What are your seasonal working capital needs?
As a very large utility, we build up an inventory of fuel in advance of generating a lot of electricity to heat people’s homes. Our fuel inventory balance will build up, we’ll create the electricity, and ultimately send out the bills. There is a pretty substantial lag between when we invest in the inventory and when we receive payment from our customers, and that, as you would expect, shifts seasonally. It’s very weather-dependent. When it’s hot and air conditioning is running, there’s a bigger gap than when it’s relatively moderate out and we’re neither heating homes nor cooling homes with electricity.
Has the crisis changed your approach to managing cash flow?
We’ve taken a much more granular look at the cash flows. Fortunately, we have a very good system, a pretty rigorous approach towards being able to predict the timing of cash payments, a good seasonal pattern. So we had the data we needed to size up the amount that we wanted to draw on our liquidity facilities. We drew the $2 billion dollars in anticipation of retiring the commercial paper as well as being able to fund the capital requirements that we saw over the near term, including the working capital requirement for fuel inventory. I’d sum it up by saying, Good cash management and a good handle on the relative fluctuations in cash management is more important now than ever in the past.
Have you had any writeoffs, such as goodwill-impairment charges, lately?
No. But like most major industries, we have a very large pension plan. We were at a 112 percent funded level and we have seen a significant decline in our level of funding. While we don’t expect that we will see a requirement to fund our pension plan in 2009, because we’ll be above the 80 percent minimum level, it is in light of the current environment likely that we will begin funding in 2010. Now that was not a writeoff, but it is a decline in asset value that will be impacting us–as we expect now, in 2010. Depending on what happens in the market, it could be 2009.
Are you sitting on any credit-default swaps?
No we’re not. But we are a very substantial participant in the energy markets. We learned, probably in the school of hard knocks a bit, from the Enron experience back in 2002. We’re fortunate in having a disciplined portfolio approach, managing our risk exposure to any one counterparty–including the banks.
What did you specifically learn from Enron?
Don’t put all your eggs in one basket. Manage the amount of risk that could roll back onto your balance sheet. The scale of the mix of transactions needs to be managed relative to your underlying balance sheet’s ability to handle the potential for collateral calls for margining and for counterparty default.
What ended up happening was that everybody that had Enron as a counterparty was left holding the bag for all those transactions. They were a pretty substantial counterparty to us. And we had many long-duration transactions with them–transactions that went for many, many years.
Have the last few months affected the way you view risk?
Yes, in one particular manner: the speed at which changes in the market can take place. You mention the credit-default-swap market. It was a wonderful tool to manage risk. We did not use it because of our internal limitations on risk exposure. We didn’t need to use it to lay off risk; we chose not to enter into those types of risk. But the speed at which markets can move and the breakdown in fundamentals has caused us to be more proactive in terms of insuring that we have breathing room.