Construction of Coal-Fired Generation: Evaluating the Utility Credit Implications

1
Construction of Coal-Fired Generation
Evaluating the Utility Credit Implications

• Ellen Lapson, Managing Director
• Fitch Ratings, Utilities, Power Gas
• July 17, 2007

2
Overview Evaluating Electric Company Credit

• Fitchs focus is on the ongoing cash flow
  stability or volatility likely to result from
  many sources, including
• Sector environment and macroeconomic trends
• Market franchise and customer demand
  characteristics
• Fuel and power supply
• Physical assets service quality
• Capital investment requirement
• Regulation and tariff setting political
  environment
• Financial resource and liquidity

3
Investment Environment

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

RISING CAPEX
4
Investment Environment

• Sector Factors, continued
• RISING CAPEX
• Competition for labor, equipment and materials
• Energy commodity costs rising too
• Rising marginal cost
• Unfavorable historical precedents during
• High capex
• Rising marginal cost per kwh

5
Investment Environment

• Macro Environment
• Transitional stage in the financial markets
• Inflation may accelerate
• Long-term debt cost likely to rise
• Potential consequences lower equity prices and
  wider credit spreads, raising overall WACC

6
Financial and Operating Risk Assessment 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
• Political reaction
• Demand price response
• Obsolescence disruptive technology

GENERIC CASE
7
Financial and Operating Risk Assessment
New-Tech Coal Baseload Power Plant

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

Hi-Tech Pulverized Coal or IGCC
8
Financial and Operating Risk Assessment New
Tech Coal Nuclear Base Load Power Plant

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

New Nuclear Plant
9
Financial and Operating Risk Assessment Dont
Build Rely on Market Purchases

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

Doing nothing also has risks, but less capital is
at stake.
10
Financial and Operating Risk Assessment Risk
Mitigants

• Known Risks
• Construction cost escalation
• Construction delays
• Liquidity and financing costs
• Change in cost relationship vs. competing fuels
• Evolving environmental standards
• Tariff recovery of costs
• Political reaction
• Demand price response
• Obsolescence disruptive technologies
• Higher per KW
• Long development and construction time
• Uncertain LT operating performance

• Risk Mitigation
• Utility Management
• Balanced energy sources
• Engineering project oversight
• Conservative funding strategy
• Regulatory and legislative policy
• Pre-certification of need
• Pre-approval of recovery
• Include construction work in process (CWIP) in
  tariff
• Lower external funding
• Lower ultimate cost
• Avoid rate shock at plant commercial operation

11
Fitch Ratings www.fitchratings.com
LondonEldon House2 Eldon StreetLondon EC2M 7UAUK44 207 417 4222
Singapore7 Temasek Blvd.Singapore 03898765 6336 6801
New YorkOne State Street PlazaNew York, NY 100041 212 908 05001 800 75 FITCH
The Fitch Group
Fitch Ratings Algorithmics Fitch Training