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Construction of Coal-Fired Generation: Evaluating the Utility Credit Implications. Ellen Lapson, Managing Director Fitch Ratings, Utilities, Power & Gas July 17, 2007. Overview: Evaluating Electric Company Credit.

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

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Construction of coal fired generation evaluating the utility credit implications l.jpg

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

Ellen Lapson, Managing Director

Fitch Ratings, Utilities, Power & Gas

July 17, 2007


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Overview: Evaluating Electric Company Credit

  • Fitch’s 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


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Investment Environment

Sector Trends

  • Dwindling capacity margins

  • Transmission congestion

  • Aging electricity infrastructure

  • New environmental regulations

  • Pressure on natural gas supply

RISING CAPEX


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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


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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


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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

Financial and Operating Risk Assessment: New Utility Investment

GENERIC CASE


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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

Financial and Operating Risk Assessment: New-Tech Coal Baseload Power Plant

Hi-Tech Pulverized Coal or IGCC


Financial and operating risk assessment new tech coal nuclear base load power plant l.jpg

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

Financial and Operating Risk Assessment: New Tech Coal NuclearBase Load Power Plant

New Nuclear Plant


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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

Financial and Operating Risk Assessment: Don’t Build; Rely on Market Purchases

Doing nothing also has risks, but less capital is at stake.


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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

Financial and Operating Risk Assessment: Risk Mitigants


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