Confidential Utility Investment Analysis White Paper

Global Utility White Paper CONFIDENTIAL They are in a capital-intensive business and need to preserve deep, low-cost access to both the equity and debt capital markets. Moreover, collateral requirements for forward power price hedging typically will spike if a utility loses its investment grade rating, which can spur concern about liquidity. Building conviction around a dividend cut thesis requires more than screening. Our process focuses on researching capex flexibility, cost-cutting potential and asset divestiture potential to determine the flexibility a company has under various scenarios. Our research process breaks capex into 3 buckets: i) committed capex (e.g. required by the regulator), ii) nondiscretionary capex (e.g. major plant overhauls — CEOs tend to avoid delays so as not to jeopardize billion dollar-plus assets), and iii) discretionary capex (CEOs can delay but may jeopardize future growth). Regarding opex, we look for cost-cutting capability, which we estimate by breaking apart the opex line or by global benchmarking. Finally, we estimate the potential impact from possible asset divestitures and the resulting impact on earnings and leverage. Once we have completed the research work on capex, opex and potential divestitures, we model various sensitivities from structural changes or other key drivers that might cause a deterioration or improvement in a utility company’s business model against forward-looking credit rating agency (S&P, Moody’s, etc.) ratios. 24 Electron Capital Partners, LLC HOUSE_OVERSIGHT_024225