1. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright © 2011 Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved. Credit Ratings -- the USA, California, and California's Energy Businesses Power Association of Northern California San Francisco, CA October 11, 2011

2. 2. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Agenda Overview of credit ratings U.S. corporate credit quality Power sector credit quality Challenges facing the power sector 2011 and beyond

3. 3. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. What is a Credit Rating?

4. 4. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Long-Term Debt Rating Scale ‘AAA’Highest Credit Quality ‘AA’ ‘A’ ‘BBB’  Investment Grade ‘BB’  Non-Investment Grade ‘B’ ‘CCC’ ‘CC’ ‘SD/D’Debt in Selective Default / Default

5. 5. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Standard & Poor’s Rating Analysis Methodology Profile (“RAMP”) RATING Business Risk Industry Characteristics Company Position Profitability / Peer Group Comparisons Country Risk Financial Risk Accounting Governance, Risk Tolerance, Financial Policy Cash Flow Adequacy Capital Structure Liquidity/Short Term Factors

6. 6. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Business and Financial Risk Profile Matrix Source: Standard & Poor’s “Criteria Methodology: Business Risk/Financial Matrix Expanded,” published 5/27/09.

7. 7. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Global Corporate Average Cumulative Default Rates (1981-2010) Source: Standard & Poor’s “2010 Annual Global Corporate Default Study And Rating Transitions,” published 3/30/11.

8. 8. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Majority of Non-Financial Corporate Issuers Speculative Grace

9. 9. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Speculative-Grade Default Experience And Forecast – A Fragile Recovery We Expect The Speculative-Grade Default Rate To Fall Shaded areas are periods of recession as defined by the National Bureau of Economic Research. Source: Standard & Poor’s Global Fixed Income Research; Standard & Poor’s CreditPro ®. U.S. Corporate Speculative-Grade Default Rate And 12-Month Forward Forecast

10. 10. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Credit Quality: The Nation and California

11. 11. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Power Sector Credit Quality: The Nation and California

12. 12. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Rated Energy Universe Oil & Gas Energy / Power E&P Oilfield Services Midstream Energy Oil Refining Retail Distribution Regulated Utilities -Electric -Gas -Water Integrated Merchant Power -Renewables Solar Ethanol Project finance/independent pwr E&P = Exploration and production

13. 13. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Ratings Profile of the U.S. Energy Sector Note: Utilities includes both gas and electric companies

14. 14. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Merchants Credit Quality Under Pressure Source: Henry Hub Forward Prices, Platt’s,

15. 15. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Major Merchant Energy Companies 2008 v. 2011 20082011 Business profile Financial profile Corporate credit rating Business profile Financial profile Corporate credit rating Calpine Corp. VulnerableAggressiveD/--/--Weak Highly leveraged B/Stable/-- Dynegy Holdings Inc. Weak Highly leveraged B/Stable/--Vulnerable Highly leveraged CC/Watch Neg/-- Edison Mission Energy WeakAggressiveBB-/Stable/--Vulnerable Highly leveraged B-/Negative/-- Energy Future Holdings Corp. (formerly TXU Corp.) Weak Highly leveraged B-/Stable/--Weak Highly leveraged CCC/Negative/-- NRG Energy Inc. WeakAggressiveB+/Stable/B-2FairAggressiveBB-/Stable/B-2 Mirant Corp. WeakAggressiveB+/Stable/--Weak Highly leveraged B/Stable/--

16. 16. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Project Finance: Renewables Development May Take a Breather  Three major incentives are expiring Department of Energy Loan Guarantees (Sep 2011), Investment tax credit (ITC) cash Grants (Dec 2011) Wind production tax credits (PTCs) (Dec 2012)  Fiscal conditions in US and Europe may affect support for renewables funding  Demand has been slow to respond to price declines Wind at $1000/kW now and Solar at $1/Watt by end-2011 Utility-scale projects can’t respond quickly and many utilities have reached RPS targets High reserve margins and low commodity prices Rooftop solar will grow and Fukushima is a positive

17. 17. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Investor-Owned Electric Utility Ratings Western U.S.

18. 18. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Credit Risks for Electric Utilities Capital spending needs are high Electric demand remains soft Retail electric rates are rising, even as natural gas prices fall Uncertainty regarding environmental regulation Need to maintain financial strength –Continued rate case activity required in many states –But declining authorized return on equity –Bonus depreciation benefits to cash flows tail off in 2012

19. 19. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. The San Francisco Utilities and Infrastructure Team Anne Selting, Director anne_selting@standardandpoors.com 415-371-5009 Swami Venkataraman, Sr. Director Swami_Venkataraman@standardandpoors.com 415-371-3071 Tony Bettinelli, Associate tony_bettinelli@standardandpoors.com Grace Drinker, Associate grace_drinker@standardandpoors.com 415-371-5045 Ben MacDonald, Associate Director 415-371-5005 ben_macdonald@standardandpoors.com

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