APRIL 30, 2010

Although electric utilities continue to enjoy favorable access to capital markets compared with most corporate issuers, outside financing activity for the electric sector has declined significantly over the past 12 months, Standard & Poor’s (S&P) said in a report issued last week.

The amount of medium- to long-term debt issued during the first quarter of 2010 was about $8.4 billion, compared with approximately $19.8 billion during the first three months of 2009. “The diminishing reliance on external capital can be traced to the significant amount of refinancing completed last year, the winding down of certain environmental compliance programs and the paring down of 2010 capital budgets for maintenance and reliability projects as the industry adjusts to customer demand patterns following the economic slowdown,” S&P said.

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APRIL 23, 2010

By Josh Silverman, Director, Term Funding & Risk Management

The start of spring seems to have brought new life to the U.S. economy as hiring has turned positive, sales at retailers have picked up and the manufacturing sector continues to expand. The recovery will not be easy to sustain, however, since there are many obstacles that could hinder growth and lead the economy back into recession.

In his testimony before the Joint Economic Committee of Congress, Federal Reserve Chairman Ben Bernanke said the Fed is expecting a “moderate economic recovery” but with significant restraints—most notably unemployment, real estate and the “poor fiscal position of many state and local governments.” The risks to recovery, combined with subdued inflation, are key reasons why the Fed likely will keep interest rates low for the remainder of this year and potentially into the start of 2011. As long as inflation is contained, the Fed will continue to use its monetary policy tools to stimulate growth.

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APRIL 23, 2010

Industrial Production Continues To Improve

March industrial production edged up 0.1 percent, but missed analyst expectations of a 0.7-percent increase. The increase follows an upwardly revised 0.3-percent gain for February. Manufacturing continued its steady pace of gains with a 0.9-percent rise, and mining production rose 2.3 percent. Capacity utilization expanded to 73.2 percent from 73 percent in February, but still remains well below pre-recession levels of nearly 80 percent.

Utility production dropped 6.4 percent as a result of the return of normal temperatures. Utilities notwithstanding, demand is rising steadily and inventories have started to rise as well, with plenty of room for continued growth in inventory levels. Increased production gains are starting to spill over into the broader economy, with strong demand growth beginning to compel manufacturers to increase employment to meet demand.

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APRIL 23, 2010

The Tennessee Valley Authority (TVA) did not violate the New Source Review (NSR) requirements of the federal Clean Air Act (CAA) in performing work at its Bull Run coal-fired power plant in 1988, according to a March 31 decision by the United States District Court for the Eastern District of Tennessee. The ruling, in what TVA lawyers called “a bellwether case,” helps define what type of work can be performed on coal-fired units without requiring CAA permits or triggering costly enforcement penalties.

The CAA requires utilities to undergo an NSR of environmental controls for new generation and for any “non-routine” modifications to existing generation. Routine maintenance, repair and replacement procedures are exempt from the requirement, but the issue of what constitutes “routine” procedures has never been clearly defined.

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APRIL 23, 2010

Last week, CFC held an investor webcast and conference call to review its financial and operational results for the third quarter of FY2010, which ended February 28.

“During the first nine months of the 2010 fiscal year, CFC has continued to reinforce its financial position, maintain a solidly performing asset portfolio, significantly enhance member support and demonstrate a high level of capital and public market liquidity,” said CFC CFO Steven Lilly.

As of February 28, 2010, CFC had approximately $380 million in cash and cash equivalents as well as approximately $725 million in unadvanced revolving facilities from the Federal Agricultural Mortgage Corporation, Lilly said. In March, CFC renewed and extended the maturity of its bank revolving credit facilities and total bank facilities currently exceed $3.3 billion. In addition, CFC has in excess of $1 billion of loan principal amortization and prepayments scheduled over the next 12 months.

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APRIL 23, 2010

Earlier this week, CFC reported preliminary findings from its annual Key Ratio Trend Analysis (KRTA), based on the 2009 operational results of a sample of 630 electric distribution cooperatives compared to results for the same 630 cooperatives from last year’s KRTA. The final KRTA report, which is expected to include data from approximately 820 distribution cooperatives, will be available in August.

“Although 2009 was a tough year for the U.S. economy, the preliminary KRTA numbers show that co-ops once again performed very well. The median financial ratios all showed an improvement over the prior year,” Claudia Phillips, CFC vice president of Programs and Planning Analysis and KRTA manager, said. “While these are not final KRTA results, this preliminary report of more than 600 systems is a significant sample.”

The median results for three ratios in particular indicate that cooperatives have maintained their financial strength during the economic downturn, Phillips said:

• The Times Interest Earned Ratio (TIER) rose to 2.29 in 2009 from 2.25 in 2008 (see Chart 1).
• Equity as a percentage of assets increased to 41 percent from 40.5 percent.
• Modified debt service coverage increased to 1.82 from 1.81.

CHART 1: Times Interest Earned Ratio (TIER)

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APRIL 16, 2010

By Dwight Brown, Derivatives Supervisor

U.S. economic growth has improved over the past two quarters but this has not been due to consumers taking the lead on spending.

Growth has been driven by government spending and improvements in business inventory levels. Consumer spending remains important though, due to its 70-percent weighting in the calculation of economic growth. While there has been an improvement in consumer spending over the past two quarters, the depth of the spending decline in prior quarters and the significant hurdles still facing consumers are enough to question whether the recent improvement is sustainable. Read More »

APRIL 16, 2010

Consumer Prices Move Up Slightly

The Consumer Price Index (CPI) rose 0.1 percent in March, matching market estimates. The rise was mostly a consequence of an increase in prices for fresh fruits and vegetables, with food inflation rising 0.2 percent after a 0.1-percent gain the previous month.

Core CPI, which excludes food and energy prices, remained unchanged in March, indicating tame inflation is accompanying the economic recovery. Core CPI was flat due to a 0.4-percent drop in apparel prices, a 0.1-percent dip in recreation and no change in housing costs. Housing has been flat or negative for an unprecedented four months in a row.

While a small rise in core inflation is generally recognized as being positive, the economy has still not fully recovered from the recession, and retailers may need to continue to discount goods. Read More »

APRIL 16, 2010

An April 1 report released by economists at the Economics for Equity and the Environment Network (E3) concluded that economic models used by U.S. government agencies underestimate the social cost of carbon (SCC)—a calculation that weighs the cost of curbing carbon dioxide (CO₂) emissions against the expected damage from each ton of CO₂ released into the atmosphere. Higher SCC estimates would support more stringent regulations.

An interagency working group—including the departments of Agriculture, Commerce, Energy, Transportation and the Environmental Protection Agency—has proposed an SCC estimate of $21/ton of CO₂ for 2010—a level unlikely to result in significant controls on emissions, E3 said. In comparison, the CO₂ mitigation cost estimate in the United Kingdom is $83/ton. “The Social Cost of Carbon” can be downloaded from the E3 Web site.

APRIL 16, 2010

Tom Vilsack

Properly structured climate change legislation will benefit American farmers, according to U.S. Department of Agriculture Secretary Tom Vilsack. “USDA is committed to helping Congress design and implement a carbon offsets market that will provide significant income opportunities to America’s farmers and ranchers,” he said, speaking at the National Farmers Union (NFU) convention last month. But the nascent market for offsets has been slow to develop due to uncertainty about whether climate change legislation will, in fact, be enacted.

Offsets represent a reduction in greenhouse gas (GHG) emissions that would not have occurred were it not for the offset. Farmers can create offsets through no-till crop production, conversion of cropland to grass, sustainable management of native rangelands and tree planting. Methane capture from anaerobic manure digester systems also can create carbon offsets. Offset credits are allowed in most GHG cap-and-trade systems as a substitute for an emissions allowance. Read More »