May 5, 2020
By Bridget Reed Morawski
Groups that represent public power providers are not waiting for nonpayment data to advocate for various financial tools — such as advance refunding on municipal bonds — they say would unlock much-needed liquidity throughout the COVID-19 crisis.
The extent of service nonpayments likely will not be known until early May, following the end of the first full billing cycle since the pandemic began and most states instituted stay-at-home orders, said Desmarie Waterhouse, vice president of government relations and counsel at the American Public Power Association, or APPA, in a recent interview.
While acknowledging that she had not yet seen information from "a statistically significant number of [APPA] members," Waterhouse said she "would be surprised if, once we see the better data, it won't confirm what [the public power sector is] thinking, which is there is definitely an increase in nonpayments."
Anecdotally, Waterhouse said officials at two utilities in the South separately have told her their bill nonpayment rates are 450% and 150% above normal.
Moody's recently affirmed a stable outlook for the U.S. public power sector, noting that those utilities should be "relatively resilient" despite the coronavirus-instigated economic downturn. However, it did note that those power providers likely will face pressures on liquidity and coverage ratios in 2020 and 2021.
As non-profit entities, public power providers do not hold on to a lot of cash. Certain requirements tied to their bond covenants or factors related to their fuel supply risk are used to define what is tucked away for a financial cushion, according to John Di Stasio, president of the Large Public Power Council, or LPPC.
So few public power organizations have large rainy day funds beyond that. And right now, according to Di Stasio, utilities are making "extraordinary expenditures" and incurring increased operational costs to sequester employees and follow shelter-in-place mandates in the face of reduced loads and revenues.
"Then you add in non-payment of bills … there are certain pressures on the finances, but this is going to be a question of, how long will we be in the circumstances that we are in currently?" Di Stasio said.
How public power providers say they could build extra liquidity
One way for the federal government to help public power providers build liquidity right now would be to reinstate advance refunding on municipal bonds, both Di Stasio and Waterhouse said. Advance refunding essentially is the act of paying off older bonds with newer bonds that have better financial terms, such as lower borrowing costs. The Tax Cuts and Jobs Act of 2017 disallowed tax-exempt advance refunding on municipal bonds.
"As we raise our capital in the municipal markets, the loss of advance refunding basically limits our ability to refinance our outstanding debt when times are favorable to do that," Di Stasio said. "That is generating a significant amount of cash for our members as they watch the market and refinance when it makes sense."
APPA and LPPC representatives also said their organizations' members would like to see the end of mandatory sequestration of Build America Bonds.
The Build America Bonds program was created by the U.S. Department of the Treasury in the wake of the 2008 financial crisis to provide a deeper federal subsidy to state and local governments than traditional municipal bonds. The Treasury made direct payments to the state or local government issuer equaling 35% of the interest payment on the bonds.
But municipal utilities have not been able to issue those bonds since the program expired at the end of 2010, and the federal government since has mandated sequestration of already issued-bond subsidies. Public utilities that issued the bonds with the understanding that a subsidy would be provided have been left holding the bag, LPPC and APPA argue.
The APPA also wants to see the small issuer exception — a legal carve out that the organization says allows banks to deduct the carrying cost for tax-exempt bonds — raised from $10 million to $30 million. Waterhouse said that would help "smaller utilities … that may not need to go out and issue bonds for projects, so they can go maybe to a local bank to get funding."
Creative tools to carry on
In the meantime, public utilities are looking to trim the fat wherever possible or practicable. Most are promoting energy efficiency and energy savings programs to minimize final bills, and Di Stasio said that all of LPPC's member companies have "active programs" in place.
"If we can help our customers and consumers invest in energy efficiency, that's going to also lower their bill and enhance their ability to ultimately pay their bill," said Di Stasio. "That's another big way to help Main Street and to help economic recovery."
But in Texas, public power provider City Public Service of San Antonio, or CPS Energy, is unlocking liquidity by suspending an employee performance incentive program for certain workers, including executives. That program was set to pay out roughly $13 million in May, according to a company news release. Most hiring outside of critical roles at the multi-utility also will be frozen for now.
CPS Energy President and CEO Paula Gold-Williams acknowledged the "increased challenges" stemming from the health crisis that led to the suspension of future program payments and said, "suspending the incentive of almost $13 million is a prudent action in this extraordinary time."