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Risk Management Forum: Desperately Seeking Liquidity

Troubled markets drive defensive tactics.

Fortnightly Magazine - February 2009

are coming onto the market. Bringing that gas to market requires new investment in infrastructure, and that’s why we’re investing in pipelines, storage and LNG.


Fortnightly: What about rate cases? Do you see any of that regulatory risk on the horizon in California?

Snell: We just got through our rate case, so we’re moving forward now. [ Editor’s Note:  Last summer the California PUC approved a rate increase for SDG&E customers averaging 7 percent, which is expected to raise the company’s revenue by $265 million through 2011. CPUC also reduced SoCalGas’s revenue by $28 million, or about 1.7 percent.] We don’t have a lot of regulatory risk exposure right now. We like the regulatory compact that we have in California. We have a good rate of return on invested capital, and California has taken a leadership position in rewarding companies for investing in new infrastructure.


Xcel: Stress Testing

Fortnightly: How has the credit crunch affected Xcel Energy’s risk outlook and strategy? How are you positioning the company for financial stability in the current troubled market?

Jack Dybalski, Chief Risk Officer, Xcel Energy:  With the credit crunch, financial liquidity certainly becomes a significant issue. Our treasury department has done an excellent job ensuring we have sufficient liquidity and credit lines available to run our business. All these things merge together. We saw almost unprecedented high commodity prices through the third quarter of last year, before they started tumbling down. For the utility business that takes a lot of cash. We have to go to the [capital] markets, and get open credit for that.

We asked ourselves what would happen if that credit were to go away, or prices were to increase. It takes increasing levels of cash to meet our energy-supply needs. We don’t get our cash from customers until two months after the fact. Our finance department did a great job, did a stress test of our liquidity needs, and as a result we raised debt and equity in the markets. [ Editor’s Note:  Xcel raised $313 million in equity during the week of Sept. 15, 2008, and raised another $450 million in bond issues during September and November.] As a result, we have the cash necessary to acquire commodities. With tremendous fluctuation in commodity prices, we think now we’ve got adequate liquidity to handle extreme conditions.


Fortnightly: How has the Wall Street meltdown affected market liquidity, counterparty credit risks, and access to risk-management services from financial firms?

Dybalski: You make your own luck on some of these things. We have pretty much avoided all but the most trivial negative credit-related impacts to our business. There was a time when we absolutely refused to take on new commodity transaction exposures to our business, because we couldn’t tell how deep the web was wound. Things started to unwind at the beginning of the third quarter. We started to see financial institutions have trouble, so we started to slow down the business we did with them. By the fourth quarter we stopped doing business with financial institutions. Some received support from