1. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright © 2010 Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved. Mid-America Regulatory Conference “What Every Regulator Needs To Know About How The Investment Landscape Has Changed” Richard W. Cortright, Jr. Managing Director June 7, 2010 Kansas City, Missouri

2. 2. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Corporate Credit Quality – Bumping Along the Bottom Ratings Distribution Of S&P’s U.S. Corporate Ratings 60% Are “BB” And Below As of May 3, 2010 D 2%

3. 3. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. U.S. Corporate Credit Quality – Bumping Along the Bottom Ratings Distribution Of S&P’s U.S. Utility Ratings 4% Are “BB” And Below As of June 4, 2010

4. 4. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Principal Credit Themes We See Affecting Regulated Utilities (Business)  Need for Substantial Infrastructure Spending → Constant Stream Of Rate Increase Filings, Frequently Of The Double-Digit Variety (PNM, AVA)  Aging Generating/Transmission Capacity, Reliability Enhancements, Organic Growth, Evolving Environmental Mandates  Balkanization of Environmental Planning/Intransigent Federal Indecisiveness  A Recent Twist…  Shale Gas – Possible Game Changer, At Least In The Intermediate Term  Reduction In Price Volatility  Politically Palatable (And That Makes All The Difference)  A Further Irritant To Renewable Portfolio Standards

5. 5. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Principal Credit Themes (Business; cont’d)  Stagnation -- Even Decline -- in Customer Consumption, At Least in the Near to Medium Term → Implications For Recovery Of Fixed Costs  Myriad Of Evolving Air (Non-CO2) Emission, Water, And Ash Disposal Regulations → Piling On Of Mandated Costs  Possibility Of Price Shock Mid-Decade As Uneconomic Coal Shuts Down And Markets Turn To Renewables In Absence Of Base Load Additions

6. 6. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Principal Credit Themes We See Affecting Regulated Utilities (Financial)  Diminished Capacity of the Banking Market  The Beneficence Of The Past Is Just That – Past: But Willingness To Lend To Utilities Remains Strong  Rising Bad Debt Expense and Increasingly Underfunded Pension Plans  Weakened Utility Balance Sheets Compared with Last Major Construction Cycle  Credit Ratings Of ‘AA’ and ‘A’ During the 1970s and Early 1980s Vs. ‘BBB’ Today IN EACH JURISDICTION, THESE ISSUES ALL COME HOME TO ROOST AT THE FEET OF THE STATE REGULATORY COMMISSION

7. 7. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Capital Expenditure Planning – A Sampling $millions 2009201020112012 Iberdrola USA$324$1,100 DTE Energy$347$1,400$1,500 Pinnacle West$711$954$1,000$1,200 CMS Energy$818$1,100$1,000$1,600 Puget Energy$776$1,000$1,100 Xcel Energy$1,800$2,200$2,300$2,100 Duke Energy$4,300$5,200$4,800$4,400 Northeast Utilities$908$1,100$1,300$1,500 Westar Energy$556$665$801$899 Wisconsin Energy$818$951$1,000$835

8. 8. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Essentials Of Credit-Supportive Regulation  Consistency And Predictability Of Decisions → Consistency And Predictability Of Cash Flows  Timeliness Of Rate Orders --- The Avoidance Of Regulatory Lag  Use Of Forward-Looking Measures  Use Of Adjustment Clauses/Trackers  Pass-Through Of Purchased Power, Gas, And Water Costs  Construction Work In Progress (CWIP)/Infrastructure Surcharges  Pre-Approval Of Significant Capital Outlays  Environmental  Conservation  Demand Response  Bad Debt  Pensions

9. 9. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Are Ratepayers Well Informed About Costs of Climate Change/EE Initiatives? A 2009 Standard & Poor’s/RKS Survey of State Regulators:

10. 10. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Ratemaking Methodologies Note: Base is 95 interviews in 2005, 96 interviews in 2007, 107 interviews in 2009. Maintain Traditional Methods or Establish New Ones?

11. 11. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Other Observations  Mergers & Acquisitions: Is There Finally Some Momentum? Hard To Say, But Skepticism Is Probably Appropriate  FirstEnergy/Allegheny Energy --- A True Consolidation  Calpine/Conectiv Energy --- An Acquisition Of Assets  PPL/Kentucky Utilities (E.On) --- A Trading Of Parents (Only Two European Parents Remain Stateside)  Cape Wind (Off The Coast Of Hyannis Port)  Nine Years And Counting  Fracturing Of Regional Cooperation To Make Room For “Home- Grown Energy Solutions;” “In-State Energy Production;” “Branding X State As A Leader In Renewable Technology” → Economic Theory of Competitive Advantage Degraded

12. 12. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Other Observations (cont’d)  Feed-In Tariffs (Oregon, Vermont, Washington) --- A Principal With A Checkered History Echoes of Niagara Mohawk’s Near-Insolvency?  Market-Based Solutions Vs. Government-Driven Approaches Through Tougher Mandates, New Laws  Political Interference In The Rate-Making Process  Virginia Regulators Have Denied An Application By Appalachian Power To Approve Three Renewable Energy Purchase Power Agreements (201 Mw) As Too Costly --- Renewable Forms Of Energy Are To Be Encouraged, But Not Necessarily At Any Cost  Florida Allowed Tampa Electric To Cancel A Solar PPA  New Jersey Is Reviewing Its Energy Master Plan  California IsReviewing Suspension Of Its Renewables Program

13. 13. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Free Energy --- What’s Not To Like? “With H.B. 1001 We Will Manufacture And Install Panels And Turbines All Over Colorado To Capture Free Energy. The Sun Will Always Shine For Free, The Winds Will Always Blow For Free, And Our Energy Production Will Be Cleaner. Renewable Energy, Green Jobs, And A Cleaner Future --- What’s Not To Like?” -Representative Max Tyler (CO), Co-Sponsor Of Bill Increasing Utility Renewables Requirement To 30% Of Retail Sales By 2020

14. 14. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Assessments Of State Political/Regulatory Credit Posture

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