Further Information Utilities

1. Further Information Utilities

2. From nuclear plants (CA, PA, IL, MA) to storm costs (FL) … Utility Securitization: Legislative Map Securitization in Texas, Wisconsin and New Jersey will likely bring total issuance to ~$40 billion 2

3. Summary of States and Securitization Bills Securitization started in the state of Washington with a novel approach to DSM recovery … … and can now be applied to any costs in the state of Idaho ... Under consideration in MS, LA, TX, NE … 3

4. Step 1: Legislation Step 2: Regulatory Approval Step 3: Securitization Bond Issuance How Does Utility Securitization Work? The State Legislature passes Legislation that provides a framework for the PSC to give a utility the authority to collect an irrevocable Securitization Charge and issue Securitization Bonds backed by these charges Utility files for a Financing Order from the PSC that establishes the Securitization Charge and authorizes the issuance of Securitization Bonds After obtaining PSC approval, Company sells the right to collect the Securitization Charge to a Special Purpose Entity (SPE) which actually issues the Securitization Bonds. 4

5. What Is Required in Legislation? • Key features of enabling legislation are: • Nonbypassability: all customers are responsible for a charge regardless of energy provider • Irrevocability: the utility’s right to collect the charge cannot be altered • Property right: right can be pledged as a security interest • State pledge: state pledges to not alter the utility’s right to collect • TRUE-UP mechanism: periodic automatic adjustment to ensure charges cover debt service • Legislation only provides framework -- PSC must authorize Financing Orders to individual utilities through a traditional filing process The required components of the enabling legislative framework are well-understood 5

6. How Does Utility Securitization Work? • Debt is serviced by a special charge on all utility bills (paid before credit cards) • Funds are collected by utility and placed in separate bankruptcy-remote entity • Charge is automatically adjusted (TRUE UP) to ensure timely payment of principal and interest • Small capital contribution (0.5%) becomes important near scheduled final maturity • Charge is typically a small portion of the utility bill (about 1%-5%) (has been higher) • Typically solid political and regulatory support of securitization The securities are typically rated AAA by all three agencies and viewed as “off-credit” to the utility – The bonds are often structured as mortgage-style and tranched in a sequential-pay fashion 6

7. What Is The Impact on Utilities and Their Customers? • Utilities earn an equity return (~10%) on rate base and “regulatory assets” • In most securitizations, utilities sacrifice this equity return for certainty of recovery • Savings are passed on to customers creating rate reduction • The recovery of costs can also be stretched out over a longer time frame • Furthermore, the rating agencies will not view the bonds as the debt of the utility, limiting any adverse credit impact Utility customers will often enjoy significant rate reductions under securitization 7

8. Utility Securitization: Issuance Overview Year Issuer (State) Estimated Amount($mm) Possible issuance from Florida (storm) and West Virginia (enviro) in 2006 could be over $1.5 billion NEW OLD THING: TRANSITION TO COMPETITION IN ILLINOIS, OHIO, etc. 8