Credit Implications in Renewable Portfolio Standards Compliance

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NARUC NARUC Staff Subcommittee On Accounting & Finance Fall 2008 Meeting

Credit Implications in Renewable Portfolio Standards Compliance

Richard W. Cortright, Jr.Managing DirectorUtilities and Infrastructure Group October 15, 2008

2.



EEI Estimate Of Future Capital Spending

•

3.



Construction Cost Growth Well Above General PPI Growth

100

150

200

250

300

2001 2002 2003 2004 2005 2006 2007 Jun-08

Co

st C

han

ge-

Cu

mu

lati

ve (

%)

Crude petroleum (domestic production) Industrial natural gas

Cement Iron Ore

Concrete products Steel mill products

Copper and brass mill shapes Fabricated iron and steel pipe, tube, and fittings

Producer price index (PPI) for finished goods

Source: The Associated General Contractors of America, July 2008

All= 100 in 12/01

4.



Investor-Owned Utility Credit Ratings --- Then And Now

At The Beginning Of The Last Major Generation

Construction Cycle In Which Utilities Were The

Principal Participants (The 1970’s), The Senior Debt

Ratings Of Most U.S. Investor-Owned Were In The ‘A’ A’

and ‘AA’and ‘AA’ Category. They Were Well Positioned For

What Was To Come. Today, In Advance of A Major

Capital Expenditure Period, The Ratings of

Companies Engaged in Power Generation Are

Significantly Lower… In the ‘BBB’ Category, And

Frequently Weaker.

5.



U.S. Power Industry Ratings Distribution

A6% A-

11%

BBB25%

BBB-16%

B'5%

AA-2%B+

2%

B-2%

A+2%

BB+3%

BB2%

BBB+19%

BB-5%

***Includes merchant generation and independent power companies (e.g. Constellation Energy, AES)

6.



Rate Case Statistics

Date

Electric: Return on Equity

(%)# of Electric Rate

CasesGas: Return on Equity

(%)# of Gas Rate

Cases

2007 10.31 37 10.23 34

2006 10.35 26 10.43 14

2005 10.51 25 10.43 25

2004 10.81 21 10.63 22

2003 10.96 20 10.99 25

2002 11.21 14 11.09 18

2001 11.06 16 10.96 5

2000 11.48 10 11.34 13

1999 10.72 6 10.74 6

1998 11.77 10 11.51 10

1997 11.33 10 11.30 12

1996 11.40 18 11.12 17

1995 11.58 27 11.44 13

1994 11.21 28 11.24 24

Authorized Rate of Return Statistics

SNL Financial LC

7.



The Feasibility Challenge of Renewable Portfolio Standards

8.



Pronouncement By International Electric Executives

"Climate Strategies Must Be Compatible With Market

Economies, Deliver Timely And Economically Efficient

Greenhouse Gas Reductions And Establish A Long-term

Carbon Reduction Value That Is Moderate, Does Not Harm

Local Economies And Stimulates Future Investments In

Zero- And Low-Carbon Emission Technologies And

Processes. It Is Vital That Effective Economic Safeguards

Are Incorporated In These Strategies To Limit The

Potential Impacts Of Carbon Policy On Jobs And

Economic Growth.“

--- Statement By The 2008 International Electricity CEO Summit

9.



A Big Upswing in Renewables Will Be UnprecedentedPeriod Wood and

WasteGeothermal Solar/PV Wind Renewable

% of total U.S. Gen

1993 55,956 16,789 462 3,006 2.4%

1994 57,066 15,535 487 3,447 2.4%

1995 56,926 13,378 497 3,164 2.2%

1996 57,711 14,329 521 3,234 2.2%

1997 58,657 14,726 511 3,288 2.2%

1998 58,786 14,774 502 3,026 2.1%

1999 59,613 14,827 495 4,488 2.1%

2000 60,726 14,093 493 5,593 2.1%

2001 49,748 13,741 543 6,737 1.9%

2002 53,709 14,491 555 10,354 2.1%

2003 53,341 14,424 534 11,187 2.0%

2004 53,073 14,811 575 14,144 2.1%

2005 54,160 14,692 550 17,811 2.2%

2006 54,759 14,568 508 26,589 2.4%

2007 RTM 55,336 14,851 606 31,756 2.5%% ch 1993-2007 -1.1% -11.5% 31.2% 956.4% -

10.



Renewables Portfolio Standards

State Goal

☼ PA: 18%** by 2020

☼ NJ: 22.5% by 2021

CT: 23% by 2020

MA: 15% by 2020 + 1% annual increase

(Class I Renewables)

WI: requirement varies by utility; 10% by 2015 goal

IA: 105 MW

MN: 25% by 2025(Xcel: 30% by 2020)

TX: 5,880 MW by 2015

☼ AZ: 15% by 2025

CA: 20% by 2010

☼ *NV: 20% by 2015

ME: 30% by 200010% by 2017 - new RE

State RPS

☼ Minimum solar or customer-sited RE requirement* Increased credit for solar or customer-sited RE

**Includes separate tier of non-renewable “alternative” energy resources

HI: 20% by 2020

RI: 16% by 2020

☼ CO: 20% by 2020 (IOUs)

*10% by 2020 (co-ops & large munis)

☼ DC: 11% by 2022

DSIRE: www.dsireusa.org September 2008

☼ NY: 24% by 2013

MT: 15% by 2015

IL: 25% by 2025

VT: (1) RE meets any increase in retail sales by

2012; (2) 20% by 2017

Solar water heating eligible

*WA: 15% by 2020

☼ MD: 20% by 2022

☼ NH: 23.8% in 2025

OR: 25% by 2025 (large utilities)5% - 10% by 2025 (smaller utilities)

*VA: 12% by 2022

MO: 11% by 2020

☼ *DE: 20% by 2019

☼ NM: 20% by 2020 (IOUs) 10% by 2020 (co-ops)

☼ NC: 12.5% by 2021 (IOUs)10% by 2018 (co-ops & munis)

ND: 10% by 2015

SD: 10% by 2015

*UT: 20% by 2025

☼ OH: 25%** by 2025

11.



A “Do More Before You Do Some” Approach

12.



Falling Short

13.



Technology Costs Determine Green Premium, If Any

Wind Solar Trough

Biomass (wood waste)

Geo-thermal

Natural Gas CC

Pulverized Coal

IGCC PRB

Nuclear

Plant capital cost $/kW 1,700 4,000 2,500 3,500 700 2,438 2,925 4,000 Capacity factor % 33% 25% 85% 90% 65% 85% 80% 85%Heat rate mmBtu/kWh - - - - 7,000 8,700 9,400 -Costs $/MWh $71 $280 $97 $76 $68 $58 $65 $89Cost estimates exclude the benefits of subsidies, including the PTC and ITC

Cost Estimates Exclude The Benefits Of Subsidies, Including The PTC And ITC

Thermal Generation Costs Exclude Any Estimates Of Carbon Capture Expenses

Natural Gas Combined Cycle Costs Assume Gas Price Of $7/Mmbtu

IGCC PRB Is Integrated Gasification Combined Cycle Using Power River Basin

Coal

Source: California Energy Commission and Standard & Poor’s

14.



Impact of a CO2 Value On Fossil Fuel Prices

Fuel

CO2 content

per million

Btu

Delivered Price

(June 2008*, all

sectors,

per million Btu)

Impact of $10 per

ton CO2 value

Impact of $50 per

ton CO2 value

$ percent $ percent

Coal 0.094 1.81* 0.94 51.9 4.70 259

Oil** 0.074 28.05 0.74 2.6 3.70 13

Gas 0.053 11.75 0.53 4.5 2.65 22.5

Placing A Value On GHG Through Either A Tax Or A Cap-and-trade Program Has A Relatively Large Impact On The Delivered Price Of Coal. This Reflects Both The Substantially Lower Price Of Coal Relative To Other Fossil Fuels Under Baseline Conditions And Its Higher Emission Of Co2 Per Unit Of Energy

Yet, A $25/Ton Value On CO2 Raises Gasoline Prices By Only About 23 Cents Per Gallon.

*April 2008 **.124 mmbtu/gallon of gasoline

15.



Willingness to Pay For Solutions

16.



Transmission Constraints As Major Hurdle To RPS Realization

17.



Key Take-Aways

RPS Targets Are Aggressive, Given Timelines And Existing

Base

Lack Of Transmission, Perennial PTC And ITC Extension Doubt

Are Factors That Could Slow RPS Achievement

Projections Of Retail Rates Under RPS Are Currently Modest But

Will Increase Rapidly

Credit Impact Will Be On A Case By Case Basis But Given Large

Capital Programs Of Most Utilities Will Tend To Add To Existing

Rate Pressure

18.



Turmoil On Wall Street: Lights Out In Paducah?

19.



A Perspective

“If The Current Financial Crisis Is Not Resolved

Quickly, Financial Pressures On Utilities Will Intensify

Sharply, Resulting In Higher Costs To Our Customers

And, Ultimately Could Compromise Service

Reliability.”

Tom Kuhn, EEI President

20.



Utility Debt (And Leases) At Year-End 2007

($MM)

Rating Debt

AAA ---

AA 2,672

A 109,462

BBB 221,695

BB 37,779

B or Lower 16,273

TOTAL 387,881

21.



Near-Term Utility Maturities

Total Utility Debt Due Twelve Months From June 30,

2008 Is About $50 Billion, Of Which Only $3 Billion Is

Speculative

Availability Under Committed Bank Revolvers Totaled

About $110 Billion, Which Generally Mature Between

2010 And 2012.

22.



Anecdotal Observations Since Lehman Bankruptcy

Some Utilities Successfully ‘Tested’ Their Revolvers In Absence of Lehman Commitment (Typically Only 5%-8% of Any Revolver)

A-2 Commercial Paper Has Been Issued Overnight By A Few Utilities At A 5% Interest Rate; Virtually A Closed Market

PECO Energy’s ( “A” Secured) Efforts To Tap The Debt Markets Were Beaten Back Until September 25, When It Issued $300 Million Five Years At 5.60%, Or 263 Over Treasuries

South Carolina Gas & Electric (“A-” Secured) Priced A 10-Year Deal At 6.5%, Or 265 Over Treasuries

Wisconsin Electric (“A-” Unsecured) Issued A Five-Year Deal at 6%, Or 300 Over Treasuries

Last December, West Penn (BBB) Issued 10 Yr At A Spread Of

Approximately +200 bps.

23.



Responses to Liquidity Concerns

“In light of the uncertain market environment, we made this proactive financial decision to increase our liquidity and cash position, and to bridge our access to the debt capital markets. This improves our flexibility as we continue to execute our business plans.”

David Hauser, CFO Of Duke Energy, referring to decision to draw down $1 billion on September 30 from its Bank Credit Agreement

AEP drew down $1.4 billion under its existing credit facilities on october 8 “to increase its cash position while there are disruptions in the debt markets. The borrowings provide AEP flexibility and will act as A bridge until the capital markets improve.”

8-k filed by AEP October 10, 2008

24.



Conclusions

Regulated Utilities Are As Well Positioned As Any Market Sector

To Contend With The Currently Clogged Credit Markets

The Liquidity That Utilities Secured During The Go-Go Years Of

The Credit Push Should Serve Them Well

Credit Will Be More Costly For An Indeterminate Period Of Time

Projects Will Be Delayed, With More Budget Dollars Redirected

Toward Maintenance From New Construction, Which Will

Inevitably Increase The Threat To Reliability

Investors Will Be Evaluating The Relationship Between Utilities

And Their Commissions As Closely As They Ever Have

Documents

Credit Implications in Renewable Portfolio Standards Compliance