The Infrastructure Financing Landscape
“Financing The Coming Capital Cycle”
David Nastro
Head of Global Power & Utilities Group
October 10, 2008
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The Coming Capital Wave
2008 – 2010 Capex as a Percent of Market Cap
Existing Net Plant in Service: $750Bn
North America
Fuels
$8Bn
Regulatory Assets
$60Bn
Distribution
$240Bn
Generation
$350Bn
Transmission
$90Bn
Source: CERA
Investment Need for Next 15 Years: $900Bn
North America
Conservation and Efficiency
$50Bn
Generation
$350Bn for 230+
GW
Environmental
Retrofits
$5Bn (excl. CO2)
Distribution
$300Bn
Transmission
$150Bn
2008 – 2010
Capex as a % of
Market Cap (2)(3)
Company
Credit Rating
(S&P / Moody’s) (1)
Edison International
BBB- / Baa2
80%
American Electric Power
BBB / Baa2
69%
PG&E Corp.
NR / Baa1
68%
Duke Energy
BBB+ / Baa2
64%
Consolidated Edison
BBB+ / A2
55%
Constellation Energy
BBB / Baa1
53%
Sempra Energy
BBB+ / Baa1
49%
Dominion Resources
A- / Baa2
49%
Southern Co.
A- / A3
46%
FPL Group
A- / A2
43%
PPL
BBB / Baa2
32%
PSEG
BBB- / Baa2
28%
Entergy
BBB / Baa3
28%
Exelon
BBB / Baa1
24%
FirstEnergy
BBB- / Baa3
24%
Source: CERA
(1)
(2)
(3)
Based on senior unsecured rating.
3-Year capex estimates from Company Presentations, Company Filings, and Equity Research
Market Cap as of 9/9/2008
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Material and Labor Costs Continue to Escalate
Basic Material Costs
Labor Costs
Index Price
Index Price
175
175
160
160
145
145
130
130
115
115
100
100
85
1991
85
1997
1999
GDP Deflator
2001
Cement
2003
2005
2007
1993
1995
1997
1999
2001
GDP Deflator
Common Labor
Heavy Construction Labor
Craft Labor
2003
2005
2007
Crushed Stone
Index Price
No. of Employees
(000s)
600
700
500
600
500
400
400
300
300
200
200
100
100
0
0
1997
1999
2001
GDP Deflator
Nickel
Copper
Aluminum
2003
2005
2007
18–25 26–30 31–35 36–40 41–45 46–50 51–55 56–60 61–65
65+
Age Group
Tungsten
Now
Five Years Out
Ten Years Out
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Traditional Capital Funding Sources
2007 Utility Capital Markets Financings
($ Billions)
78
66
7
5
Total Capital Raised
Debt
Equity
Hybrids
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Balance Sheet Strength?
S&P Long-Term Debt Ratings
(%)
1970
1980
1990
2000
2007
AAA
14.0
0.0
0.0
0.0
0.1
AA
65.6
32.9
27.4
14.1
1.7
A
17.4
43.8
34.2
54.6
28.8
BBB
3.0
21.9
34.3
26.6
42.4
BB or Lower
0.0
1.4
4.1
4.7
27.1
79.6
32.9
27.4
14.1
1.8
3.0
23.3
38.4
31.3
69.4
Proportion by Grouping
AAA and AA
BBB or Lower
Source:
America’s Electric Utilities: Past, Present, and Future, 8th Edition, by Hyman, Robert C.; Andrew S.; and
Leonard S. Table 37.5, page 432, Wall Street estimates
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Utility Sector Equity Risk Premium Likely to Rise
Free Cash vs. Equity Risk Premium
($)
(%)
20,000
26
15,000
21
10,000
16
5,000
0
11
(5,000)
6
(10,000)
1
(15,000)
(20,000)
1973
1976
1979
1982
1985
1988
Pre-Div FCF
1991
1994
1997
2000
2003
2005
(4)
2009E 2011E
Implied Equity Risk Premium
Source:
Wall Street Estimates and FactSet
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Less Traditional Financing Alternatives
 Joint Ventures
 Asset Monetization
 Securitization Technology
 Alternative Sources of Capital
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Joint Ventures
Ability to Fund Major Capex – Size Matters
$2Bn Super-Critical Coal Plant
Market Cap (1)
($Bn)
Cost as % of
Market Cap
Exelon
41
5
Southern
29
7
9
22
Exelon
41
12
Southern
29
17
9
56
Exxon Mobil
381
1
Royal Dutch Shell
193
2
BP
169
2
“Average” Investor-Owned Utility
$5Bn Nuclear Plant
“Average” Investor-Owned Utility
$4Bn Deepwater Drilling Platform
(1) As of 9/9/2008
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Joint Ventures
Illustrative Utility / Power Joint Ventures
Nuclear
Wind
Geothermal
 CEG / EdF (UniStar)
 Dominion / BP
 NRG / Toshiba
(NINA)
 AES / Acciona
 Sierra Pacific /
Ormat (Carson Lake)
Solar
Fossil
Electric Transmission
 AES / Riverstone
(AES Solar)
 NRG / UIL
(GenConn)
 AEP / MidAmerican
(ETA)
 Integrys / Dairyland
(Weston 4)
 AEP / Allegheny (PATH)
 SCANA / Santee
Cooper
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Asset Monetization
Selected Recent Examples
Company
Asset Monetization
Con Edison
Sale of Non-regulated Generation
Teco
Sale of Transport Subsidiary
PPL
Sale of Latin American Assets
Dominion
Proposed Sale of LDC Properties
Progress
Sale of Merchant Business
PSEG
Sale of Latin American Assets
CMS
Sale of Latin American Assets
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Asset Monetization
Sale of Minority Stake in Transmission
Attractive Cost of Capital
Private Market
Mean 2008 P/E
(x)
30
28x
Partner
Existing
Transmission Assets
KKR
ITC
15
Babcock & Brown
Cross Sound Cable
10
GE Capital
CMS Transmission
Borealis
National Grid Transco
Ontario Teachers
AltaLink
25
20
15x
5
0
Integrated
Electric
ITC
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Securitization Technology
PPL First Ever Securitization of Electric Delivery (2001)
Securitization Benefits
 Establishes bankruptcy remote special
purpose entity
Post-Securitization Transaction Structure
PPL Corporation
 Takes ring fenced assets off-credit
 Maximizes potential leverage
 Results in lower overall cost of capital
$800MM
Cash
PPL Energy
Supply
PPL Electric
Utilities
Securitized
Debt
Legal Ringfencing
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Alternative Sources of Capital
Illustrative List of Less Traditional Capital Sources
Private Equity Funds
Infrastructure Funds
 AIG Highstar
 Alinda
 Apollo
 Babcock & Brown
 ArcLight
 Borealis Infrastructure
 Blackstone
 Brookfield
 Carlyle / Riverstone
 Citi Infrastructure Fund
 Energy Capital Partners
 CPP Investment Board
 GE
 Global Infrastructure
Partners
 KKR
 Madison Dearborn
 Tenaska
 TPG
 Warburg Pincus
 Macquarie
 Morgan Stanley
Infrastructure Partners
 Ontario Teachers
Infrastructure Fund
Sovereign Related Entities
Wealth Funds
 Abu Dhabi Investment
Authority
 China Investment
Corporation
 Government Investment
Corporation (Singapore)
 Int’l Petroleum Investment
Corp. (Abu Dhabi)
 Investment Corp. of Dubai
 Kuwait Investment
Authority
 Qatar Investment Authority
 TAQA (Abu Dhabi)
 Temasek
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Implications for Strategic Activity
Jury Is Still Out on Level of M&A in 2008
Catalysts Driving Desire for Utility Deals
 Benefits of scale

Cost

Ability to address capex needs

Commodity and procurement

Access to capital
U.S. Utility Deals by Value
($MM)
62,447
23,846
 Nuclear capital requirements and size
 Global and regional diversification
23,358
18,151
11,679
5,940
 Succession planning
2004
2005
2006
2007
2008
2008
YTD Annualized
Source: Company filings and press releases
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Key Takeaways
 Traditional Access to Capital Facing Headwinds
 Formation of Partnerships / Joint Ventures

International Utilities

Financial Parties
 Emergence of New Pools of Capital

Sovereign Wealth Funds

Middle Eastern Investors

South East Asian Investors

Japanese Investors

Pensions and Endowments
 More Creativity!!!
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