APPA NATIONAL CONFERENCE How Policymakers are Responding to the Economic Downturn-A Credit Perspective Presented by: Dan Aschenbach Senior Vice President, Global Infrastructure Presented by: Dan Aschenbach Senior Vice President, Global Infrastructure June 16, 2009

2 Agenda Economic Recession Moody’s Outlook Key Credit Strategies Credit Ratings and Outlook

3 ECONOMIC RECESSION

4 Moodys.Com Economic Outlook Recession now engulfs virtually all U.S. states and metropolitan areas Confidence is beginning to stabilize; surprisingly, the Northeast leads the way Manufacturing in the Midwest and Southeast— excluding automakers—will get a lift as new orders stabilize House prices have dropped enough in the weakest markets to entice investors and first- time buyers

5 Rays of A Better Outlook Consumers, businesses and financial markets are showing signs of improving health Fiscal and monetary policy steps are cushioning the recession Layoffs need to ease, consumers need to regain confidence, and loans need to become more available for the economy to recover For the first time in nearly two years, the near- term outlook is a bit brighter Full recovery remains a long way off

6 AP Stress Index Falling Slightly The AP calculates a score from 1 to 100 based on each county's rate of unemployment, foreclosure and bankruptcy, with lower numbers indicating less economic pain. A county is considered stressed when its score jumps past 11. In February, nearly 40 percent of the nation's counties were at or above that threshold. In April, 34 percent scored 11 or higher. Source: AP May 2009

7 Impact on Public Power Electric Utilities Demand is down in 2009 in single digits but not all related to recession…weather driven and conservation-related Municipal utilities with large industrial customers closing may be most exposed particularly if fixed costs need to be spread on smaller sales base Still magnitude and depth of economic downturn unknown and holds potential for sector outlook to turn negative

8 Fiscal Stress of Local Governments Continue to Be A Possible Public Power Utility Pressure Most of the defaulted local governments (850) happened several years after the 1929 Depression Today unfunded pension and medical benefit liabilities present a burden not experienced in the past Some evidence this year of increased General Fund transfers from utility Significance of this fiscal stress issue will be dependent on recovery in economy

9 Strategies in Response to Current Downturn Maintain Liquidity and Mitigate Risk Public Power Resource Optionality Maintenance of Financial Metrics Strengthen Governance Relationship In Particular as it Relates to Rates

10 Maintain Liquidity and Mitigate Risk-The Challenge Evaluate risks and establish liquidity targets and communicate this From Nebraska ice storms to California drought impacts on hydro to collateral posting or swaps-know your threat to liquidity New costs expected to be coming so stronger balance sheet needed

11 Public Power Resource Optionality Planning-A Key Process Recessions end so plan through the cycle Resource optionality as it relates to carbon important “Long term cost-based approach with options”

12 Strengthen Metrics-More Focus by Moody’s Debt service coverage Days cash on hand Debt ratio See Moody’s medians

13 Strengthen Governance Relationship As it Relates to Rate Setting Best practice is keeping governing board close so rate requirements are understood Explain pressure General Fund Transfers have on utility and rates Rate pressure the most important credit issue

14 Moody’s Has A Stable Credit Outlook On The Electric Industry Less certainty to longer- term outlook due to recession, carbon and commodity market uncertainty Average credit rating for U.S. investor-owned electric utilities is in Baa range with stable outlook Public power credit quality of A2 has stable outlook

15 Moody’s Public Power Credit Ratings Public Power Utility Number of Rated Issuers Median Credit Rating Credit Outlook Debt Outstanding ($billions) JPA 42 A2Stable$31.3 Municipal Electricity Distributors 300 A2Stable$8.0(est.) Largest 25 City-owned Elec. Utilities 25 A1Stable$20.7 Largest 9 State/district utilities 9 A1Stable$41.6

16 What Factors Likely To Be A Concern In ?  Resource uncertainty due to the scale, scope and depth of regulatory intervention on carbon Political risk rising due to new costs related to shifting from carbon to renewable and nuclear may lead to rate resistance and lower debt service coverage margins

17 What Factors May Continue To Improve Credit Quality In 2010?  Less political appetite for major industry market restructuring will limit challenges to business model and maintain unregulated essential service  Potentially more reasonable phase-in of carbon policy Risk management experience has stabilized cash flow forecasts Some easing of commodity prices

18 Questions? Thank you.