Investors who own bonds floated by public power utilities are political junkies by necessity, a new report says.
In a report on the public power sector this month, the municipal bond insurer National Public Finance Guarantee listed the primary credit metrics investors should consider in public power bond analysis.
Atop the list was not leverage or liquidity or interest coverage. The first item on the list was regulation.
Few industries are as exposed to, or as reliant on, Washington as electricity distributors.
The legislation Congress is shaping right now — on issues like cap-and-trade, reduction of carbon emissions, and renewable energy incentives — will determine the creditworthiness for many public power utilities, National Public Finance said in the report released last week.
Because the outcome is so unpredictable, the best investors can do is gird for the most likely changes.
That means sticking with utilities with the authority to set their own rates so they can recoup any costs incurred by complying with the regulations sure to come, National Public Finance said.
About 14.5% of Americans get their power from 2,010 utilities owned by cities or states, according to the American Public Power Association.
These utilities are eligible to sell tax-exempt debt. Public power utilities, which generate about $47 billion in revenue a year, have floated $15.84 billion of bonds so far this year, according to Thomson Reuters.
The bonds are often secured by utilities' pledge to charge their customers high enough rates to generate the revenue to repay lenders.
Most public utilities can set their own rates, if not unilaterally then with authorization from the governing city or state.
That authority will enable utilities to cover the initial costs of complying with whatever new standards the federal government implements, National Public Finance said.
"Over the long term, however, as new technology is required to meet the lower emissions targets or coal units that are shut down, many utilities' capital budgets will increase substantially and will likely cause stress for high emitters in weaker service territories or with already stressed balance sheets," the report said.
National Public Finance foresees problems for utilities that emit greater levels of carbon, since those providers will probably have to bear heavy costs to reduce emissions over time. The company likes utilities with exposure to other types of energy.
The report is based on a National Public Finance's review of the sector and of the 32 individual credits in the sector that the company insures.
For instance, it insures $1.76 billion of debt issued by the Los Angeles Department of Water & Power, which delivers electricity to 3.8 million people.
The department's primary fuel source is natural gas, which is the cleanest-burning fossil fuel.
The insurer also guarantees payments on $1.59 billion of debt floated by the Municipal Electric Authority of Georgia.
MEAG serves 600,000 customers in 49 communities. More than half its power is nuclear, which emits no carbon.
The report includes summary credit profiles for all the utilities for which National Public finance guarantees debt. Each profile include information on the amount of debt insured by national, the utilities' finances, their fuel exposures, and their carbon dioxide emisssions as of 2005.
