1. American Public Power Association 2009 Business and Financial Conference The Financial Outlook for Public Power September 15, 2009 Dan Aschenbach, Senior Vice President

2. American Public Power Association 2009 Business and Financial Conference 2 Agenda Moody ’ s Public Power Sector Outlook Key Credit Strengths Key Challenges Through 2010 Strategies for Good Bond Ratings

3. American Public Power Association 2009 Business and Financial Conference 3 Stable Credit Outlook for U.S. Public Power Electric Utility Sector  Recession and climate change policies challenge outlook  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

4. American Public Power Association 2009 Business and Financial Conference 4 Moody’s Public Power Credit Ratings Public Power Utility Number of Rated Issuers Median Credit Rating Credit Outlook Debt Outstanding ($billions) Joint Power Agency 45 A2Stable$31.3 Municipal Electricity Distributors 300 A2Stable$8.0(est.) Largest 35 City-owned Elec. Utilities 35 Aa3Stable$30.7 Largest 9 State/district utilities 9 A1Stable$41.6

5. American Public Power Association 2009 Business and Financial Conference 5 Key Public Power Credit Strengths

6. American Public Power Association 2009 Business and Financial Conference 6 Credit Strengths  Limited default record  Generally sound financial metrics  Strong link to local government with access to fiscal support in times of stress  Past record of reliability and competitive pricing

7. American Public Power Association 2009 Business and Financial Conference 7 Credit Strengths  We do not expect the existing public power electric utility business model to change under the Obama Administration.The sector will retain the fundamental strengths of being a near-monopoly in the service area and having local governance and independent rate-setting  Utilities will likely continue to resort to more conservative debt structures with less variable rate debt exposure  We expect a longer timetable for compliance of utilities that own coal-fired generation with greenhouse gas emissions regulations because of the lack of commercial alternatives and lack of technology available for carbon capture

8. American Public Power Association 2009 Business and Financial Conference 8 Key Credit Challenges Through 2010  The Great Economic Recession  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 weaker financial metrics

9. American Public Power Association 2009 Business and Financial Conference 9 Credit Challenge: The Great Economic Recession

10. American Public Power Association 2009 Business and Financial Conference 10 Recession Impact on Public Power Electric Utilities  Demand is down in 2009 by single digits but not all related to recession…weather driven and some demand lost due to conservation  Municipal utilities with large 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 fully unknown and there is potential for sector outlook to turn negative if revenue collections and financial metrics weaken

11. American Public Power Association 2009 Business and Financial Conference 11 Fiscal Stress of Local Governments Continues to Be One of the Major Public Power Utility Pressures  Most of the defaulted local governments (850) happened several years after the 1929 Great Depression  Today during the Great Recession 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 to city to assist in stress  Significance of this fiscal stress issue will be dependent on recovery in economy

12. American Public Power Association 2009 Business and Financial Conference 12 Credit Challenge: Resource Uncertainty Due to the Scale, Scope and Depth of Regulatory Intervention on Carbon  Already impacts from coal disinvestment to renewable energy seen in financial and rate forecasts  Carbon cap and trade without a commercially proven capture technology or competitive alternative to coal will raise consumer prices dramatically  Is the past pollutant regulatory process prologue?  Uncertainty presents potential unintended consequences

13. American Public Power Association 2009 Business and Financial Conference 13 Uncertainty Example:  Natural gas futures at $3.353 per million BTUs on July 7, 2009  Wind economics change. Do plans for new transmission to wind farms get derailed?

14. American Public Power Association 2009 Business and Financial Conference 14 Credit Challenge: Political risk rising due to new costs related to shifting from carbon to renewable and nuclear may lead to rate resistance and weaker financial metrics

15. American Public Power Association 2009 Business and Financial Conference 15 Credit Challenge: New Nuclear Plants Increase Negative Credit Pressure  Most nuclear-building utilities suffered ratings downgrades-sometimes by several notches -during the last building cycle  Only 24 months remain before NRC expects to issue first licenses for new projects and few utilities have strengthened their balance sheets  Current lingering turmoil in credit markets, Federal loan uncertainty, and difficult rate challenges are apparent

16. American Public Power Association 2009 Business and Financial Conference 16 Location of New U.S. Nuclears

17. American Public Power Association 2009 Business and Financial Conference 17 New Nuclear Issues  Excellent safety and performance record  Design and regulatory process certainty is key  Nuclear renaissance; get first ones right  New nuclears located adjacent to existing units have strong likelihood of success  $6,000 to $7,000/KW build cost estimate could be the stumbling block

18. American Public Power Association 2009 Business and Financial Conference 18 Number One Pressure on Ratings Will rising retail rates due to issues like recession pressures, carbon decisions and new nuclear affect willingness to maintain debt service coverage margins and levels of financial liquidity?

19. American Public Power Association 2009 Business and Financial Conference 19 Strategies for Good Bond Ratings  Maintain Liquidity and Mitigate Risk  Public Power Resource Optionality  Maintenance of Financial Metrics  Strengthen Governance Relationship In Particular as it Relates to Rates

20. American Public Power Association 2009 Business and Financial Conference 20 Know Your Risks, Identify Mitigating Actions and Maintain Liquidity-The Challenge  Evaluate risks and establish liquidity targets and communicate this  From Katrina impact on natural gas supplies to recession impacts to collateral posting on swaps-know your threat to liquidity  New costs expected to be coming so stronger balance sheet are needed

21. American Public Power Association 2009 Business and Financial Conference 21 Public Power Resource Optionality Planning  Recessions end so plan through the cycle  Resource optionality as it relates to carbon important  “Long term cost-based approach with options”

22. American Public Power Association 2009 Business and Financial Conference 22 Strengthen and Maintain Financial Metrics  Debt service coverage – 2.54 x (median for distributors)  Debt service coverage – 1.85 x (median for utilities that own generation)  Days cash on hand – 111 days (median for utilities that own generation)  General Fund Transfer – 7.1% (median)  Debt Ratio – 30.8 % (median for distributors)  Debt Ratio – 49.9% (median for utilities that own generation)

23. American Public Power Association 2009 Business and Financial Conference 23 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

24. American Public Power Association 2009 Business and Financial Conference 24 Rating Process  Keep Moody’s informed of strengths and challenges  Periodic meetings and updates  Ongoing Credit Surveillance

25. American Public Power Association 2009 Business and Financial Conference 25 Questions? Thank you.

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