Investing in CoalFired Generation: Credit Implications

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Investing in Coal-Fired Generation Credit
Implications

• Ellen Lapson, Managing Director
• Fitch Ratings, Utilities, Power Gas
• February 26, 2008

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Investment Environment

• Sector Trends
• Dwindling capacity margins
• Transmission congestion
• Aging electricity infrastructure
• New environmental regulations affecting CO2
  emitters
• Pressure on natural gas supply

RISING CAPEX
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Investment Environment

• Implications of Rising Capex
• Competition for contractors, labor, equipment and
  materials
• Inflation in cost estimates
• Effect of weak US on equipment and materials
• Unfavorable historical precedents during periods
  of high capex and rising marginal cost of
  electricity per kwh
• Step-function in electricity price
• Demand elasticity
• Over-capacity for five to ten years

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Investment Environment

• Macro Environment
• Capital and bank markets have repriced the risk
  of
• Mortgage securities and CDOs, various structured
  credit products
• Bank loans and high yield corporate securities
• Whats next?

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Financial and Operating Risk Assessment Generic
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 or Market power prices
• Political and legislative reaction to higher
  costs
• Demand price response
• Obsolescence disruptive technology

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Financial and Operating Risk Assessment
New-Tech Coal Baseload Power Plant

• Known Risks
• Construction cost escalation delays
• Access to capital higher financial costs
• Change in cost relationship vs. competing fuels
• Evolving environmental standards
• Tariff recovery of costs Market price of power
• Political and legislative reaction
• Demand price response
• Obsolescence disruptive technologies
• Higher per KW large-scale projects
• Long development and construction time
• Uncertain long-term operating performance

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Financial and Operating Risk Assessment Nuclear
Power Plant

• Known Risks
• Construction cost escalation delays
• Access to capital higher financial costs
• Change in cost relationship vs. competing fuels
• Evolving environmental standards
• Tariff recovery of costs Market price of power
• Political and legislative reaction
• Demand price response
• Obsolescence disruptive technologies
• Higher per KW large-scale projects
• Long development and construction time

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Financial and Operating Risk Assessment Dont
Build Rely on Market Purchases

• Known Risks
• Natural gas dependence and gas price volatility
• Shortage of capacity
• Tariff recovery of costs of purchased power and
  gas
• No return on investment at best, just a recovery
  of costs
• Political reaction to volatile costs or power
  shortages

Doing nothing also has risks for the economy and
for consumers.
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Financial and Operating Risk Assessment Risk
Mitigants

• Known Risks
• Construction costs delays
• Long development and construction time
• Access to liquidity and funding
• Change in cost relationship vs. competing fuels
• Evolving environmental standards
• Tariff recovery of costs
• Political reaction to price change
• Demand elasticity
• Technological obsolescence
• Uncertain LT operating performance

Who can mitigate the risks?
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Financial and Operating Risk Assessment Risk
Mitigants

• Steps corporate management can take to mitigate
  the risks associated with major capital
  investments
• Balanced approach to energy sources
• Make full use of energy efficiency and demand
  reduction and consider the potential effects of
  energy efficiency upon projected demand
• Effective engineering project oversight
• Partnerships and joint ventures to spread risks
• Conservative funding strategy

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Financial and Operating Risk Assessment Risk
Mitigants

• Steps regulators and policy-makers can take to
  mitigate the risks associated with major capital
  investments
• Pre-certification of need
• Pre-approval of recovery
• Include construction work in process (CWIP) in
  tariff
• Lower external funding
• Lower ultimate cost
• Send price signals to consumers that reflect the
  rising marginal costs and avoid rate shock at
  plant commercial operation
• Increase funding of Research, Development, and
  Demonstration

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