Pitchbook US template

1
M A R C H   3 ,   2 0 0 5
A G A   F I N A N C E   C O M M I T T E E 
 M E E T I N G   /   K E M P E R   R Y A N   / 
 3 1 2 - 7 3 2 - 3 8 7 0
                                                
                          
2
2004 utility and pipeline sectors review
2004 review
New issue supply

• New issue volume declined significantly in 2004
• 2004 versus 2003 supply was down approximately
  20
• 2004 supply was 40 billion (with PGE
  representing 6.7 billion and TXU representing
  3.5 billion) versus 50 billion in 2003
• Supply was dominated by operating companies (55)
  with only two generation companies (PSEG Power
  and PPL Energy Supply), four project deals, and
  eleven pipeline transactions
• Floating rate issuance in the utility and
  pipeline sectors increased to 5.8 billion, or
  14.5 of issuance, due to a variety of financing
  objectives
• FRNs were typically used as an instrument for
  very highly-rated credits and short-dated funding
  needs however, issuance expanded to lower-rated
  credits and maturities extended to 5 years (PCG,
  NI)
• Credit quality in the utility and pipeline
  sectors stabilized in 2004
• Large number of regulatory rate cases in 2004 had
  been an area of focus with regard to credit
  quality (DTE, EIX, PNW, PPL, ED)
• The sector continued to experience spread
  compression in 2004 and traded in a tight range
  throughout most of the year
• Spread compression was driven by strong
  technicals as investor demand continued to
  outpace supply
• The first of the mandatory convert remarketings
  took place in 2004 with eight in the utility and
  pipeline space
• Initial remarketing premiums were in the 50 to 75
  bps range but declined to approximately 10 bps as
  investors became more familiar with the structure
  (FPL, Dominion)
• Beginning of increased MA activity resulted in
  additional new issue supply (AGL/NUI, Atmos/TXU
  Gas, Southern Union/Transwestern Pipeline)
• However, while MA activity increased, it was not
  as robust as had been expected

(Bn)
Source Securities Data Corp
Issuer type
Maturity breakdown
Genco2

20yr25
Pipeline12
15yr3

Opco55
12yr4
Project4
5yr16
10yr31
Holdco27
7yr4
A G A   F I N A N C E   C O M M I T T E E 
 M E E T I N G   /   K E M P E R   R Y A N   / 
 3 1 2 - 7 3 2 - 3 8 7 0
Spread performance
(bps)
Source JPMorgan secondary trading desk Holdco
American Electric Power, Dominion Resources, Duke
Capital, Exelon Corp, Progress Energy Opco
(Unsecured) Arizona Public Service, Carolina
Power Light, Con Edison of NY, Virginia
Electric Power Opco (Secured) Commonwealth
Edison, Florida Power Corp, Florida Power
Light, Public Service Electric Gas
1
3
2005 utility and pipeline sectors outlook
Spread outlook
Supply outlook

• Market technicals are expected to remain strong
  throughout 2005 due to reduced issuance and high
  investor cash positions
• We expect spreads in the sector to remain firm,
  absent any exogenous shocks to the broader
  market, supported by stabilizing and improving
  credit fundamentals and strong market technicals
• Potential for modest spread compression
• Spread widening for name specific credits due to
  negative headlines still exists
• On the ratings front last year, we saw a
  moderation in the negative trend in ratings
  actions
• We expect the trend to continue in a positive
  trajectory this year as credit fundamentals
  improve, not withstanding shareholder friendly
  actions

• Approximately 18 billion in maturities in 2005
  (not including callables, preferreds and
  converts) compared with 20 billion in 2004
• Increased issuance volumes in 2005 could be
  driven by
• Continued mandatory convert remarketings
• Improving MA activity
• Continued pre-funding of future maturities based
  on a rising interest rate environment
• Higher capital expenditure needs due to
  environmental compliance (particularly utilities
  in the Midwest with large coal generation) as
  well as reserve margins
• Liability management opportunities associated
  with strategic initiatives, rate cases and
  capital structure modifications
• Debt financed stock repurchase programs and
  dividend increases

Ratings have stabilized
A G A   F I N A N C E   C O M M I T T E E 
 M E E T I N G   /   K E M P E R   R Y A N   / 
 3 1 2 - 7 3 2 - 3 8 7 0
Source SP report Industry Report Card U.S.
Electric/Water/Gas dated 10/06/04, JPMorgan
2
4
JPMorgan expects a measured Fed and continued
strength in the economy
10-year yield performance ()
Commentary

• JPMorgan continues to expect a measured Fed,
  tightening by 25 bps at each meeting this year,
  bringing the Fed Funds rate to 4.25 by December
  2005
• With solid US growth and core inflation forecast
  to move higher, the Fed is expected to move to a
  neutral stance in 2005
• Increases are nearly certain at the March 22nd
  and May 3rd meetings, with the futures markets
  implying an 80 chance of a hike on June 30th
• However, if core CPI trends higher at a faster
  pace, the Fed may be pressured to accelerate its
  pace of tightening
• JPMorgan forecasts a continuation of curve
  flattening as rising short-term yields outpace
  the long end of the curve
• Despite showing resilience in 2004, long-term
  yields are forecasted to rise with the 10-year US
  Treasury yield expected to exceed 5.00 by
  mid-year 2005
• JPMorgans US Client Treasury survey shows record
  number of shorts
• Recent Fed comments highlight a more comfortable
  growth outlook and some concern about rising
  inflation
• Technical pressures are also likely to dominate
• Pension-related long end buying to add duration
  to portfolios
• Lack of supply in the long end of the curve
• Record budget deficit could cause need to issue
  more debt
• Reduced foreign central bank buying of Treasuries

A G A   F I N A N C E   C O M M I T T E E 
 M E E T I N G   /   K E M P E R   R Y A N   / 
 3 1 2 - 7 3 2 - 3 8 7 0
Economic interest rate forecasts
Forecasts are for the end of the period
3
5
The private placement market is an attractive and
flexible source of funding for investment grade
rated companies
The private placement market is flexible

• There are a number of misconceptions regarding
  the private placement market
• Relatively high credit spreads
• Small offering sizes
• Tight covenants
• Short maturities
• Over the past decade, as the liquidity and
  technicals in this market have increased, the
  difference between the private and public term
  debt markets have become minimal
• However, issuers are able to benefit from the
  additional flexibility that is available in the
  private placement market but not in the public
  debt markets
• Delayed drawdowns
• Maturity tranching

A G A   F I N A N C E   C O M M I T T E E 
 M E E T I N G   /   K E M P E R   R Y A N   / 
 3 1 2 - 7 3 2 - 3 8 7 0
4
6
The private placement market provides issuers
with additional flexibility delayed financings
are provided at no additional cost
Delayed drawdown locks in current yields, yet
does not fund until a later date

• The delayed drawdown feature of the private
  placement market, which is not available in the
  public debt markets, allows an issuer to
  determine the current interest rate while funding
  the transaction at some future date, eliminating
  future credit spread and Treasury yield
  volatility
• For a transaction with a delayed drawdown of up
  to 3 months, investors will not charge any
  additional credit spread, thus allowing an issuer
  to lock in its full cost of debt with total
  certainty at todays prices
• For a delay of more than 3 months, investors will
  require modest additional spread to compensate
  for the interest rate volatility
• However, relative to the cost of a rate lock
  (T-Lock or Forward Starting Swap) for the same
  period, the cost of delaying is less expensive in
  the private market, and it offers the added
  benefit of full coupon certainty
• Much as in the swap market, given the currently
  flat US Treasury yield curve, the cost of the
  delay is very low
• A transaction requiring funding in several
  months, which would create a negative carry if
  issued today, can be executed presently and the
  drawdown of funds can be delayed until the funds
  are needed
• Issuers are becoming increasingly interested in
  this option, for example
• About three weeks ago, JPMorgan priced a private
  placement offering for an electric utility that
  is rated Baa1/A that has historically issued in
  the public debt markets
• The credit spread on the notes was the same as
  had it accessed the public high grade market
• The documentation for the notes is similar to
  that of a public debt offering and includes no
  financial covenants
• The offering incorporates a delayed drawdown and
  will fund on August 1, 2005
• The proceeds will be used to finance the par call
  of the company's notes that are callable on that
  day
• JPMorgan priced the transaction within 3 days of
  being mandated, and two investors will purchase
  the notes

A G A   F I N A N C E   C O M M I T T E E 
 M E E T I N G   /   K E M P E R   R Y A N   / 
 3 1 2 - 7 3 2 - 3 8 7 0
5
7
Volume has grown and credit spreads have
tightened in the private placement market over
the past few years
Private placement market overview
Traditional private placement volume (billions)

• The private placement market is extremely active,
  with 2004 volume slightly behind the record
  levels of 2003
• Investor demand has forced credit spreads to
  historical lows
• The average new issuance size is 172 million as
  large public companies continue to access the
  private market

US Treasury yields
Credit spreads (basis points)
A G A   F I N A N C E   C O M M I T T E E 
 M E E T I N G   /   K E M P E R   R Y A N   / 
 3 1 2 - 7 3 2 - 3 8 7 0
6
8
More size and structures have attracted investors
and issuers to the private placement market
Floating rate issuance (millions)
Cross-border issuance
Average number of investors by issue size in
millions
Average transaction size (millions)
A G A   F I N A N C E   C O M M I T T E E 
 M E E T I N G   /   K E M P E R   R Y A N   / 
 3 1 2 - 7 3 2 - 3 8 7 0
Sources Private Placement Letter and JPMorgan
7
9
The range of issuers remains broad across issuer
category and rating category
Issuance by industry in 2004
Issuance by rating category in 2004
A G A   F I N A N C E   C O M M I T T E E 
 M E E T I N G   /   K E M P E R   R Y A N   / 
 3 1 2 - 7 3 2 - 3 8 7 0
8
10
The investor base is dominated by insurance
companies
Characteristics
Examples
Investors
Description

• Large Insurers
• Lead investors
• 25-150mm bite sizes
• Buy and hold orientation
• Separate private placement department

Aegon, AIG, Allstate, GE Financial, ING, John
Hancock, MetLife, New York Life, Northwestern,
Prudential, Teachers

• Investor universe 100
• Mainly insurance companies
• Typically buy and hold until maturity
• Relative value focus
• Perform in-house credit analysis
• Rely on agents industry and credit knowledge
• Do not require credit ratings
• Maintain confidentiality

• Middle Tier
• Either lead or next layer
• 10-40mm bite sizes
• Separate private placement departments
• Formerly smaller players without much market
  clout/resources

Babson Capital, CIGNA, Citi/Travelers, Delaware
Lincoln, Hartford, Jefferson Pilot, Lutherans,
MONY, Nationwide, Pacific Life, PPM America,
Principal, Prudential MG, UNUMProvident
Types of investors
A G A   F I N A N C E   C O M M I T T E E 
 M E E T I N G   /   K E M P E R   R Y A N   / 
 3 1 2 - 7 3 2 - 3 8 7 0

• Participating
• 3-7mm bite sizes
• Focus on spread, liquidity
• Combine public and private desks

AIB, AUL, Modern Woodmen, Mutual of Omaha, Ohio
National, Sun Life
9
11
The entire maturity spectrum is available to
issuers
Private placement issuance by maturity in 2004
of market
A G A   F I N A N C E   C O M M I T T E E 
 M E E T I N G   /   K E M P E R   R Y A N   / 
 3 1 2 - 7 3 2 - 3 8 7 0
10