Construction of Coal-Fired Generation: Evaluating the Utility Credit Implications

1. Construction of Coal-Fired Generation: Evaluating the Utility Credit Implications Ellen Lapson, Managing Director Fitch Ratings, Utilities, Power & Gas July 17, 2007

2. Overview: Evaluating Electric Company Credit • Fitch’s focus is on the ongoing cash flow stability or volatility likely to result from many sources, including: • Sector environment and macroeconomic trends • Market franchise and customer demand characteristics • Fuel and power supply • Physical assets; service quality • Capital investment requirement • Regulation and tariff setting; political environment • Financial resource and liquidity

3. Investment Environment Sector Trends • Dwindling capacity margins • Transmission congestion • Aging electricity infrastructure • New environmental regulations • Pressure on natural gas supply RISING CAPEX

4. Investment Environment Sector Factors, continued • RISING CAPEX • Competition for labor, equipment and materials • Energy commodity costs rising too • Rising marginal cost • Unfavorable historical precedents during • High capex • Rising marginal cost per kwh

5. Investment Environment Macro Environment • Transitional stage in the financial markets • Inflation may accelerate • Long-term debt cost likely to rise • Potential consequences: lower equity prices and wider credit spreads, raising overall WACC

6. Known Risks Construction cost escalation Construction delays Access to capital; higher financial costs during construction Change in fuel cost versus competing fuels over plant life Evolving environmental standards over life Tariff recovery of costs Political reaction Demand price response Obsolescence; disruptive technology Financial and Operating Risk Assessment: New Utility Investment GENERIC CASE

7. Known Risks Construction cost escalation Construction delays Access to capital; higher financial costs Change in cost relationship vs. competing fuels Evolving environmental standards Tariff recovery of costs Political reaction Demand price response Obsolescence; disruptive technologies Higher $ per KW Long development and construction time Uncertain long-term operating performance Financial and Operating Risk Assessment: New-Tech Coal Baseload Power Plant Hi-Tech Pulverized Coal or IGCC

8. Known Risks Construction cost escalation Construction delays Access to capital; higher financial costs Change in cost relationship vs. competing fuels Evolving environmental standards Tariff recovery of costs Political reaction Demand price response Obsolescence; disruptive technologies Higher $ per KW Long development and construction time Uncertain long-term operating performance Financial and Operating Risk Assessment: New Tech Coal NuclearBase Load Power Plant New Nuclear Plant

9. Known Risks Commodity price volatility Shortage of capacity Tariff recovery of costs No return on investment; at best, just a recovery of costs Political reaction to volatile costs or power shortages Financial and Operating Risk Assessment: Don’t Build; Rely on Market Purchases Doing nothing also has risks, but less capital is at stake.

10. Known Risks Construction cost escalation Construction delays Liquidity and financing costs Change in cost relationship vs. competing fuels Evolving environmental standards Tariff recovery of costs Political reaction Demand price response Obsolescence; disruptive technologies Higher $ per KW Long development and construction time Uncertain LT operating performance Risk Mitigation Utility Management Balanced energy sources Engineering & project oversight Conservative funding strategy Regulatory and legislative policy Pre-certification of need Pre-approval of recovery Include construction work in process (CWIP) in tariff Lower external funding Lower ultimate cost Avoid rate shock at plant commercial operation Financial and Operating Risk Assessment: Risk Mitigants