1. Construction of Coal-Fired Generation: Evaluating the Utility Credit Implications Ellen Lapson, Managing Director Fitch Ratings, Utilities, Power & Gas July 17, 2007

2. Overview: Evaluating Electric Company Credit >Fitch’s focus is on the ongoing cash flow stability or volatility likely to result from many sources, including: –Sector environment and macroeconomic trends –Market franchise and customer demand characteristics –Fuel and power supply –Physical assets; service quality –Capital investment requirement –Regulation and tariff setting; political environment –Financial resource and liquidity

3. Investment Environment Sector Trends >Dwindling capacity margins >Transmission congestion >Aging electricity infrastructure >New environmental regulations >Pressure on natural gas supply RISING CAPEX

4. Investment Environment Sector Factors, continued >RISING CAPEX >Competition for labor, equipment and materials >Energy commodity costs rising too >Rising marginal cost >Unfavorable historical precedents during –High capex –Rising marginal cost per kwh

5. Investment Environment Macro Environment >Transitional stage in the financial markets –Inflation may accelerate –Long-term debt cost likely to rise –Potential consequences: lower equity prices and wider credit spreads, raising overall WACC

6. Financial and Operating Risk Assessment: New Utility Investment Known Risks >Construction cost escalation >Construction delays >Access to capital; higher financial costs during construction >Change in fuel cost versus competing fuels over plant life >Evolving environmental standards over life >Tariff recovery of costs >Political reaction >Demand price response >Obsolescence; disruptive technology GENERIC CASE

7. Financial and Operating Risk Assessment: New-Tech Coal Baseload Power Plant Known Risks >Construction cost escalation >Construction delays >Access to capital; higher financial costs >Change in cost relationship vs. competing fuels >Evolving environmental standards >Tariff recovery of costs >Political reaction >Demand price response >Obsolescence; disruptive technologies Higher $ per KW Long development and construction time Uncertain long-term operating performance Hi-Tech Pulverized Coal or IGCC

8. Financial and Operating Risk Assessment: New Tech Coal Nuclear Base Load Power Plant Known Risks >Construction cost escalation >Construction delays >Access to capital; higher financial costs >Change in cost relationship vs. competing fuels >Evolving environmental standards >Tariff recovery of costs >Political reaction >Demand price response >Obsolescence; disruptive technologies Higher $ per KW Long development and construction time Uncertain long-term operating performance New Nuclear Plant

9. Financial and Operating Risk Assessment: Don’t Build; Rely on Market Purchases Known Risks >Commodity price volatility >Shortage of capacity >Tariff recovery of costs >No return on investment; at best, just a recovery of costs >Political reaction to volatile costs or power shortages Doing nothing also has risks, but less capital is at stake.

10. Financial and Operating Risk Assessment: Risk Mitigants Known Risks >Construction cost escalation >Construction delays >Liquidity and financing costs >Change in cost relationship vs. competing fuels >Evolving environmental standards >Tariff recovery of costs >Political reaction >Demand price response >Obsolescence; disruptive technologies Higher $ per KW Long development and construction time Uncertain LT operating performance Risk Mitigation > Utility Management –Balanced energy sources –Engineering & project oversight –Conservative funding strategy > Regulatory and legislative policy –Pre-certification of need –Pre-approval of recovery –Include construction work in process (CWIP) in tariff >Lower external funding >Lower ultimate cost >Avoid rate shock at plant commercial operation

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