Kroll Bond Rating Agency Releases Report on the Potential Impact of Natural Gas Fracking on Municipal Bond Issuers

Kroll Bond Rating Agency (KBRA) published a report today on the potential impact of shale gas development on municipal bond issuers. The goal of this preliminary report is to alert investors to a new dynamic in the market, the potential development of trillions of dollars of unanticipated, domestic shale gas reserves over the next few decades. While there are significant environmental challenges, particularly contamination of groundwater and aquifers, the focus of this report is the potential impact on municipal credit quality if these shale gas reserves are developed on a large-scale.

It has been known since the 1950s that North America has tremendous quantities of gas and oil trapped in shale formations, but until recently, almost all of this was deemed non-recoverable. Recent advances in combining hydraulic fracturing and horizontal drilling have materially reduced the cost of recovering shale gas and dramatically increased projected reserves.

This report provides estimates of these new reserves by state and metrics to help investors determine how their development could affect credit quality of “taxed-backed” municipal issuers. It also explains how the further expansion of shale gas development in the United States could benefit many public power utilities by:

• Reducing financing, operating, and construction risks associated with multi-billion dollar projects;
• Providing a low cost, relatively clean fuel with ample supply and expected price stability;
• Significantly reducing future capital costs and forecasted bond issuance; and
• Allowing an inexpensive way to reduce plant emissions of CO₂, mercury, and sulfur oxides.

Although estimates surrounding many key factors are in flux, and concerns over health and environmental issues have still not been adequately addressed, we believe investors need to be cognizant of the potential credit impact shale gas development could have on securities issued on behalf of states, localities, and utilities.

On a macro level, the development of this resource has the potential to materially increase the nation's GDP, lower energy costs, create a large number of new jobs, and enhance national security. However, significant environmental challenges must be overcome.

Gary Krellenstein is a Managing Director in the Public Finance Group at Kroll Bond Rating Agency, Inc. Gary is nationally recognized in the infrastructure, energy finance and alternative energy fields and is a frequent speaker on energy and finance issues. He has given numerous presentations to utilities, energy companies and institutions such as Harvard University, the U.S. Congress, Carnegie Mellon University, the Electric Power Research Institute (EPRI), the National Governors Association, the American Public Power Association (APPA), and the New York Academy of Science.

Prior to joining Kroll, Gary had been an Investment Banker and Managing Director in JPMorgan's Energy and Environmental Group, specializing in electric utilities, alternative energy technologies and project financing. Prior to joining JP Morgan in 2000, Gary was the Director of Municipal Research at First Albany Corporation and a Senior Vice President at Lehman Brothers.

Before becoming an investment banker, Gary took top honors in the national polls of financial analysts conducted by Institutional Investor Magazine (1^st team for 11 consecutive years). He has also been elected to All-American Research Teams (first place in the Utilities, Industrial Development and Pollution Control categories) by the Bond Buyer, Global Guaranty, and Smith's Research and Rating Review. In addition, the National Federation of Municipal Analysts (NFMA) presented Mr. Krellenstein with the “1998 Award for Excellence” for his work in credit research and analysis. He recently served on the Board of Directors of the Climate Response Fund, an NGO which focuses on technologies to address climate change.

Gary holds degrees in Nuclear Engineering and Computer Science, as well as an MBA from Cornell University and started his career as a nuclear engineer and systems analyst for the Envirosphere Company, and as a federal intern at both the U.S. Department of Energy and the U.S. Nuclear Regulatory Commission.