Credit Implications for T&D Utility Activities GRIDSCHOOL 2010 MARCH 12, 2010  RICHMOND, VIRGINIA INSTITUTE OF PUBLIC UTILITIES ARGONNE NATIONAL LABORATORY Jim Hempstead Senior Vice President Moody’s Investors Service ■ Do not cite or distribute without permission MICHIGAN STATE UNIVERSITY

Hempstead - 02 GridSchool 2010 Introduction  Moody’s Rating Methodology  Sector Mapping  Factor 1 – Regulatory Framework  Factor 2 – Returns and Cost Recovery  Factor 3 – Diversification  Factor 4 – Financial Strength  Financial profile  Current trends and developments  Financial projections

Hempstead - 03 GridSchool 2010  Sector Mapping Moody’s Rating Methodology Many corporate / industrial sectors have a much higher percentage of Quantitative factors in Rating Methodologies:  Oil & Gas - 92%  Chemicals - 91%  Coal – 83%

Hempstead - 04 GridSchool 2010  Sector Mapping Moody’s Rating Methodology

Hempstead - 05 GridSchool 2010 Moody’s Rating Methodology  Factor 1 – Regulatory Supportiveness Draft – as of 2/18/10 – subject to change

Hempstead - 06 GridSchool 2010  Factor 1 – Regulatory Framework (T&D’s) Moody’s Rating Methodology

Hempstead - 07 GridSchool 2010  Factor 1 – Regulatory Framework (Integrated) Moody’s Rating Methodology

Hempstead - 08 GridSchool 2010 Moody’s Rating Methodology  Factor 2 – Cost Recovery Draft – as of 2/18/10 – subject to change

Hempstead - 09 GridSchool 2010 Moody’s Rating Methodology  Factor 2 – Cost Recovery (T&D’s)

Hempstead GridSchool 2010 Moody’s Rating Methodology  Factor 2 – Cost Recovery (Integrated)

Hempstead GridSchool 2010 Moody’s Rating Methodology

Hempstead GridSchool 2010 Moody’s Rating Methodology  Factor 3 – Diversification (T&D’s) For T&D’s, all 10% of Factor 3 is allocated to T&D Market Position due to the lack of owned generation

Hempstead GridSchool 2010 Moody’s Rating Methodology  Factor 3 – Diversification (Integrated)

Hempstead GridSchool 2010 Moody’s Rating Methodology  Factor 4 – Financial Strength (T&D’s)

Hempstead GridSchool 2010 Moody’s Rating Methodology  Factor 4 – Financial Strength (Integrated)

Hempstead GridSchool 2010 Financial Profile  Income Statement (3 year average, )

Hempstead GridSchool 2010 Financial Profile  Balance Sheet (3 year average, )

Hempstead GridSchool 2010 Financial Profile  Cash Flow Statement (3 year average, )

Hempstead GridSchool 2010 Credit Trends and Developments  Numerous considerations with credit implications over the long-term horizon; few risks evident over near-term  Does NOT absolve sector from proactively strengthening balance sheet and bolstering liquidity reserves on front-end of cycle

Hempstead GridSchool 2010 Financial Projections

Hempstead GridSchool 2010  T&D Cash Flows / Debt Financial Projections

Hempstead GridSchool 2010  Integrated Cash Flows / Debt Financial Projections

Hempstead GridSchool 2010 Financial Projections CFO pre-WC / Debt CFO pre-WC / Interest  AverageT&D Metrics

Hempstead GridSchool 2010 Appendix

Hempstead GridSchool 2010 Appendix