 7.32 4.44 -0.62 0.35 -3.16
www.fitchratings.comFidelity Management & Research Co.
24
The Answer is….
Everything!
PFM
The PFM GroupMike MaceManaging DirectorPublic Financial Management
Information Prepared for the
Annual Meeting
Challenges & Uncertainty
vs.
Solutions & Opportunity
June 15, 2009
PFM
26
Public Power Finance in a Challenging Environment
26
• Introduction
• Impacts of the Financial Crisis
• Current Challenges
• The Solutions
• Preparing for the Next Challenges
PFM
27
Introduction
27
• Public Financial Management
- Offering financial and investment advice to governments & not-for-profits
- 400 professionals in 30+ offices throughout the US
- Two separate operating companies
- No bond underwriting or trading for our own account
- Helping our clients maximize financial value
- Within risk tolerances consistent with public sector objectives
Public Financial Management
Financial Advice & Strategic Consulting
$50+Bn/Yr Capital Markets Transactions
10 Person Public Power Group
PFM Asset Management
Investment Management & Consulting
SEC Registered & Regulated
Managing $35+ Billion of Client Assets
PFM
28
Crisis… What Financial Crisis?
28
• Borrowing Costs Under /Around 5.00%, Short-Term Rates Almost Zero!
• Investment Rates are Up, Stock Market Has Been Strong
• Natural Gas and Commodity Prices Beginning to Make Sense Again
2.00
3.00
4.00
5.00
6.00
7.00
8.00
Rates % Long Term Rates Over the Past Year
AAA GO A ELEC REV TREASURY
PFM
29
More Good News Than We Have Time For
29
• Retail Investors Have Been Big Buyers of Public Power Bonds- LIPA in January ~$250 MM Retail Orders for $435 MM Bonds
- SRP in January ~$300 MM Retail Orders for $744 MM Bonds
- JEA in February $71 MM Retail Orders for $129 MM Bonds
- Energy Northwest in March ~$270 MM Retail Orders for $370 MM Bonds
- JEA in April $98 MM Retail Orders for $64 MM Bonds
- CMEEC in April $68 MM Retail Orders for $38 MM Bonds
• Taxable Build America Bonds Have Been a Huge Success
- SMUD sells $200 MM long-term bonds at a net rate of 4.11%
- CPS Energy sells $375 MM long-term bonds at a net rate of 3.89%
- Both issues receive investor orders ~4+ times their size
• MEAG Power & CPS Energy Projects Atop DOE Nuclear Guarantee List
PFM
30
More Good News Than We Have Time For
30
• MEAG Power Finances Initial Stage of Vogtle Expansion- Tax-exempt, 13-month notes ranging from 0.47% to 0.85%- Taxable, 13-month notes at 1.90%- Total of ~$500 MM averaging 0.84%
• OUC Sells $200 MM One-Year Notes at 0.45%
• SRP Rolls 30- and 60-Day Commercial Paper at 0.23% and 0.28%
• JEA Short-Term Bonds Reset at 0.23%
• MMWEC “Failed” Auction Rate Bonds Reset at 0.06% (not a typo!)
• SMMPA Renews Two-Year Credit Facility at 0.70%
PFM
31
Public Power Financing – Challenges Remain
31
• #1: Change - Dramatic, Fast-Paced & Unprecedented
THEN NOW
– Bond Insurance: commonplace non-existent
– Auction Rate: solution problem
– Bank Letter/Lines: cheap → expensive → unavailable
– Gas Prepays: huge savings huge headaches
– Bond Market: good → volatile → closed → wide open
– Derivatives: free money &*$%#@!
– Fuel/Energy Hedging: saving money just a hedge
Last Year’s Solutions Became This Year’s Problems
Fortunately, the Problems Have Been Manageable
Public Power Fares Better Than Most Market Sectors
PFM
32
Public Power Financing – Challenges Remain
32
• #2: Long-Term Planning in a Time of Uncertainty- Resource decisions: WHAT?, WHEN?, IF?
- The high cost of risk aversion and mitigation
- When does “normal” return and what does it look like?
- How do you make 40+ year decisions in a 12-month window of turmoil?
• #3: Managing Environmental Alternatives, Impacts & Costs
• #4: The Economy vs. Credit Strength- High credit ratings have never been more valuable
- Your customers are under considerable pressure
- Local governments have significant needs
- Where is the proper balancing point?
PFM
33
Public Power Financing – Challenges Remain
33
• #5: Liquidity Concerns- Fuel and purchased power contract collateral postings
- Interest rate swap collateral postings and termination payments
- Revenues falling or failing to rise
- Rating agency scrutiny of bank letter/line of credit repayment provisions
- The business is more volatile, and requires more reserves
- Yet liquidity is more expensive than in the past
• #6: Reduced Competition on the Financial Playing Field- Fewer Underwriters, Insurers, Commercial Banks
- Staffing has declined at remaining firms
- Fees have increased
- Bank Letter/Line capacity and pricing will remain a problem
- Short-term program fees are up to 6X the actual short-term interest rates
PFM
34
Public Power Financing – The Challenges
34
• How Are We Doing So Far?
→
PFM
35
Public Power Financing – The Solutions
35
• The Stimulus Bill and Build America Bonds- Taxable bond with a 35% Issuer Interest Subsidy from Treasury- Provides theoretical full value for tax-exemption, resulting in ~4.00% net rate- Public power is well positioned to enter the taxable market- Taxable investors understand utility credits and can compare you to IOUs
UVAAAA
NJ TPKA CAL GO
A
NY MTAAA-
SMUDA+ ILL Toll
AA-
CPS AA+
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4/15 4/20 4/23 4/28 5/1 5/6 5/11 5/14 5/19 5/22 5/27 6/1 6/4
Spread to 30YR Treas
Build America Bond Initial Treasury Spreads
PFM
36
Public Power Financing – The Solutions
36
• The Stimulus Bill and Build America Bonds, Examples:
- And positive side effects from $10+ Billion reduction in tax-exempt volume
Reduced Volume Helps Muni Market
3.50
3.75
4.00
4.25
4.50
4.75
5.00
4/15 4/22 4/29 5/6 5/13 5/20 5/27 6/3
Rates % Long Term Rates In Recent Months
AAA GO TREASURY
Date Issuer Rating RateTreas
Spread Net RateSavings vs Tax
ExemptSavings vs Tax
Exempt
04/22/09 CAL GO A2/A/A 7.43% 3.65% 4.83% ~0.60%
05/05/09 SMUD A1/A+/A 6.32% 2.25% 4.11% ~1.15% ~ $60 MM
06/02/09 CPS Energy Aa1/AA/AA+ 5.98% 1.45% 3.89% ~0.90% ~ $90 MM
Selected Build America Bond Results
PFM
37
Public Power Financing – The Solutions
37
• However, No Good Deed Goes Unpunished by the Financial Media
TaxpayersLose$328MillioninBuildAmericaProfitsBy Darrell Preston and Bryan Keogh
May 4 (Bloomberg) -- State and local public finance officials from New Jerseyto California rewarded investors with $328 million of instant profit by sellingdebt through the federal government’s Build America Bonds program.(continued)…
PFM
38
Public Power Financing – The Solutions
38
• Other Tax Credit Bonds Can Deliver Near 0% Financing- Renewable and conservation expenditures qualify for tax credit financing
- Investor received a Federal tax credit instead of interest from borrower
- Limited size and uncertain allocations are considerable drawbacks
- The current program partially rewards, but does not incentivize, renewables
- The tax credit market needs taxpayers
• DOE Loan Guarantees and Other New Technology Incentives- Value and availability of guarantees are uncertain
- DOE Nuclear Guarantees: from marginal, to valuable, to essential, to optional???
- If administered properly, it can be a powerful program
PFM
39
Public Power Financing – The Solutions
39
• House Financial Services Committee Proposals
- Municipal Bond Insurance Enhancement Act Treasury Dept. Office of Public Finance to reinsure up to $50 BN annually
- Municipal Bond Liquidity Enhancement Act Federal Reserve/TARP to lend money for the purchase existing variable-rate debt
- Municipal Financial Advisors Regulation Act Financial Advisor standards and SEC-registration
- Municipal Bond Fairness Act Require credit ratings system to reflect comparable risks of default
Some or All of This Could be Helpful
Some or None of This Might Actually be Implemented
PFM
40
Public Power Financing – The Solutions
40
• Investors Still Have Money on the Sidelines:- Educated, credit-sensitive institutional investors can help public power - Retail investors must be willing to come out of their shells
Credit Crisis Sends Investors Packing
PFM
41
Public Power Financing – The Solutions
41
• Preserving Credit Strength- Balance local, ratepayer and bondholder interests
- Do what you can, but no downgrades
- Credit spreads are higher than ever – Cost of Downgrade Studies
- Avoid the Straw That Breaks the Camel’s Back
Incremental action leading to a downgrade is VERY expensive
Downgrades take many years to reverse
Borrowing the extra $50 MM may raise interest costs on future $Billions
• Educated and Informed Public Power Constituents- Work with the Board to make informed decisions
- Helping ratepayers understand the value of their public power asset
PFM
42
Preparing for the Next Challenges
42
• Ongoing Concerns
– Federal Debt and the Impact on Interest Rates
– Economic Impact on Credit Ratings
– Headline Risk Effect on Investors
– Bank Credit Enhancement Market Taking Years to Normalize
PFM
43
Preparing for the Next Challenges
43
• Ultimately, There Will Be a Price for All the Federal Help- Drastically Climbing Federal Debt and Guarantees
- Debt Up 27% in past 18 months: from $9.0 to $11.4 Trillion
PFM
44
Preparing for the Next Challenges
44
• We May Just be Starting to Pay the Price- Normalization, or the start of a trend?
2.00
2.50
3.00
3.50
4.00
4.50
5.00
Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Mar-09 Apr-09 May-09 Jun-09
Rates % Sharply Rising 30-Yr Treasury Rates
PFM
45
Preparing for the Next Challenges
45
• What Will Help Us Meet the Challenges
– The Tax-Exempt Product Will be Essential to Investors
– Retail Investors are the Backstop to Higher Rates
– The Bond Market Will Remain Open and Provide Access to Capital
– Commercial Banks Will Recognize Public Power Value and Safety
– Public Power Will Continue to Outperform Other Sectors