The power industry may be suffering now from a liquidity crunch, but it’s not the first time for the sector, and history may offer some “important” lessons, according to a Standard & Poor’s credit analyst.

Jeffrey Wolinsky said on Thursday that the latest credit problems faced specifically by two utilities, Consolidated Edison Co. of New York (Con Ed) and GPU Inc., were the subject of case studies by the Harvard University Business School. The “lessons” from the studies “teach us that companies should be financially prepared to weather surprises, especially when extended by growth, industry change, etc.”

In 1974, said Wolinsky, Con Ed faced a cash shortfall of about $600 million, with the Arab oil embargo hiking its fuel bill to about $800 million from $300 million in 1973. Also, because Con Ed was concerned about the oil shortage, it asked its customers to conserve energy. “As a result, revenues declined sharply, while expenses did not, leading to a liquidity crisis,” said the analyst. It requested a $423 million rate increase but was denied by the New York Public Service Commission (NYPSC), which granted only a temporary increase of $175 million.

“The NYPSC’s decision reduced investor confidence in Con Ed and the company issued $150 million in bonds in March 1974, at the highest yield in the power industry at the time,” said Wolinsky. The financial problems were compounded by a large construction budget of $3.5 billion from 1974 to 1978. Delaying construction would “increase the likelihood of brownouts and potential system failure. Also, its stock was trading at a 10-year low and “substantially below book value, which limited access to the equity markets.” It also was having trouble gaining approval to sell two partially completed generating plants to the New York Power Authority, and approval was uncertain.

“Con Ed opted to forgo the quarterly dividend in 1974 to shore up its liquidity and subsequently sold the power plants…to survive the credit crunch. However, eliminating the dividend came at a cost, because Con Ed had difficulty accessing the equity markets for a number of years afterward.”

Meanwhile, in 1979, GPU and subsidiaries Jersey Central Power & Light Co., Metropolitan Edison Co. and Pennsylvania Electric Co. faced a liquidity crisis following the accident at the Three Mile Island 2 nuclear power plant. Following the incident, there was “considerable uncertainty surrounding the subsidiaries’ ability to recover replacement power costs and whether Three Mile Island would continue to remain in rate base.”

GPU also had begun a construction program, planning to spend $455 million in 1979 and $516 million in 1980 to match customer growth. GPU ended up reducing the budget, as well as laying off 600 people and reducing its dividend. However, the cuts still left it with a projected cash deficit and problems with lenders following the Three Mile Island incident. It finally was able to structure a loan secured by fuel inventory and a stock pledge in each of its subsidiaries, avoiding bankruptcy in the process.

“One lesson to be learned…is that Con Ed and GPU were financially unprepared to deal with surprises, especially in a period of growth, which led to their liquidity problems,” said Wolinsky. “The lesson to be learned from these experiences is that companies that rely on access to the capital markets and bank markets during periods of stress put themselves and their investors at great risk. Companies should prudently match their liabilities to their assets.” Another lesson, he noted, is that “companies should maintain cash balances to meet near-term liquidity needs and not rely on banks.”

Those companies that managed their growth and maintained a strong balance sheet, matching assets to liabilities, have “weathered the storm,” said Wolinsky. “These companies may have suffered some deterioration in credit fundamentals, but are not experiencing a financial crisis.”

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