Credit Trends in the Utility Industry

1
Credit Trends in the Utility Industry

• Dharm Patel Equifax Analytical Services

2
Agenda

• Credit Economic Outlook
• ARM Resets Impact on Consumers Ability to Pay
  Bills
• Advanced Energy Risk Score Trends
• Questions

3
Credit Economic Outlook
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Has Housing Market Stabilized?

• The U.S. housing market peaked in q405 and has
  been on the decline since
• Inventories are high and sales sluggish
• Banks have tightened lending standards
• Investors are wary of mortgage-backed bonds
• Delinquencies and foreclosures are still rising
• Conditions will continue to deteriorate through
  2008. Trough is expected in mid 2009.
• Problems are concentrated in areas with rapid
  price increases 2001-2005.

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Unprecedented Surge in Mortgage Defaults
First mortgage loan defaults, ths
Source CreditForecast.com
6
...Where do your customers live?
of homeowners defaulting on their first
mortgage, 2007Q4
Below U.S.
Near U.S.
Above U.S.
U.S. 2.1
7
Household Credit Quality Is Rapidly Eroding
Household debt in delinquency or default, bil,
annualized
Source CreditForecast.com
8
...Due (in Part) to Fading Equity Withdrawal
Gross equity extraction, bil, Source
Creditforecast.com
9
The Worst Is Yet to Come
Mortgage delinquency rate,
Source CreditForecast.com
10
Auto Loans Fall in the Middle
Auto delinquency rate,
Source CreditForecast.com
11
Credit Cards Will Continue to Outperform
Credit card delinquency rate,
Source CreditForecast.com
12
Rising Unemployment Signals Recession
Year-over-year change in unemployment
Source BLS
13
Recession Already Plagues Parts of the Country
In recession
Near recession
Expansion
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Outlook Summary

• Mortgage risk performance has rapidly eroded,
  with problems concentrated in subprime lending
  and in metro areas with rapid price deceleration.
  Imbalances in the housing market are expected to
  last through early 2009.
• There are signs that the credit cycle is turning
  and consumers are under more stress, but the
  outlook depends critically on the economy.
• The economic forecast is at a tipping point. We
  may avoid recession but have a long period of
  slow growth, higher unemployment and higher
  delinquencies.
• Utility Risk Managers should expect more impact
  than in 2001 with higher billed amounts,
  consumers under more stress and with fewer
  options.

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ARM Resets Impact on Consumers Ability to Pay
Bills
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Do They Have ARMs Due to Reset?
Mortgage debt outstanding facing first payment
reset, bil Source CreditForecast.com and
Credit Suisse
Source First American LP
17
How do mortgage rate adjustments impact consumers?
A 1.5 increase in interest can drive a 19
increase in payment, that can make a material
impact in a household budget
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Advanced Energy Risk Score Trends
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Advance Energy Risk Score Trends
Source Creditforecast.com

• Vermont has the highest performance of all other
  States and is on average 28 points higher in
  average score when compared to the United States.
• While these five states trend higher than all
  other states, these states are still forecasted
  to decrease in average score over the next three
  year.

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Advance Energy Risk Score Trends Cont.
Source Creditforecast.com

• Mississippi has the lowest average Advance Energy
  score compared to all other states and is on
  average 50 points lower than the United States in
  total.

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Utility inquiries
Advance Energy Score Distribution

• 2007 score distribution for new inquiries steady
  Q2-Q4.

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What to Expect for your Portfolio?

• Some Direct Housing Market Impact
• Areas with largest Housing Market Corrections and
  highest Foreclosure Rates
• Consumers with ARMS resetting and less
  opportunity to refinance
• Surprise NPDs not reflected in application scores
• Indirect Recession Risk
• Job losses and small business failures will cause
  income disruptions and payment stress
• Credit Scores tend to lag so need frequent
  monitoring for early signs of trouble
• Expect more impact than 2001 recession because
  consumers generally in worse shape

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Questions
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