HomeMy WebLinkAbout1996-03-21 City Council (4)City
City of Palo Alto
Manager’s Report
TO:HONORABLE CITY COUNCIL
FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:MARCH 21, 1996 CMR:199:96
SUBJECT:MOODY’S BOND RATING
REQUEST
This report is to inform the Council that Moody’s Investor Service has recently confirmed
the City of Polo Alto’s Utility Revenue Bond rating of Aa.
RECOMMENDATIONS
This report is for information only, and no action is required.
POLICY IMPLICATIONS
There are no policy implications in this report.
EXECUTIVE SUMMARY
BACKGROUND
Moody’s Investor Service, one of the nation’s top credit rating agencies, recently published
the results of a special study, which assessed the potential impact of deregulation on the
credit worthiness of municipal utilities in the Western United States. The study was in
response to the decision by the California Public Utilities Commission (CPUC) to deregulate
the State’s electric industry and introduce performance-based rate structures by 2005.
The Moody’s study confirmed the current ratings of Aa for the combined 1990, 1992, and
1995 series of Palo Alto Utility Revenue Bonds. In September 1995, another leading rating
agency, Standard & Poors, also reaffirmed an AA+ rating for Palo Alto Utility Revenue
Bonds (CMR: 439:95). The ratings for a number of other utilities in California w.ere
CMR:199:96 Page 1 of 3
downgraded, as they operate with high cost power generating plants and have not, to date,
responded pro-actively to industry deregulation.
Moody’s believes the CPUC decision to phase in deregulation offers a "window of
opportunity" for municipal utilities to realign their operations along more competitive lines.
In order to evaluate long-term competitiveness, Moody’s assessed each municipal utility’s
ability to lower long-term fixed costs, refine rates for commercial and industrial customers,
focus marketing and service efforts, and balance political demands with competitive
challenges.
Rating agencies, like Moody’s and Standard & Poor’s, use a variety of criteria to rate the
credit worthiness of municipal utilities. Moody’s analysis included the following factors:
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The depth and experience of key management staff;
The level of fixed cost investments in power generating facilities;
Utility rate competitiveness;
Nature and diversity of power supply resources;
Regularity of strategic and financial plan development;
Financial performance and debt coverage ratios;
Diversity of customer base; and
Local demographic and economic trends.
Supporting factors cited by the Moody’s study in favor of Palo Alto were:
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Management’s in-depth knowledge of regulatory and competitive issues coupled with
a strong and visionary management approach;
Lower fixed investment in power generation facilities;
Low rates for end users;
Diversified and inexpensive supply resources;
Strong financial performance resulting in lower long-term debt; and
A vibrant local and regional economy.
Favorable bond ratings and a competitive market position allow the City to maintain its
current market value of outstanding revenue bonds, and aids in obtaining favorable interest
rates for future utility bond financing.
Most importantly, a strong and competitive market position at the onset of deregulation
protects the market share and current customer base of the City’s utilities. Although the
future cannot be predicted with absolute certainty, a favorable "report card" from a nationally
recognized rating service is a strong indicator that the Electric Utility Funds’ future is sound.
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PREPARED BY: Tony Sandhu, Senior Accountant
DEPARTMENT HEAD APPROV~. ~~~~
Emi~rris0n -
Deputy City Manager,
Administrative Serv~
CITY MANAGER APPROVAL:
CC: n/a
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