Regulated U.S. Electric Utilities - Mid-Year 2010 Update

Regulated U.S. Electric Utilities - Mid-Year 2010 Update

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Description: Regulated U.S. Electric Utilities, Corporate Credit Quality, Standard and Poor U.S. Economic Forecast, Improving Corporate Credit Quality, Corporate Ratings Upgrade, Ratings Distribution for U.S.

Corporate, Regulated Electric Utility Credit Quality, Standard & Poor View, Happenings in Washington, D.C. Tightening Air Quality Standards, Cooling Water Intake and Generation. Repowering and Retrofitting.

New Nuclear and Related Developments.

 
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Domain:  Green Tech Category: Environmental Subcategory: Utility Strategy & Tactics 
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Contents:
Regulated U.S. Electric Utilities Mid-Year 2010 Update

Standard & Poor's July 14, 2010

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.

Regulated U.S. Electrics Mid-Year 2010 Update Speakers from S&P's Regulated Electric Utility Team
John Whitlock, Managing Director; Analytical Manager john_whitlock@sandp.com; (212) 438-7678 Gerrit Jepsen, Director gerrit_jepsen@sandp.com; (212) 438-2579 Dimitri Nikas, Director dimitri_nikas@sandp.com; (212) 438-7807 Gabe Grosberg, Associate Director gabe_grosberg@sandp.com; (212) 438-6043 Todd Shipman, Director; Sector Specialist, Electric Utilities todd_shipman@sandp.com; (212) 438-7676
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2.

Corporate Credit Quality

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3.

Standard and Poor's U.S. Economic Forecast

Sluggish Growth
2010e Real GDP Growth Unemployment Fed Funds Rate 3.3% 9.7% 0.2% 2011e 2.8% 9.2% 1.5%

Consumer Spending
Source: Standard & Poor's Economic Outlook. As of June 18, 2010.

2.6%

2.8%

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4.

Improving Corporate Credit Quality

We Expect Defaults To Fall In 2010
180 160 140 120 100 80 60 40 20 0 2006 2007 2008 2009 2010F

EXPECT DEFAULTS TO FALL IN 2010

Defaults by Standard & Poor's Rated Corporate Non-Financial Issuers.

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5.

Corporate Ratings Upgrade/Downgrade Ratios
Ratings Trends Are Improving And Ratings Activity Has Moderated
400 350 300 250 200 150 100 50 0 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 (QTD) Down
Data as of July 1, 2010.

UPGRADES OUTPACING DOWNGRADES IN Q2 of 2010

Up

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6.

Ratings Distribution for U.S. Corporate Ratings
49% are "B" and below

CCC/CC 8%

D 1%

AAA/AA 2%

A 9% BBB 19%

B 40% BB 20%

As of July 1, 2010.

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7.

Corporate Credit Quality � Bumping Along the Bottom

Bottom Line: We Expect The Economy Will Recover Slowly
� The recession was the longest and deepest since 1946

� We expect fiscal stimulus will support the recovery

� But we believe recovery is likely to be slow. Some of the

factors include: - European sovereign debt crisis could roil financial markets - Consumers are cautiously spending and borrowing less - Non-residential construction will likely remain weak - Home prices are stagnant

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8.

Regulated Electric Utility Credit Quality

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9.

Stable Ratings Trend For Regulated Electric Utilities Standard & Poor's Ratings And Outlook
Ratings Distribution
180 160 140

Outlook Distribution

BB AA

A

120 100 80 60 40

BBB

20 0 Stable Positive Negative Developing CW-Pos CW-Neg CW-Dev

Source: Standard & Poor's, as of July 1, 2010.

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10.

Standard & Poor's Jurisdictional Assessments

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11.

Standard & Poor's View: Capital Access Remains Solid
New Public Equity Issues ($mm) New Public Debt Issues ($mm)

2010 YTD Total: $193.8 Billion
Energy Industrials Consumer Staples Information Technology Utilities Materials Consumer Discretionary Healthcare Telecommunication Services
Energy Industrials

2010 YTD Total: $501.8 Billion
Materials Consumer Discretionary Healthcare Telecommunication Services

Consumer Staples Information Technology Utilities

Source: Capital IQ, as of July 1, 2010.

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12.

Happenings in Washington, D.C.

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13.

Tightening Air Quality Standards
� Legislation being considered by Congress around carbon dioxide emissions by electric utilities � The Environmental Protection Agency is reviewing existing air quality standards

� The EPA issued an endangerment finding regarding six gases including carbon dioxide that can now be regulated under the Clean Air Act

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14.

Cooling Water Intake and Generation By-Products
� The EPA is reviewing water intake by power plants � Improve protection around intakes to minimize harm to wildlife

� The EPA may require cooling towers

� Expensive and may be difficult to locate on existing sites

� Review of management and disposal of coal combustion byproducts such as fly ash and bottom ash, resulting in greater storage and transportation costs

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15.

Repowering and Retrofitting
� Repowering could include demolishing a coal plant and building a gas plant on the site

� Alternatively, retrofitting a coal plant to burn a different fuel such as gas

� Existing plants could be retrofitted with pollution control equipment

� As more and more stringent air quality standards are implemented, existing environmental equipment may need upgrading

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16.

Retiring Facilities
� Companies have announced plans to close coal facilities since future coal restrictions would make these plants uneconomic � Examples of announced plant retirements � Duke (1,500 MW) � Progress Energy (1,500 MW) � Exelon (900 MW) � Xcel Energy (200 MW) � Wisconsin Energy (100 MW)

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17.

Developing New Technologies
� Converting coal into a gas and removing impurities before combustion is an option

� Duke Energy is building an integrated gasification combined cycle, or IGCC, facility

� Capturing carbon dioxide before it enters the air and sequestering the CO2 underground

� American Electric Power is experimenting with this concept at its Mountaineer facility

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18.

Standard & Poor's View on Utility Environmental Spending
� Regulated customers will likely experience rising bills to pay for mandates established in Washington For regulated electric utilities, Standard & Poor's believes ratepayers will likely incur the costs since utilities will recover them through state regulatory proceedings Utility cost recovery options would include: base rates, rate surcharges, and cash flow support during environmental construction Ultimately, the dollar amount of the costs and the timeliness in recovering the environmental expenditures will be important factors affecting our view of a utility's credit quality







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19.

New Nuclear and Related Developments

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20.

Why New Nuclear Now?
� The Energy Policy Act of 1992 revised the licensing process for new nuclear power plants in order to address the challenges encountered during the earlier construction period � The new licensing framework eliminates the "build now and approve later" approach and now includes:
� Pre-approval of site for new unit(s) � Certification of reactor design � Single construction and operating license (COL) � Plant design must be substantially complete prior to COL � Inspections, tests, analyses and acceptance criteria (ITAACs) � Plant can begin operation when construction is complete and ITAACs are met

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21.

Why New Nuclear Now?
� Some state regulatory environments have evolved to accommodate new construction
� Pre-approval of budget and schedule � Rolling prudence reviews � Recovery of abandoned investment � Regular periodic reviews keep regulators fully apprised of progress and developments and provide transparency � Collection of financing costs during construction eliminate capitalization of financing costs and provide a source of cash flow to the utility

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22.

Why New Nuclear Now?
� The Energy Policy Act of 2005 provided investment stimulus for new nuclear plant construction
� Loan guarantees for up to 100% of total project debt when project debt does not exceed 80% of project costs � Department of Energy may share collateral with others to allow sponsors to participate in the project � Production tax credits ($18/MWh for up to 6,000MW) � Federal standby support to cover construction delays caused by licensing problems ($2 billion)

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23.

Recent Developments
� South Carolina Electric & Gas and Georgia Power Company are proceeding with site preparation activities on their respective projects
� COLs expected by late 2011

� Georgia Power along with the co-owners of units Vogtle 3 and 4 have received a conditional loan guarantee from the DOE
� Guaranteed source of funds and lower-cost financing � Total guaranteed borrowings not expected to exceed 70% of eligible project costs or about $3.4 billion for Georgia Power � Borrowings will be from the Federal Financing Bank � Borrowings will be full recourse to Georgia Power and secured by a firstpriority lien on the company's 45.7% ownership interest in the two units � Borrowings are conditional on receipt of COL

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24.

Standard & Poor's View: Credit Implications
� Regulatory framework for new construction along with engineering, procurement and construction (EPC) contracts provide a solid and complementary framework under which to build new nuclear plants � Business risk is increasing for both South Carolina Electric & Gas and Georgia Power, partly mitigated by the combination of regulatory framework and EPC contracts � Financial profile will come under pressure and therefore remaining operations must perform reliably to provide support to consolidated credit profile
� For both companies we believe there are more downside risks than upside potential, especially if nuclear construction experiences regulatory and/or political challenges

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25.

Other Nuclear Developments
� Uprates � Many utilities are pursuing uprates of existing plants
� Since 2000, uprates have increased nuclear generation capacity by 3,760MW1

� Ongoing maintenance to ensure reliable and consistent operations
� Steam generator and reactor vessel head replacements

� License renewal efforts continue (Vermont Yankee, Indian Point, Pilgrim, Kewaunee, Duane Arnold, Crystal River) � Effort to increase loan guarantees by $36 billion � Still, we see no long-term solution for spent nuclear fuel
1: Status and Outlook for Nuclear Energy in the United States, Nuclear Energy Institute May 2010.

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26.

Electric Transmission Projects

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27.

United States Transmission Grid

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28.

FERC's Constructive Regulation
� Incentivized capital investments
Project Green Power Express Chicago- Hartland (North Dakota) Gateway Transmission Project High Plains Express Electric Transmission Texas Chinook Transmission Line Zephyr Transmission Line TransWest Express Donald C. Cook Transmission Line Tehachapi Renewable Transm. Proj. Sunrise Powerlink CapX 2020 Potomac-Appalachian Transm. Highline Texas CREZ Projects Mid-Atlantic Power Pathway
Source: EEI, SNL.
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Company ITC AEP PacifiCorp PSC of CO, PSC of NM ETA TransCanada Corp. TransCanada Corp. Anschutz AEP & ITC Edison International Sempra Energy Xcel AEP & Allegheny Oncor Pepco Holdings

Voltage 765 kV 765 kV 500 kV 500 kV 765 kV 500 kV 500 kV 500 kV 765 kV 500 kV 500 kV 345 kV 765 kV 345 kV 500 kV

Location IA-WI-ND ND-IL ID-WY WY-CO-NMAZ TX MT-NV WY-NV WY-AZ OH-MI CA CA MN WV-MD TX VA-DE

Distance 3,000 mi 1,000 mi 2,000 mi 1,300 mi 1,000 mi 1000 mi 1100 mi 900 mi 700 mi 306 mi 123 mi 650 mi 275 mi 310 mi 150 mi

Projected Cost $10 - 12B $5-10 B $6 B $5.1 B $3.2 B $3 B $3 B $3 B $2.6 B $2 B $1.9 B $1.6-1.9 B $1.8 B $1.34 B $1.24 B

Projected Year In Service 2020 2020 2014-2018 2017 2015 2015 2015 2014 2020 2015 2012 2015 2014-16 2010-12 2014

29.

Major Issues and New Developments
� Many companies are entering the industry
� Exelon � ATC

� Cost allocation
� SPP vs. MISO

� Is hydro a renewable?
� Vermont bill

� Siting
� "NIMBY"

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30.

Standard & Poor's View: Impact On Credit Quality
� Projects could take longer to put in service than companies are anticipating � Joint ventures, mergers, or asset sales � Levering up at the holding company level � Potential for lower ROEs in the future

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31.

Criteria: Liquidity Analysis Standardized

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32.

Liquidity Recently, Standard & Poor's refined its liquidity analysis methodology for corporate issuers.
� Descriptors standardized into five categories (exceptional, strong, adequate, less than adequate, and weak) � Analysis based mainly on key quantitative measures � Also incorporates our view of covenants, bank relationships, market standing, and risk management � Analysis focuses on the upcoming 12 months � An issuer's liquidity category can affect both long-term and short-term ratings

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33.

Standard & Poor's View: Quantitative Measures of Liquidity SOURCES (A)
� Surplus cash (defined by S&P) � FFO � Net working capital inflows � Asset sale proceeds � Available portion of committed bank lines

USES (B)
� Negative FFO
� Capital spending � Net working capital outflows � Debt maturities � Pension top-up needs � Potential collateral posting � Contracted acquisition funding � Expected shareholder distributions

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34.

Standard & Poor's View: Quantitative Measures of Liquidity

Key indicators of liquidity:
� A/B (sources divided by uses) � A-B (sources minus uses)

Exceptional: A/B of 2x or more, positive A-B with 50% EBITDA decline Strong: A/B of 1.5x or more, positive A-B with 30% EBITDA decline Adequate: A/B of 1.2x or more, positive A-B with 15-20% EBITDA decline Less Than Adequate: A/B of 1x, A-B around zero Weak: material deficit in A/B & A-B

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35.

Standard & Poor's View: Quantitative Measures of Liquidity

Covenants:
Exceptional: None, or no breach with 50% EBITDA decline; debt 30% below limit Strong: No breach with 30% EBITDA decline; debt 25% below limit Adequate: No breach with 15-20% EBITDA decline; debt 15% below limit Less Than Adequate: Breach possible with 10% EBITDA decline; debt within 5-10% of limit Weak: Breach likely

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36.

Standard & Poor's View: Qualitative Measures of Liquidity
Exceptional: Can absorb high-impact, low-probability events: wellestablished bank relationships; high standing in credit markets; prudent financial risk management Strong: Likely to absorb high-impact, low-probability events; wellestablished bank relationships; high standing in credit markets: prudent financial risk management Adequate: Can absorb high-impact, low-probability events with limited refinancing; sound bank relationships; satisfactory standing in credit markets; prudent financial risk management Less Than Adequate: Cannot absorb high-impact, low-probability events; no core bank relationships; poor standing in credit markets Weak: Considerable debt maturities; poor standing in credit markets

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37.

Putting It Together: Standard & Poor's Liquidity Assessment
Quantitative and Qualitative Measures
Exceptional: Meets A/B test plus four other supportive characteristics Strong: Meets A/B test plus four other supportive characteristics Adequate: Virtually all supportive characteristics, minor deviations on one or two allowed Less Than Adequate: Two or more of the negative characteristics present, or one of the serious ones (e.g., exposure to covenant violation) Weak: Two of the four negative characteristics, or one of the quantitative measures

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38.

Effect of Liquidity Assessment on Ratings

Exceptional or Strong: No impact on ICR Adequate: Rating-neutral (ICR of B+ and above) Less Than Adequate or Weak: will result in a lower ICR*

*An investment-grade issuer can sustain "Less Than Adequate" liquidity for a short period.

Short-term ratings: are correlated to the long-term rating, but in cases where two short-term ratings are possible (A+, A, A-, BBB), liquidity assessment could be determinative

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39.

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