APPA NATIONAL CONFERENCE How Policymakers are Responding to the Economic Downturn-A Credit Perspective Presented by: Dan Aschenbach Senior Vice President,

APPA NATIONAL CONFERENCEHow Policymakers are Responding to the Economic Downturn-A Credit Perspective

Presented by:

Dan Aschenbach

Senior Vice President,

Global Infrastructure

Presented by:

Dan Aschenbach

Senior Vice President,

Global Infrastructure

June 16, 2009

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Agenda

Economic Recession

Moody’s Outlook

Key Credit Strategies

Credit Ratings and Outlook

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ECONOMIC RECESSION

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Moodys.Com Economic Outlook

Recession now engulfs virtually all U.S. states and metropolitan areas

Confidence is beginning to stabilize; surprisingly, the Northeast leads the way

Manufacturing in the Midwest and Southeast—excluding automakers—will get a lift as new orders stabilize

House prices have dropped enough in the weakest markets to entice investors and first-time buyers

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Rays of A Better Outlook

Consumers, businesses and financial markets are showing signs of improving health

Fiscal and monetary policy steps are cushioning the recession

Layoffs need to ease, consumers need to regain confidence, and loans need to become more available for the economy to recover

For the first time in nearly two years, the near-term outlook is a bit brighter

Full recovery remains a long way off

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AP Stress Index Falling Slightly

The AP calculates a score from 1 to 100 based on each

county's rate of unemployment, foreclosure and

bankruptcy, with lower numbers indicating less economic

pain.

A county is considered stressed when its score jumps

past 11. In February, nearly 40 percent of the nation's

counties were at or above that threshold. In April, 34

percent scored 11 or higher.

Source: AP May 2009

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Impact on Public Power Electric Utilities

Demand is down in 2009 in single digits but not all related to recession…weather driven and conservation-related

Municipal utilities with large industrial customers closing may be most exposed particularly if fixed costs need to be spread on smaller sales base

Still magnitude and depth of economic downturn unknown and holds potential for sector outlook to turn negative

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Fiscal Stress of Local Governments Continue to Be A Possible Public Power Utility Pressure

Most of the defaulted local governments (850) happened several years after the 1929 Depression

Today unfunded pension and medical benefit liabilities present a burden not experienced in the past

Some evidence this year of increased General Fund transfers from utility

Significance of this fiscal stress issue will be dependent on recovery in economy

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Strategies in Response to Current Downturn

Maintain Liquidity and Mitigate Risk

Public Power Resource Optionality

Maintenance of Financial Metrics

Strengthen Governance Relationship In Particular as it Relates to Rates

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Maintain Liquidity and Mitigate Risk-The Challenge

Evaluate risks and

establish liquidity targets

and communicate this

From Nebraska ice storms

to California drought

impacts on hydro to

collateral posting or

swaps-know your threat to

liquidity

New costs expected to be

coming so stronger

balance sheet needed

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Public Power Resource Optionality Planning-A Key Process

Recessions end so plan

through the cycle

Resource optionality as

it relates to carbon

important

“Long term cost-based

approach with options”

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Strengthen Metrics-More Focus by Moody’s

Debt service coverage

Days cash on hand

Debt ratio

See Moody’s medians

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Strengthen Governance Relationship As it Relates to Rate Setting

• Best practice is keeping

governing board close

so rate requirements are

understood

• Explain pressure

General Fund Transfers

have on utility and rates

• Rate pressure the most

important credit issue

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Moody’s Has A Stable Credit Outlook On The Electric Industry

• Less certainty to longer-

term outlook due to

recession, carbon and

commodity market

uncertainty

• Average credit rating for

U.S. investor-owned electric

utilities is in Baa range with

stable outlook

• Public power credit quality

of A2 has stable outlook

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Moody’s Public Power Credit Ratings

Public

Power

Utility

Number of

Rated

Issuers

Median

Credit

Rating

Credit

Outlook

Debt

Outstanding

($billions)

JPA 42 A2 Stable $31.3

Municipal Electricity

Distributors

300 A2 Stable $8.0(est.)

Largest 25 City-owned

Elec. Utilities

25 A1 Stable $20.7

Largest 9 State/district

utilities

9 A1 Stable $41.6

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What Factors Likely To Be A Concern In 2009-2010?

Resource uncertainty due to

the scale, scope and depth

of regulatory intervention

on carbon

• Political risk rising due to

new costs related to

shifting from carbon to

renewable and nuclear may

lead to rate resistance and

lower debt service coverage

margins

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What Factors May Continue To Improve Credit Quality In 2010?

Less political appetite for major industry market

restructuring will limit challenges to business

model and maintain unregulated essential service

Potentially more reasonable phase-in of carbon

policy

• Risk management experience has stabilized cash

flow forecasts

• Some easing of commodity prices

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Questions?

Thank you.