APPA National Conference: Financing Capital Projects in Difficult Market Conditions

1. APPA National Conference:Financing Capital Projects in Difficult Market Conditions Panelists: Michael Mace, Managing Director, Public Financial Mgmnt. John Murphy, Sr. Research Analyst, Fidelity Investments Karl Pfeil III, Managing Director, Fitch Ratings

2. Financing Capital Projects in Difficult Market Conditions Karl H. Pfeil III, Fitch Ratings June 15, 2009

3. The Credit Drivers of the Current Market Environment • The Basic Pillars of Public Power Credit • New Rating Considerations: • Economic Issues • Financial Considerations • Environmental Credit Considerations • Fitch Ratings’ Public Power Outlook - How Does it Stack to other Sectors? www.fitchratings.com

4. Primary Credit Factors www.fitchratings.com

5. Location, Location, Location • Each region has distinct characteristics affecting the utilities’ credit profile: • Fuel supply • Water supply • Environmental • Regional politics • Service territory characteristics • New developments www.fitchratings.com

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9. Financial Considerations www.fitchratings.com

10. Financial Ratios • Coverage (How much cash flow cushion is there to pay the utility’s fixed obligations?) • Debt service coverage • Debt/funds available for debt service • Liquidity (how much cash does the utility have relative to its operating expenses?) • Days cash on hand • Days liquidity on hand (includes CP capacity & lines of credit) • Free liquidity to support variable rate debt • Leverage (how much equity has the utility built up relative to its asset base?) • Equity/capitalization • Debt/funds available for debt service • Other • Variable rate exposure as % of capitalization • Annual capital additions • Five-year capital improvement plan and financial projections www.fitchratings.com

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12. Gross Variable Rate Debt/Capitalization (%)(2006-2008) www.fitchratings.com

13. Greenhouse Gas/Carbon Reductions CO2 Regulation: Not if but when • Fitch Ratings believes that there will be a carbon law at the federal level • Increasing number of state regulators are placing a cost on carbon in ratemaking proceedings • More traditional Wall Street investors are now looking at carbon issues www.fitchratings.com

14. Public Power Outlook www.fitchratings.com

15. For a Stable Sector – The Issues Are Very Complex Increasing Capital Costs Utility's Credit Fuel Costs Environmental Regulation New Generation Economy and Housing Declines Rates /Regulation www.fitchratings.com

16. Fitch Ratings’ Public Power Credit Outlook for 2009 • The Outlook into 2009 is Stable with near-term pressures on individual credits that could result in increased negative rating actions • The longer-term Outlook reflects increasing negative cost pressures • While our near-term outlook for the sector is stable, if current pressures such as limited capital market access together with increasing economic stress that persists long into 2009, a change in Outlook to Negative may be warranted • Public power has historically proven itself to be a very solid investment despite past complexities facing the industry such as deregulation, fuel price volatility, and the corporate credit crisis www.fitchratings.com

18. What Investors Really Want! John M. Murphy, Research Analyst Fidelity Investments APPA National Conference June 2009

19. What Investors Really Want! • Research • Trading & Markets • Portfolio Management www.fitchratings.comFidelity Management & Research Co.

20. What Research Really Needs! • Research • Security • First Mortgage • Gross vs. Net Revenue Pledge • Liquidity Facilities • Market Access Alone is NOT a Security Interest • Access to All Pertinent Deal Documents • Covenants • Disclosure • More Frequent Release of Financial Results • Derivative and Counterparty Exposures • Material Events • Transparency • Semi-Annual Conference Calls or Internet Road Shows • Access to Management via Conferences, Calls or Meetings www.fitchratings.comFidelity Management & Research Co.

21. What Traders Really Need! • Trading & Markets • Surveillance, Primary and Secondary • Appropriate Spread • Structure: Fixed vs. Floating • Duration / Maturity • Dealer Support www.fitchratings.comFidelity Management & Research Co.

22. Evaluating Structural Relationships Over Time Increased focus on quantitative infrastructure is necessary because municipal bond valuations are influenced by many variables. www.fitchratings.comFidelity Management & Research Co.

23. What PM’s Really Need! • Portfolio Management • Sector Weights • Index Weighting • Security Selection www.fitchratings.comFidelity Management & Research Co.

24. The Answer is…. Everything! www.fitchratings.comFidelity Management & Research Co.

25. Information Prepared for the Annual Meeting Challenges & Uncertainty vs. Solutions & Opportunity June 15, 2009 The PFM Group Mike Mace Managing Director Public Financial Management

26. Public Power Finance in a Challenging Environment 26 • Introduction • Impacts of the Financial Crisis • Current Challenges • The Solutions • Preparing for the Next Challenges

27. Introduction • Public Financial Management • Offering financial and investment advice to governments & not-for-profits • 400 professionals in 30+ offices throughout the US • Two separate operating companies • No bond underwriting or trading for our own account • Helping our clients maximize financial value • Within risk tolerances consistent with public sector objectives PFM Asset Management Investment Management & Consulting SEC Registered & Regulated Managing $35+ Billion of Client Assets Public Financial Management Financial Advice & Strategic Consulting $50+Bn/Yr Capital Markets Transactions 10 Person Public Power Group 27

28. Crisis… What Financial Crisis? 28 • Borrowing Costs Under /Around 5.00%, Short-Term Rates Almost Zero! • Investment Rates are Up, Stock Market Has Been Strong • Natural Gas and Commodity Prices Beginning to Make Sense Again

29. More Good News Than We Have Time For • Retail Investors Have Been Big Buyers of Public Power Bonds • LIPA in January ~$250 MM Retail Orders for $435 MM Bonds • SRP in January ~$300 MM Retail Orders for $744 MM Bonds • JEA in February $71 MM Retail Orders for $129 MM Bonds • Energy Northwest in March ~$270 MM Retail Orders for $370 MM Bonds • JEA in April $98 MM Retail Orders for $64 MM Bonds • CMEEC in April $68 MM Retail Orders for $38 MM Bonds • Taxable Build America Bonds Have Been a Huge Success • SMUD sells $200 MM long-term bonds at a net rate of 4.11% • CPS Energy sells $375 MM long-term bonds at a net rate of 3.89% • Both issues receive investor orders ~4+ times their size • MEAG Power & CPS Energy Projects Atop DOE Nuclear Guarantee List 29

30. More Good News Than We Have Time For • MEAG Power Finances Initial Stage of Vogtle Expansion • Tax-exempt, 13-month notes ranging from 0.47% to 0.85% • Taxable, 13-month notes at 1.90% • Total of ~$500 MM averaging 0.84% • OUC Sells $200 MM One-Year Notes at 0.45% • SRP Rolls 30- and 60-Day Commercial Paper at 0.23% and 0.28% • JEA Short-Term Bonds Reset at 0.23% • MMWEC “Failed” Auction Rate Bonds Reset at 0.06% (not a typo!) • SMMPA Renews Two-Year Credit Facility at 0.70% 30

31. Public Power Financing – Challenges Remain 31 • #1: Change - Dramatic, Fast-Paced & Unprecedented THENNOW • Bond Insurance: commonplace non-existent • Auction Rate: solution problem • Bank Letter/Lines: cheap → expensive → unavailable • Gas Prepays: huge savings huge headaches • Bond Market: good → volatile → closed → wide open • Derivatives: free money &*$%#@! • Fuel/Energy Hedging: saving money just a hedge Last Year’s Solutions Became This Year’s Problems Fortunately, the Problems Have Been Manageable Public Power Fares Better Than Most Market Sectors

32. Public Power Financing – Challenges Remain • #2: Long-Term Planning in a Time of Uncertainty • Resource decisions: WHAT?, WHEN?, IF? • The high cost of risk aversion and mitigation • When does “normal” return and what does it look like? • How do you make 40+ year decisions in a 12-month window of turmoil? • #3: Managing Environmental Alternatives, Impacts & Costs • #4: The Economy vs. Credit Strength • High credit ratings have never been more valuable • Your customers are under considerable pressure • Local governments have significant needs • Where is the proper balancing point? 32

33. Public Power Financing – Challenges Remain • #5: Liquidity Concerns • Fuel and purchased power contract collateral postings • Interest rate swap collateral postings and termination payments • Revenues falling or failing to rise • Rating agency scrutiny of bank letter/line of credit repayment provisions • The business is more volatile, and requires more reserves • Yet liquidity is more expensive than in the past • #6: Reduced Competition on the Financial Playing Field • Fewer Underwriters, Insurers, Commercial Banks • Staffing has declined at remaining firms • Fees have increased • Bank Letter/Line capacity and pricing will remain a problem • Short-term program fees are up to 6X the actual short-term interest rates 33

34. Public Power Financing – The Challenges → 34 • How Are We Doing So Far?

35. Public Power Financing – The Solutions • The Stimulus Bill and Build America Bonds • Taxable bond with a 35% Issuer Interest Subsidy from Treasury • Provides theoretical full value for tax-exemption, resulting in ~4.00% net rate • Public power is well positioned to enter the taxable market • Taxable investors understand utility credits and can compare you to IOUs 35

36. Public Power Financing – The Solutions • The Stimulus Bill and Build America Bonds, Examples: • And positive side effects from $10+ Billion reduction in tax-exempt volume 36

37. Public Power Financing – The Solutions • However, No Good Deed Goes Unpunished by the Financial Media 37

38. Public Power Financing – The Solutions • Other Tax Credit Bonds Can Deliver Near 0% Financing • Renewable and conservation expenditures qualify for tax credit financing • Investor received a Federal tax credit instead of interest from borrower • Limited size and uncertain allocations are considerable drawbacks • The current program partially rewards, but does not incentivize, renewables • The tax credit market needs taxpayers • DOE Loan Guarantees and Other New Technology Incentives • Value and availability of guarantees are uncertain • DOE Nuclear Guarantees: from marginal, to valuable, to essential, to optional??? • If administered properly, it can be a powerful program 38

39. Public Power Financing – The Solutions • House Financial Services Committee Proposals • Municipal Bond Insurance Enhancement Act • Treasury Dept. Office of Public Finance to reinsure up to $50 BN annually • Municipal Bond Liquidity Enhancement Act • Federal Reserve/TARP to lend money for the purchase existing variable-rate debt • Municipal Financial Advisors Regulation Act • Financial Advisor standards and SEC-registration • Municipal Bond Fairness Act • Require credit ratings system to reflect comparable risks of default • Some or All of This Could be Helpful • Some or None of This Might Actually be Implemented 39

40. Public Power Financing – The Solutions • Investors Still Have Money on the Sidelines: • Educated, credit-sensitive institutional investors can help public power • Retail investors must be willing to come out of their shells 40

41. Public Power Financing – The Solutions • Preserving Credit Strength • Balance local, ratepayer and bondholder interests • Do what you can, but no downgrades • Credit spreads are higher than ever – Cost of Downgrade Studies • Avoid the Straw That Breaks the Camel’s Back • Incremental action leading to a downgrade is VERY expensive • Downgrades take many years to reverse • Borrowing the extra $50 MM may raise interest costs on future $Billions • Educated and Informed Public Power Constituents • Work with the Board to make informed decisions • Helping ratepayers understand the value of their public power asset 41

42. Preparing for the Next Challenges 42 • Ongoing Concerns • Federal Debt and the Impact on Interest Rates • Economic Impact on Credit Ratings • Headline Risk Effect on Investors • Bank Credit Enhancement Market Taking Years to Normalize

43. Preparing for the Next Challenges • Ultimately, There Will Be a Price for All the Federal Help • Drastically Climbing Federal Debt and Guarantees • Debt Up 27% in past 18 months: from $9.0 to $11.4 Trillion 43

44. Preparing for the Next Challenges • We May Just be Starting to Pay the Price • Normalization, or the start of a trend? 44

45. Preparing for the Next Challenges 45 • What Will Help Us Meet the Challenges • The Tax-Exempt Product Will be Essential to Investors • Retail Investors are the Backstop to Higher Rates • The Bond Market Will Remain Open and Provide Access to Capital • Commercial Banks Will Recognize Public Power Value and Safety • Public Power Will Continue to Outperform Other Sectors