Credit Risks Associated With Nuclear Generation NARUC Staff Subcommittee on Accounting and Finance

1. Credit Risks Associated With Nuclear Generation NARUC Staff Subcommittee on Accounting and Finance Sharon Bonelli Managing Director April 2, 2008 New Orleans, Louisiana

2. State of U.S. Nuclear Industry • Currently 104 nuclear projects supply 20% of power in U.S • Most existing nuclear plants licensed in 1960s and 1970s • Plants performing well • Nuclear fuel costs rising, but still quite low relative to fossil fuels • 48 license extensions granted, 38 pending and publicly announced • Share of energy from nuclear will diminish absent new construction www.fitchratings.com

3. Drivers of Renewed Interest in Nuclear Construction High Fuel Prices Growing Base Load Demand Potential Carbon Regulations Investment Incentives in EPACT 2005 www.fitchratings.com

4. U.S. Nuclear Plant Additions * Planned additions www.fitchratings.com

5. State of U.S. Nuclear Industry • 30 new U.S. nuclear projects currently proposed by 17 companies • Carbon free energy source • Promotes diversity and national energy security • Wide ranging cost estimates • On the high end, Turkey Point 6 and 7 ($6,000 - $9,000/kw) • $12 – 18 billion for 2,200 mw option • $18 – 24 billion for 3,040 mw option • Need certified by FPSC March 2008, permitting FP&L to get in the queue for large castings • On the low end, South Texas 3 and 4 (June 2006 estimate 2,000/kw) • $5,400 billion for 2,700 mw www.fitchratings.com

6. Fitch Approach to Rating New Build Nuclear • Fitch has no preference for nor against nuclear generation • We focus on how the costs of building, operating and decommissioning nuclear facilities could affect a company’s overall financial health, and in particular its effect on bondholders • Fitch evaluates nuclear investments in a similar fashion to investments in other long-lived assets or capital outlays in the power sector • Regulated utilities - Mechanisms and timeliness of cost recovery • Gencos - Wholesale power market energy and capacity pricing forecast or contractual cash flows • Primary focus is on the adequacy of cash flow relative to debt and interest, capital adequacy and liquidity www.fitchratings.com

7. Construction and licensing period risk Credit risk often at peak during construction period Federal and state initiatives can limit associated risks Massive scale of investment; access to capital Operating period risk Operating performance and outages Power market effects of new capacity additions NRC regulation Storage/disposal of spent fuel End of operating life risk Decommissioning/license extension risks Credit Risks Evolve Through Nuclear Plant Life Cycle www.fitchratings.com

8. Problems in Prior Building Cycle Non standard design – frequent change orders Two stage licensing process Construction Operation Inadequate documentation led to application delays at NRC Safety issues unresolved until construction completion Widespread community opposition to NRC licensing Targeted Improvements this Cycle NRC design certification process for standardized modular plants One step combined Construction and Operating License (COL) to resolve issues upfront Cooperation among nuclear developers using same design Community support in certain regions, particularly existing sites in the Southeast Construction and Licensing:New Plant NRC Licensing Risk www.fitchratings.com

9. Construction and Licensing:NRC Design Certification • Westinghouse AP1000 – Design certifiedby NRC • Southern, SCANA, Progress, Duke, TVA/Nustart consortium • AREVA U.S. EPR – NRC application pending • Unistar consortia: CEG, AEE, PPL, Amarillo Power, Alternate Energy Holdings • Mitsubishi Heavy Industries US-APWR - NRC application pending • Luminant • GE/Hitachi US – ESBWR – NRC application pending • Dominion, Exelon, Entergy, Entergy/NuStart consortium • GE/Hitachi ABWR – Design certified • NRG • Other advanced designs from AREVA, Westinghouse, etc. may seek NRC design certification in the future www.fitchratings.com

10. Construction and Licensing:EPACT 2005 Incentives for Early Movers • EPACT 2005 provisions for new technology nuclear investment • Risk insurance for NRC or litigation related delays • DOE loan guarantee program for advanced technology clean energy projects • Nuclear solicitation round expected later this year • Program designed to stimulate investment in new clean energy technologies that may not otherwise be able to attract capital on economic terms • Companies will need to raise substantial equity for their investment even with incentives www.fitchratings.com

11. Problems in Prior Build Cycle Construction delays Rising material and labor costs Rate shock when plant entered operation and was added to rate base Entire construction cost borne by owner(s) Potential Mitigant this Cycle Standard design Allocation of cost over-run or delay risk to EPC contractor (the bid/ask seems to be still wide) Joint venture with manufacturer CWIP in rate base or other mechanism to ease costs in rates Federal incentives such as FFB funding under DOE program to reduce costs Construction and Licensing:Nuclear Construction Risk www.fitchratings.com

12. Construction and Licensing:Procurement Risks for Major Components and Labor • Global competition for components increasing costs and lead times • 35 plants under construction worldwide (6 China, 6 India, 7 Russia…), China announced plans for 30 reactors at multiple sites • Japan Steel Works is only maker of large forgings needed for reactor vessels • Other pinch points may develop for equipment such as steam generators, turbine generators, nuclear-grade pumps and heat exchangers • Prices of steel, concrete and other materials very high • Intense competition for design and craft skills • Up-rates • Maintenance needs for aging plants www.fitchratings.com

13. 11 State Initiatives to Reduce Construction and Licensing Risks • Run the gamut • Minnesota - 2007 law: repealed ban on certificate of need for new nuclear plant • Georgia – 2006 regulation: Allows Georgia Power to capitalize costs incurred for development and licensing of a new unit at Plant Vogtle • NC – 2007 law: allows NCUC to add approved costs to rate base prior to completion or even if canceled • More credit supportive models • SC • FL • VA www.fitchratings.com

14. SC Legislation • South Carolina Base Load Review Act (May 2007) • Intended to allow a utility to recover prudently incurred capital and operating costs for new nuclear or coal plants larger than 350 mw • Utility files application to build plant, SC PSC reviews and rules on prudence of decision to build • If decision is determined prudent, this finding is binding on all future proceedings so long as construction proceeds in accordance with the schedule, and budget estimates in the application • Utility can file revised rates each year of construction for CWIP based on updated cost of debt and capital structure • Utility can use project specific ROE or use the return from proceedings less than 5 years old www.fitchratings.com

15. FL Legislation and Regulation • Enabling legislation (SB888) enacted June 2006 • Florida’s Nuclear Power Plant Cost Recovery Rules promulgated to promote investment in new nuclear plants by establishing alternate cost recovery mechanism for such investments • Phases in cost recovery to avoid rate shock • Nuclear Cost Recovery Rule allows recovery of “all prudently incurred” costs associated with siting, designing, licensing, constructing and operating new nuclear power plants • First units certified under this rule by FPSC March 2008, permitting FP&L to get in queue large castings for Turkey Point 6 and 7 and uprate of St. Lucie and Turkey Point • Progress Energy Florida expected to seek certification for new Levy unit later in 2008. www.fitchratings.com

16. Virginia Legislation • Acknowledges need for baseload generation and provides enhanced return on those investments • New generation riders provide for recovery of financing costs, operating costs, and investments through rate adjustment clause separate from base rates • Annual request to SCC for rider recovery of next year’s projected revenue requirement • Rider provides stability through forward looking approval • Phases in the costs to avoid rate shock • Annual true-up for actual vs. projected costs • 200 basis point enhanced return on nuclear for 12 – 25 years of service life; ROE floor based on peer group www.fitchratings.com

17. Operating Stage: Nuclear Operating Risks • Nuclear operator credit rating considerations • Quality of nuclear assets • Performance track record • Outage history • Age of unit/License extension status • Safety record • NRC inspection results • Liquidity • Cash and committed facilities • Outage insurance www.fitchratings.com

18. Operating Stage:Nuclear Operating Risk • Track record of U.S. nuclear fleet is improving • Capacity factors rising • Re-fueling outages getting shorter • Shared best practices • Concentration of nuclear ownership • Strong worker safety record (low incidence of lost time accidents) www.fitchratings.com

19. Operating Stage: Economic Incentives Under EPACT 2005 • Production tax credit of $18/mwh for first 6,000mw of new nuclear capacity (8 years with annual cap of $125mm/unit) • Risk mitigation: 20 year extension of Price-Anderson Act www.fitchratings.com

20. Operating Stage: Cost of Prolonged Outage • Risks of prolonged outage – low incidence/high consequence • Significant costs for replacement power, repairs • May need NRC approval to re-start • 45 reactors have had outages of one year or more (7 more than two years) since TMI in 1979 according to the Union of Concerned Scientists • Most outages for component repair/replacements or safety restoration • 1,000 mw XYZ Nuclear unit replacement power costs for estimated cost of 1 year outage 1,000 mw x 8,760 (hours) x 90% (capacity factor) x $50 mwh (spot market price) = $394.2 million per year or about $7.5 million per week www.fitchratings.com

21. First Energy Case Study • Davis Besse Outage • 883 mw nuclear unit • 2 Year outage (Feb. 2002 – April 2004) Outage Costs ($ Mil.) 2002 2003 2004 Capital 63 21 0 O&M 115 93 1 Replacement pwr. 12019664 Total 298 310 65 • Ratings Impact • July 2002 - Rating Outlook revise to Negative from stable • September 2003 – Ratings lowered to ‘BBB-’ from ‘BBB’ www.fitchratings.com

22. U.S. Nuclear Refueling Outage Days Average Source: 1990-98 EUCG, 1999-2007 Energy Velocity / Nuclear Regulatory Commission Updated: 2/08

23. U.S. Nuclear Industry Capacity Factors, 1971- 2006 Source: Global Energy Decisions / Energy Information Administration Updated: 10/07

24. End of Operating Life Risks • Community opposition to license extensions in certain locales • Most decommissioning funds are over-funded; license extensions provide additional time for funds to grow • Spent fuel disposal is a federal problem, not a credit risk www.fitchratings.com

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