DelValle Final 6.10.11

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New England Electricity Restructuring Roundtable June 10, 2011

Financing Power Infrastructure in New England

Mauricio Del Valle Morgan Stanley

Vice President, Global Power and Utilities

Capital Markets Environment

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3

Equity Markets and Volatility

Indexed Price Chart and Volatility Index (VIX)Last 4 Years (%)

S&P 500 VIX

Source: FactSet

0

30

60

90

120

150

Jun-07 Jun-08 Jun-09 Jun-10 Jun-11

0

20

40

60

80

100

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4

13

46

2 1

1114

2006 2007 2008 2009 2010 2011 YTD

Utility Debt Issuance By Year2006 – Present (U.S.)

26

31

3736

13

43

2006 2007 2008 2009 2010 2011 YTD

Investment Grade Debt Issuance ($MM)

High Yield Debt Issuance ($MM)

Source:Thomson Reuters, Bloomberg

Term Cost of Debt

BBB Index 5y – 30y 3.0% – 6.0%

Term Cost of Debt

BB Index 5y – 12y 4.5% – 6.0%

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5

Project Finance Market Update

354.6289.9

320.5278.4

0.0

100.0

200.0

300.0

400.0

2007 2008 2009 2010

Global Project Finance Volume(Debt and Equity) ($Bn)

31%

18%

4%6%8% 33%

29%

14%

4%

11%

42%

Sectors(Debt and Equity)

Regions(Debt and Equity)

MiningTelecom

Industrial

Oil & Gas

Infrastructure

EnergyLatin America and Caribbean

Middle East and Africa

North America

Europe

Asia Pacific

Source:Project Finance Magazine, Dealogic

Volume Volume

NE Supply / Demand Dynamics

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7

ISO – NE Fuel Mix Composition

2010 Capacity Fuel Mix 2010 Generation Fuel Mix

Capacity vs. Generation

22%

13%

9%

8%

23%

22%

3%

OthersCoal

Hydro

Nuclear

Oil

Natural Gas

Gas / Oil

34%11%

6%5%

12%

30%

Others

Coal

Hydro

Nuclear

Oil

Natural Gas

Gas / Oil

Wood / Refuse

Source:ISO – NE

<1%1%

Installed Capacity: 30,380 MW Total Generation: 126,403 GWh

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ISO – NE Capacity Auction Results

Results of First Five Capacity Auctions

Source:ISO – NE

34,07737,283 36,996 37,501 36,918

1,772

4,755 5,031 5,3743,718

10,000

20,000

30,000

40,000

50,000

FCA 1 FCA 2 FCA 3 FCA 4 FCA 5

1.50

2.50

3.50

4.50

5.50

Total Cleared Capacity (MW) Excess Supply (MW) Floor Price ($/kW-month)

(MW) (USD)

(1)

(1) Represents preliminary results

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9

ISO – NE Capacity Auction Results

ISO – NE Reserve Margins

Source:Ventyx Advisors

Reserve Margin (%)

0

5

10

15

20

25

30

35

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Projected Reserved Margin (includes only operating capacity, capacity under construction, and expected retirements)

Target Reserve Margin

Financing New Power Infrastructure in NE

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11

What Is Needed to Finance New Power Infrastructure?

Capital Availability

(Debt and Equity)

Policy Support

(Regulatory / Environmental,

Tax Credits)

Adequate Investor Returns

(Power Supply and Demand / Energy and

Capacity Pricing)

Project Viability

(Permitting / Interconnection)

Adequate Documentation

(Engineer’sReport, etc. )

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12

Project Finance: Required Diligence Materials

Material Project Agreements

Offtake Agreements, EPC / Construction contract , O&M Agreements

Independent Engineer

Environmental Consultant

Market Consultant

Insurance Consultant

Legal / Tax

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13

Key Characteristics for Successful Project Finance

Equity PerspectiveLender’s Perspective

No risk of “cram down”

Strategic partners in place

Certain path to profitability

Secured control

No conflicts of interest

Anti-dilution rights

Commercialization timeline matches exit strategy

Liquidity event in near-term

Returns on capital at least 500bps above WACC

Project size greater than $100MM

3x EBIT / Interest

Contracted revenues (PPA or off-take agreement)

Liquidation value greater debt obligation

Limited technology risk

Reputable contracted suppliers

Creditors control uses of cash flow

No quick exit for sponsor

Creditor has ability to veto

Source:Jefferies Equity Research

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14

Financing Solar and Wind Projects

SolarWind

Long-term PPA or offtake agreement sufficient in length to fully amortize project debt

EPC contract with performance surety

Contracted site control

Environmental permits

Transmission / interconnection agreement

Long-term PPA or offtake agreement from an investment grade purchaser

Independent engineer’s report

“Bankable” meteorological wind data

Reputable project manager

Adequate turbine technology

Key Items

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15

IPP Trading Analysis – $/kW

Trading Analysis – $AV/kW

330

410

480

570

0

100

200

300

400

500

600

Calpine NRG Dynegy GenOn

($/kW)

Median: 445/kW

Source:Company filings, FactSet

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16

424352 335 336

830

332

651 665683

594 602

509

422475 501

0

100

200

300

400

500

600

700

800

900

LS P

ower /

Capit

al Pow

er

Brick

Power

/ C

apital P

ower

Hedge

Funds /

ECP

Dyneg

y / N

RG

Bosto

n Gen /

CEG

BG Gro

up /

ECP

Pepco

/ C

alpine

Stark

/ Exe

lon

PSEG / W

ayza

ta

PSEG / H

igh P

lains

CEG / H

igh P

lains

Calpine

/ R

aybu

rn

Navaso

ta /

CEG

Sempr

a / Occ

identa

l

Dyneg

y / N

RG

Gas Asset Precedent Analysis – $/kW

Precedents Analysis – $/kW($/kW)

TexasNortheast California

Texas Median:$435/kW

Northeast Median:$509/kW

California Median:$658/kW

(1) (1)

(1) Transaction terminated

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Illustrative Pricing Required to Support New Build

(1) Capacity pricing calculated assuming current forward energy prices held constant.(2) Energy pricing calculated assuming current forward capacity prices held constant.

Illustrative Pricing Needed to Attract New Investment

Current Forecasted Pricing Range

Pricing Needed to Achieve Target Returns

Capacity Pricing (1) ~ 3 area ($/kW-month) 9 – 12 ($/kW-month)

Energy Pricing (2) 50 – 60 ($/MWh) 75 – 85 ($/MWh)

Key Model Assumptions

500 MW combined-cycle gas turbine plant

40% capacity factor

7,000 Btu/kWh heat rate

1,300 $-kW total capital cost

Documents

DelValle Final 6.10.11