1. Valuing a Utility
APPA Conference
April 21, 2005

2. Agenda 1. Overview/Relevance of Valuation Issues to Public Utilities
2. Valuation Perspectives in Utilities/Power
3. Overview of Valuation Methodologies
4. Illustrative Valuation Analysis 1

3. 1. Overview/Relevance of Valuation Issues to Public Utilities

4. Why Understand Valuation?
Acquisition or Assumption of Service Territory
Divestiture of Generation Assets
Contribution of Assets to Pooling Arrangements
Responding to Questions Related to Residual Equity- “Elected Officials Have Considered Selling Us.” 2

5. Capitalization Issues Make Public Utilities Different
All equity is rate payor contributed
Most debt is secured by revenues
Average life of debt is long (typically over 15 years)
Tax law impacts use of divestiture proceeds and acquisition debt types
Many public agencies may not own shares
Equity is investor owned and traded
Debt is secured by assets or unsecured 3

6. Valuation in the Public Arena is Influenced by Buyer Type
Public Sector Transactions
Acquisition rules for tax exempt funding
Two agencies unrelated
Flexible rules related to disposition of tax exempt debt
Debt structure of two agencies unrelated
Debt restructuring flexibility is often a source of value
Taxes are not a valuation influence
Public/Investor Owned Transactions
Acquisition
Potential taxable funding
Governmental ownership tax free
Assets often are drivers of pilot payments or dividends
Divestiture
Limited ability to accept only cash
Mitigation of tax exempt debt may be costly
Cash or Assets
Cash
Public
Agency
Public
Agency
Public
Agency
Investor
Owned Utility
Assets
Cash or Assets
Assets
Public
Agency
Investor
Owned Utility
Cash 4

7. 2. Valuation Perspectives in Utilities/Power

8. Market Themes Significant outperformance by utility stocks in 2004
Continued low interest rate environment
Rising commodity prices benefiting integrated utilities
Large dividend increases
Interest rate movements likely to be key driver of valuations going forward
Merchant generators trading at significantly higher multiple than regulated utilities, but with substantially higher earnings volatility
Utilities with unregulated generation less penalized than in recent past
Understanding the broader public market is critical when valuing any asset 5

9. Evaluating the Market: Illustrative Sector Groupings
“Defensive” Utilities
“Integrated” Utilities
“Transitional” Utilities
Offer significant current income and lower risk profile
Highly correlated to interest rates
Lower current income but higher potential earnings growth
Less correlated to interest rates; more correlated to commodity prices
Diverse risk / reward profile
Expected to migrate into the other categories over time 6
Source: Equity research.

10. Utilities: Outperforming the Market
‘03-’04 ’05 YTD Integrated 27.6% 13.8% Transitional 19.2% 5.4% Defensive 11.8% (3.7)% S&P % (6.3)% 7
Source: Equity research.

11. Current Valuations Appear Full
1-Yr Fwd P/E
1-Yr Fwd P/E Relative to S&P 500
Source: Equity research. Note: Historical high / low reflects January 1989 through April 2005 statistics. 8

12. Interest Rates vs. Dividend Yield: Implication for Sector Valuations
Dividend Yield & Treasury Rates
Sustainability of Elevated P/Es
With a large portion of regulated cash flows and high payout ratio, large cap utility market values trend to be highly correlated with treasury yields
Spread to Treasury is a large component of sector valuation
Correlation implies that elevated P/Es may not be sustainable in a rising interest rate environment
Sector valuation may come under pressure if interest rates rise as expected 9

13. ROE Trends – Electric Utilities
ROEs have declined, but not as much as interest rates
Fewer equity return determinations in recent years relative to the 1980’s and early 1990’s, but more data points in early 2005
ROE Trend vs Interest Rates
Trend in # of Determinations
Source: Regulatory Research Associates. Note: Dotted line reflects 1Q 2005 annualized. 10

14. Current Market Valuations by Strategy
Fwd P/E (2006E)
LTM EBITDA 11
Note: Data as of April 15, EPS estimates reflect IBES consensus.

15. U.S. Utility M&A Activity
$1,541.0
$9,265.2
$8,626.1
$7,643.2
$13,039.8
$7,780.1
$21,413.4
$7,655.1
$3,379.1
$4,745.5
$1,237.5
$194.3
$22,551.0
$919.9
$2,881.0
$1,107.1
$7,227.8
$852.2
$17,387.8
$18,033.0
$11,346.6
$22,773.9
$8,506.7
$27,356.6
$6,255.4
$2,350.0
$4,044.6
$16,451.9
$12,868.1
$2,018.0
$3,915.0
$13,643
$293.5
$0.0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
$ in million
Electric T&D
Gas LDC
Integrated
Generation 12
Note: Excludes terminated deals.

16. 2005 M&A Predictions Corporate Utilities
Exelon / PSEG transformation to provide stimulus to other merger discussions
“Back-to-basics” strategies to be overtaken by renewed focus on growth
Regulators continue to make industrially logical mergers more difficult than they should be
Political pressure to keep end-user energy prices contained in continued high commodity price environment will facilitate some cost-reducing consolidation activity
Foreign interest revived by Dollar weakness
Return to levels of M&A activity experienced in late 1990s
Contracted Generation
High yield markets to provide competitive alternative to outright sales
Merchant Generation
Emergence of multi-fuel, multi-regional generators with significant scale
Continued divergence of valuations between CCGT and coal/nuclear operators
Further migration of trading and marketing to Wall Street 13

17. 3. Overview of Valuation Methodologies

18. Valuation Overview
Valuation is 25% quantitative analysis and 75% qualitative considerations
Sophisticated M&A practitioners look beyond financial models
The math is relatively straight-forward; the interpretation and the inputs are not
Judgment always needs to be applied to ensure the inputs are appropriate and the results meaningful
Multiple methodologies are typically used to “triangulate” to a valuation conclusion 14

19. Overview of Primary Valuation Methodologies
Public Mkt Multiples
Private Mkt Multiples
Discounted Cash Flow
Based on multiples at which comparable companies currently trade
Based on multiples paid for comparable targets in previous M&A transactions
Based on the company-specific projections and outlook for the future
Valuable benchmark for M&A valuation
Reflects collective wisdom of market given current conditions
Critical benchmark for M&A valuation
Reflects value of “control”
Theoretically most closely approximates intrinsic value
Relies on analogy
May ignore relevant company-specific factors
Affected by market conditions at the time
Affected by transaction structure and synergies
Highly dependent on accuracy of projections
Terminal value often comprises large %age of present value 15

20. Key Considerations: Multiples-Based Valuation Analyses
For public market valuation analysis, the key factor is selecting “comparable” companies, and applying the data
In a private market valuation analysis, same considerations plus transaction structure and timing considerations
Key considerations for selecting comparable companies include:
Qualitative
Quantitative
Business mix (e.g. % regulated)
Composition of customer base
Geographic mix
Allowed rate of return / rate stability
Regulatory environment
Quality of management
Growth prospects
Profitability
Size / scale
Capital structure
Liquidity 16

21. Key Operating Metrics for Multiples-Based Valuation Analyses
Regulated T&D
Integrated Utility
Generation
Forward earnings
Tangible book value
Rate base
Customers
Forward earnings
EBITDA
Tangible book value
Rate base
EBITDA
Forward earnings
Capacity ($ / kw) 17

22. Key Considerations: DCF Valuation Analysis
Three drivers of discounted cash flow valuation analysis:
Forecasted unlevered free cash flows
Underlying assumptions
Timeframe: specified number of years up to the life of asset
Terminal value assumption if forecast cash flows < life of asset
Apply a public market multiple
Apply a perpetuity growth rate
Discount rate assumption
Reflects a long-term target capital structure
Reflects the long-term cost of the related debt and equity, raised in today’s environment 18

23. Other Key Considerations
Cost of capital advantage of tax-exempt entities relative to IOUs
Perceived competition for the asset
Competitors ability to pay
“Premium” paid
Potential synergies
Other items of potential value
Basis step-up in an asset deal
Net operating losses that go with the stock 19

24. 4. Illustrative Valuation Analysis

25. Summary Valuation Analysis: Regulated Electric T&D Asset20
Note: Green bar reflects estimated incremental value associated with a 2007 rate case.

26. Multiples-Based Valuation21

27. Public Market Comparables22

28. Private Market Comparables23

29. Discounted Cash Flow Analysis24

30. WACC Analysis 25

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