Transcript Rating Agency Presentation

Memphis Light, Gas and Water Division
Electric Prepayment
September 2006
Outline of Presentation
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MLGW Environment
Why Prepay with TVA?
Prepay Details
Alternatives
Challenges
Mitigating Risks
Prepay Contract Terms and Protections
Conclusions
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MLGW Electric Environment
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TVA has monopolistic control in its statutory service
territory due to:
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Federal law constraints:
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Federal law
Long-term, all-requirements power contracts with distributors
TVA cannot be required to transport power purchased from
other suppliers to MLGW
MLGW is prohibited from selling power to other entities
TVA is an federal monopoly with:
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Control of Generation and Transmission
Rates set by the TVA Board
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MLGW Electric Environment (cont.)
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MLGW is TVA’s largest distributor representing
about 10% of TVA’s distributors’ sales.
MLGW pays TVA about $800 million annually for
power.
MLGW’s transmission connections to other systems
are limited
TVA is a AAA/Aaa rated Agency of the Federal
Government
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Why Prepay with TVA?
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Benefits of Prepayment:
 MLGW mitigated supply risks by securing baseload
supply from TVA’s low-cost resources.
 MLGW achieved a price discount for 15 years totaling
$225 million over the life of the transaction.
 TVA secured MLGW (its largest customer) for half its
energy requirements for 15 years. The prior
contractual arrangement was only for 5 years.
 Current Federal law impedes all alternative supply
options for MLGW.
 Electric prepayment is the single most viable risk
management tool available to MLGW to achieve supply
security and low cost power in the current industry
environment.
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Prepay Details
Exhibit A: Representation
MLGW/TVA PrepayofArrangement
Graphical
Prepay
1
Electricity
TVA
Bond Proceeds
MLGW
2
Prepayment
(discounted electricity price)
Electricity
Summary
1
3
Investors
Debt Service
4
Ratepayer Collections
Ratepayers
MLGW issues 15-year amortizing debt to
finance prepayment
payment from MLGW for
2 TVA receives up-front
capacity portion of future power costs
3 MLGW pays investors payments to cover debt
service
4 MLGW supplies electricity to its ratepayers
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Prepay Details (cont.)
3,500
Annual load duration
curve illustrating MLGW’s
hourly demands sorted
from highest to lowest.
3,000
2,000
1,500
1,000
500
8484
7985
7486
6987
6488
5989
5490
4991
4492
3993
3494
2995
2496
1997
1498
999
500
0
Prepaid 928 MW
1
Load (MW)
2,500
Hour
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Prepay Details (cont.)
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The annual debt service
displaces power cost that
MLGW would have paid
anyway without the
prepayment.
Total annual power costs is
$13 million less than it
otherwise would have been
without the prepayment
Prepay transaction locks in
the “discount”, not power
prices. TVA’s future rates
may go up or down, but
MLGW will always receive
a discount on the prepay
portion equal to debt
service + $13 million
Exhibit C: Prepayment Calculations
Prepaid Baseload kW
kWh @ 100% Load Factor
MLGW Total Annual Projected kWh
% Energy Reserved
928,671
8,135,154,397
15,751,035,711
51.65%
TVA Capacity Cost - $/kW-yr
Annual Capacity Prepayment (928,671 x $167.88)
Total Credits for 15 Years
Assumed Borrowing Rate
Estimated Annual Debt Service
Required Prepayment
Annual Savings
$167.88
$155,904,742
$2,338,571,132
4.83%
$142,904,742
$1,500,000,000
$13,000,000
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Alternatives?
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Build
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Buy
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Do Nothing
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Alternatives? (cont.)
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Prohibiting factors to building generation:
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MLGW has a bundled all-requirements contract with
TVA for a minimum of 5 years.
Environmental restrictions (plant location issues)
The 1959 TVA Act amendment prohibits off-system sale
of any distributor generated power.
Economics do not show benefits compared to the
current arrangement and the risk is greater.
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Alternatives? (cont.)
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Prohibiting factors of purchasing from
alternative suppliers:
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Federal Law – MLGW is a captive customer of
TVA.
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“TVA Fence”
Anti-cherry picking
Existing contract
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5 year minimum all-requirements
Transmission constraints
MLGW has no interconnections with other utilities.
Load flow studies indicate insufficient transmission
capacity within surrounding utilities.
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Challenges- State Law Limitations
Problem
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State law only allowed
municipal bonds to be
issued for capital
projects.
State law prohibited
issuance of bonds for
payment of power
costs.
Solution
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MLGW pursued
modifications to the
law to allow this
transaction.
MLGW efforts were
successful and State
law was modified
(Apr 2003).
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Challenges- Treasury/IRS Regulations
Problem
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Original Treasury/IRS
regulations (pre-April 2002)
would have made this
transaction almost impossible.
In April 2002, Treasury/IRS
proposed new regulations that
would allow gas prepayments,
but not electricity
prepayments (actually
tightened rules).
Solution
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MLGW efforts to modify the regulations:
 Filed detail comments on new
proposed Treasury prepay
regulations.
 Testified before and met with key
Treasury officials.
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MLGW President and TVA
Chairman
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MLGW’s CFO provided oral &
written testimony
 Developed new proposed
regulations that would allow
transaction.
 Developed a business case.
 Enlisted political support (Sen. Frist,
etc.)
 August 1, 2003 new Treasury
regulations were released that
allows electricity prepayments like
this transaction.
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Mitigating Risks
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Risk centers around TVA performance, not MLGW.
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MLGW secured only a portion of energy requirements
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Counterparty is AAA rated
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Counterparty is already operational and connected to
MLGW system.
.
Strong punitive default provisions are in place.
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Prepay contract terms and protections mitigate risks of
prepayment.
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Prepay Contract Terms and Protections
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TVA remains committed to supply all of MLGW’s power
requirements to be provided, as required, from all TVA generation
and transmission facilities or market purchases. TVA is to provide
all transmission necessary to deliver power to MLGW’s gate
electrical stations.
MLGW is absolutely guaranteed by TVA a fixed Monthly Savings
each month for 15 years. The guaranteed fixed discount will be
sufficient to pay debt service on the bonds and provide an annual
$13 million in savings to MLGW.
TVA will not discriminate against MLGW in eligibility for various
programs or by charging MLGW a special rate for the purpose of
reducing or canceling out the Monthly Savings.
MLGW is entitled to fully exercise and participate in any partial
requirements option or right arising pursuant to Act of Congress,
executive order, court decision, or regulatory act, or any other right
or opportunity under any partial requirement program offered by
TVA. This right is limited to that portion of MLGW load for which
MLGW has not made a prepayment.
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Prepay Contract Terms and Protections (cont.)
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TVA’s obligation to deliver to MLGW the full amount of power associated with the
prepaid capacity is absolute and unconditional and is not excused by force
majeure-type events or by TVA’s loss of its generation or transmission facilities.
This obligation on the part of TVA, as well as the remedies outlined below,
significantly exceed those in the current MLGW power contract and those offered
by TVA on other distributor contracts.
If TVA fails to deliver to MLGW the power associated with the prepaid capacity in
any hour, TVA will reimburse MLGW for all costs of any replacement power
MLGW purchases from another source.
If TVA fails to deliver to MLGW all of the power associated with the prepaid
capacity over the 15-year period, or delivers less than the full monthly allocation
of such power for 3 consecutive months, or delivers less than half of the monthly
allocation of such power in any one month, then MLGW has the option to
terminate the agreement, and TVA must pay to MLGW a Default Payment equal
to the net present value of all the remaining Monthly Savings plus any costs
associated with MLGW’s calling the bonds plus any other actual damages to
MLGW, including covering for the cost of replacement power, plus interest.
If in any month, the highly unlikely event occurs that MLGW’s prepaid power
credit exceeds system requirements, in monetary terms, the credit balance shall
be applied to the next monthly invoice and carried forward with interest. In the
event that a credit balance is outstanding at the end of the contract period, TVA
shall pay MLGW the outstanding amount.
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Prepay Contract Terms and Protections (cont.)
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If TVA makes a more favorable deal or repayment arrangement
with another distributor, TVA will make MLGW whole for any
difference, to be determined by mediation if necessary.
If the agreement is assigned by TVA without MLGW’s permission
or by operation of law, MLGW may terminate the agreement and
TVA must pay to MLGW the Default Payment. This contract
provision protects MLGW from privatization of TVA or breakup and
sale of TVA assets.
TVA expressly agrees that the agreement is legally binding on it
and enforceable by a lawsuit in U.S. District Court in Tennessee.
Traditionally, no appeals process has existed for distributors on
actions taken by TVA. This contractual language provides MLGW
a methodology to be used to settle disputes arising with TVA in
regard to the prepayment transaction. While a procedure for
Alternative Dispute Resolution (ADR) is provided in the contract,
neither party is required to participate or delay the commencement
of litigation on the basis of the ADR process. This right to ADR
and litigation far exceeds that which MLGW has under its current
power agreement.
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Prepay Contract Terms and Protections (cont.)
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The agreement did not become effective until MLGW
had obtained tax-exempt financing at a cost that it
found acceptable in its sole discretion.
At any time prior to the execution of the bond
purchase agreement, MLGW could request a
one-time adjustment of the economic terms of the
agreement to preserve the economics of the
prepayment transaction. If TVA and MLGW did not
reach agreement on adjusted terms, then the
agreement would not become effective.
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Conclusions
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The transaction structure justified a AAA/Aaa rating based on
contractual protections and the credit strength of both parties. The
counterparty to this transaction, TVA, is a federal entity with a AAA
rating.
There are significant tangible and intangible benefits to both
parties.
This was MLGW’s best available option to secure long-term, lowcost baseload power with the least risk.
MLGW will save approximately $225 million over the term on its
cost of power.
The savings will allow MLGW to hold down its rates, which
substantially improves its competitive outlook in the future.
TVA is assured of retaining 50% of the energy needs of its largest
customer and can effectively use the proceeds of the prepayment
for capital projects or debt reduction that will only further its ability
to meet the needs of MLGW and other customers.
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