Energy Industry Opportunities and Challenges

Accounting Leadership Conference & Chief Audit Executives Conference

Richard McMahon Jr. Vice President, Energy Supply and Finance

June 27, 2017 Discussion Outline

I. Financial Results II. Grid Mod III. Tax Reform IV. Energy Supply V. FERC VI. ESG VII. Security (Cyber & Physical)

2 I. Financial Results Financial Highlights as of 03-31-2017

EEI Index DJIA S&P NASDAQ YTD 6.1% 5.2% 6.1% 9.8% Stock 1-year 7.5% 19.9% 17.2% 21.4% Performance 5-year 79.3% 77.5% 86.7% 91.2% 10-year 99.9% 117.8% 106.3% 144.1%

• Yield = 3.4% Dividends • All companies paying a dividend • 40 of 44 companies increased dividend in 2016

• Strengthening ‘BBB+’ Average Credit Ratings • Outlook 85% Stable or Positive

Note: Stock returns are total returns, ending 03-31-2017, (i.e., include dividends) except for NASDAQ, which is price appreciation only. Source: EEI Finance Department, S&P Global Market Intelligence. 4 Industry Capital Expenditures

$130 B 120.8 119.7 $120 B 113.8 109.0 $110 B 112.5104.5 $100 B 104.0 96.5 $90 B 96.1 90.3 90.3 $80 B 82.8 77.7 78.6 $70 B 74.1 74.3 $60 B $50 B $40 B $30 B 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Actuals Projections (August 2016) Notes: Total company spending of U.S. Investor-Owned Electric Utilities, consolidated at the parent or appropriate holding company. Projections (April 2017) Projections based on publicly available information and extrapolated for companies reporting fewer than three projected years (0.1% of the industry for 2018 and 2019). 5 Source: EEI Finance Department, company reports, S&P Global Market Intelligence (April 2017). Projected Functional CapEx

2015P 2016P as of September 2015 as of August 2016 To be updated $108.6 B $120.8 B $120 B summer 2017

$100 B $42.0B 35% $35.3B 32% Generation

$80 B Distribution

$32.0B 26% Transmission $60 B $28.7B 26% Gas-Related

$40 B Environment $19.3B 18% $20.8B 17% Other $20 B $13.3B 12% $17.9B 15% $5.7B 5% $3.4B 3% $0 B $6.2B 6% $4.7B 4%

Notes: Total company functional spending of U.S. Investor-Owned Electric Utilities. 2015P total does not sum to 100% due to rounding. Projections based on publicly available information and extrapolated for companies not reporting functional detail (1.3% and 0.7% of the industry for 2015 and 2016, respectively). 6 Source: EEI Finance Department, company reports , S&P Global Market Intelligence (August 2016). The Electric Power Industry in America SUPPORTS + 7 MillionJOBS

2,662,000 4,418,000 DIRECTLY PROVIDED INDUCED

491,000 756,000 1,415,000 678,000 959,000 445,000 2,336,000 ELECTRIC CONTRACTORS INVESTMENT INDUCED: INDUCED: INDUCED: INDUCED: POWER & SUPPLY CHAIN ELECTRIC POWER CONTRACTORS PUBLIC-SECTOR ECONOMY-WIDE INDUSTRY INDUSTRY & SUPPLY CHAIN RIPPLE EFFECTS EMPLOYEES EMPLOYEES

The U.S. electric power industry supports more than 7 million jobs. This includes nearly 2.7 million jobs directly provided through electric power industry employees, contractors and supply chain, and investments, and an additional 4.4 million induced jobs, including 445,000 public-sector jobs though tax revenue.

Each job directly provided by the industry supports an additional 1.7 jobs throughout U.S. communities. US Electric IOUs Rating History 2002 – 2016

8% 6% 19% 12% 24% A or higher 13% 23% A- 16% BBB+ 40% 29% 25% BBB

BBB- 9% 18% 21% Below BBB- 18% 10% 8% 2% 2002 2009 2016

BBB Average Industry Credit Rating is Increasing BBB+ 8 Source: EEI Finance Department. II. Grid Mod We Are Individualizing Customer Solutions

PRESENT

PAST

10 Source: The Edison Foundation Institute for Electric Innovation, Thought Leaders Speak Out: Key Trends Driving Change in the Electric Power Industry, December 2015 State Initiatives to Evolve the Grid

. New York: “Reforming the Energy Vision” (REV) . California: Distributed Resource Plans . Hawaii: Power Supply Improvement Plan . Illinois: Energy Infrastructure Modernization Act, NextGrid regulatory proceeding . Maryland: PC44 grid modernization proceeding . Minnesota: “e21 Initiative” . Massachusetts: Grid Modernization Plan . Ohio: PowerForward Grid modernization proceeding

11 Source map: GTM Research Building the Smarter Energy Infrastructure Customers Want

Projected: $52.8 Billion Invested in the Energy Grid in 2016

Source: The Edison Foundation Institute for Electric Innovation 12 Energy Storage: No Longer Aspirational

Energy storage can be deployed in all parts of the energy grid, and has applications in all parts of the value chain.

Enhance Electric Optimize Power Enhance Customer Provide Grid Support Company Operations System Experience

. Alleviate high energy . Regulate frequency . Defer transmission . Higher power prices through time . Reduce spinning, non-spinning, and distribution quality and shifts and supplemental reserve upgrades reliability . Reduce the need for requirements . Relieve electricity . Retail electric new generation . Voltage support congestion energy time shift . Black start electricity restoration

STATE FERC END REGULATED REGULATED T&D USE Source: Adapted from DOE/EPRI Handbook, EEI (graphic) 13 Micro Grids Are Evolving and Utility Partnerships Are Emerging

Source Data: GTM Research 14 Picture: Northwestern grid supported micro grid The Smart City Revolution

Street Lighting

Smart Buildings Smart Transportation

Distributed Energy Resources Monitoring & Sensing

15 III. Tax Reform Industry’s Tax Reform Priorities

EEI Tax Reform Principles . Maintain Interest Deductibility for Corporate Debt . Maintain Deductibility for State & Local Taxes . Maintain Tax Normalization and Address Excess Deferred Taxes . Keep Dividend Tax Rates Low and on Par with Capital Gains Tax Rates

17 Interest Deductibility Impacts Customers

Advocacy Messaging . Utilities are uniquely regulated . Utilities are the most capital-intensive industry . Utility capital structure is about ½ debt, ½ equity . Losing interest deductibility negatively impacts customers

“We will not eliminate the interest deduction for small

businesses, real estate purchases or utilities.” d

Kevin Brady (R-Texas) House Ways & Means Committee Chairman June 2017 18 IV. Energy Supply Transformation Drivers

Low Natural Gas Environmental Declining Diversification Prices regulations Technology Costs

State and Federal Financial Incentives Customer New Technologies Public Policies Demand and Business Models

20 Low Natural Gas Prices Driving Fuel Switching

Increased coal to gas switching when the price of gas drops below the price of Central Appalachia coal. The ability to substitute between coal and gas units also moderates gas demand as well.

21 Source: U.S. Energy Information Administration, SNL Our National Fuel Mix Is Changing

2006 National 2016 National Energy Resource Mix Energy Resource Mix (Preliminary)

Source: U.S. Department of Energy, Energy Information Administration 22 Chart percentages are based on net generation data. Electric Companies Use a Diverse Mix of Fuels to Generate Electricity

*Includes generation by agricultural waste, landfill gas recovery, municipal solid waste, wood, geothermal, non-wood waste, wind, and solar.

** Includes generation by tires, batteries, chemicals, hydrogen, pitch, purchased steam, sulfur, and miscellaneous technologies.

Sum of components may not add to 100% due to independent rounding.

Source: U.S. Department of Energy, Energy Information Administration, Power Plant Operations Report (EIA-923); 2014 preliminary generation data.

April 2015

© 2015 by the Edison Electric Institute. All rights reserved.

23 U.S. Power Sector Carbon Dioxide Emissions Declining

Power Sector Carbon Emissions (2015 – 2016) . 1/3 of U.S. power generation comes from zero-emissions sources and another 1/3 from natural gas . Coal-to-gas fuel switching has been a key factor in driving down power sector emissions . As of 2016, industry CO2 emissions were nearly 25 percent below 2005 levels . Trajectory will continue based on current trends

24 Source: Source: Developed from U.S. Energy Information Administration, Monthly Energy Review, March 2017. Current Generation Focus on Renewables and Natural Gas

Announcements of New Generating Capacity (2016) Capacity Additions and Retirements

Announced retirements (2010-2025)

25 Source: EEI; Velocity Suite, ABB Enterprise Software. Data as of March 2017 We Are Adding More Non-Hydro Renewable Resources to the Mix

26 Pipeline Congestion Is Improving

Winter gas pipeline congestion – residential and commercial peak season

November 2014 – March 2015

November 2010 – March 2011

Average capacity utilization of compressor stations and pipeline segments.

27 Source: ABB, The Velocity Suite Opposition Groups Fighting Natural Gas on Multiple Fronts

28 The Value of Fuel Diversity: The January 2014 “Polar Vortex”

Fuel diversity helps to protect consumers from contingencies such as fuel unavailability and fuel price fluctuations

A variety of generation sources helped maintain reliability during the Polar Vortex Image Source: NASA

. Record storage withdrawals helped meet increased demand for natural gas. . Dual-fueled generators were able to rely on oil during times of gas pipeline constraints.

. The nuclear fleet operated at 95% capacity at the height of the polar vortex. (NEI) . Coal plants, many currently slated for retirement, were employed to help meet demand. . Regional wind generation was strong, providing PJM with 3,500 MW while electricity prices averaged more than $500/MWh. (AWEA)

29 The Value of U.S. Power Supply Diversity

The study examines the risks to a diversified electricity portfolio and finds: “[A] combination of factors—tightening environmental regulations, depressed wholesale power prices, and unpopular opinions of coal, oil, nuclear, and hydroelectric power plants—is currently moving the United States down a path toward a significant reduction in power supply diversity.” The study quantifies the impact of a reduced fuel and technology diversity profile in America’s electric sector, concluding: . Electricity supply in the reduced diversity case increases average wholesale power prices by about 75 percent and retail power prices by 25 percent . Electricity price impacts would reduce U.S. gross domestic product by nearly $200 billion . Price impacts would also lead to roughly one million fewer jobs . The typical household’s annual disposable income would decline by about $2,100

30 V. FERC Current Commissioners

. Acting Chairman LaFleur (D) - 2019 . Commissioner Honorable (D) - 2017 leaving at end of term . Vacant - 2018 . Vacant – 2020 . Vacant – 2021

Current Nominees • Neil Chatterjee – Senior Advisor for Mitch McConnell • Rob Powelson – Chair of Pennsylvania PUC • Kevin McIntyre – Partner, Jones Day

32 Wholesale Markets

33 State Policies and Wholesale Markets

. Technical Conference held May 1-2, 2017 to discuss how the competitive wholesale markets can select resources of interest to state policy makers while preserving the benefits of regional markets and economic resource selection. (Docket No. AD17-11- 000) . Current market structure is not achieving outcomes desired by policymakers: • Concerns about reliance on gas • Concerns about loss of nuclear units • No recognition of environmental stewardship objectives . Questions raised: • Who is responsible for resource adequacy • Should the markets accommodate or achieve state policies

34 VI. ESG / Sustainability Why Regulated Electric Companies Are Different

Sector Beta vs. S&P500 US Electric IOUs Credit Rating History 4% 9% 7% Consumer Discretionary 1.13 13% 11% 14% 25% Consumer Staples 0.76 13% A or higher Energy 0.99 26% 24% A- 19% Financials 1.07 BBB+ Health Care 0.94 35% 22% 23% BBB Industrials 1.02 27%

Materials 1.24 BBB- 13% Technology 1.03 20% 25% 20% Below BBB- Utilities 0.19 20% 6% 12% 8% 4% 0.00 1.00 2.00 Low Movement Relative to Market High 2003 2007 2011 2015 BBB Industry Average is Improving BBB+ Source: AltaVista Research LLC (April 2016).

Industry Investment National Fuel Mix $130 B 119.7 $120 B 113.8 109.0 $110 B 112.5 $100 B 104.0 $90 B 96.1 90.3 90.3 $80 B 82.8 77.7 78.6 $70 B 74.1 74.3 $60 B 2006 2016P $50 B $40 B $30 B 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Actuals Projected Source: Department of Energy, Energy Information Administration. Source: EEI, company reports, S&P Global Market Intelligence (April 2017). Note: Chart percentages are based on net generation data.

36 Electric Company Reporting on ESG / Sustainability

Number of Companies and Keyword Occurrence in Report Titles Report Content Level of Reporting (out of 38 reports)

Sustainability 23 (53%) Economic Responsibility 9 (21%) 17% Comprehensive Environment 5 (12%) None 38 Citizenship 3 (7%) Social 76% 6 12% Commitment 1 (2%) 46% Minimal Stewardship 1 (2%) Environment 6 Accountability 1 (2%) 37% 12% 0 5 10 15 20 25 Number of Reports

Year of Most Recent Report Number of Companies Using a Length of Reports (comprehensive reports) Common Reporting Framework (by page count) 15 20 17 11 15 10 8 11 [None] 7 10 8 17 4 GRI 45% 5 3 2 2 5 21 1 1 1 55% Number of Reports

Number of Reports 0 0 < 20 < 40 < 60 < 80 < 150 > 175 2012 2013 2014 2015 2016 < 125 < 175 Page Count

Note: Data is current as of August 2016. 37 Standardized ESG / Sustainability Metrics will Inform Investors

EEI has initially identified 5 areas of focus based on a review of our member company ESG/Sustainability Reports and discussions with investors

Qualitative ESG/Sustainability Management and oversight of ESG / Sustainability. Governance Practices, programs, and initiatives designed to support the company’s Transition Strategy transition to an increasingly sustainable energy future.

Quantitative Utility Portfolio An Excel-based data reporting template that is customized for electric utilities to include metrics on owned and/or purchased generation data by Emissions technology/resource type, energy efficiency, reliability, grid modernization, transmission and distribution, as well as other metrics related to emissions, Resources environmental stewardship, and natural and human resources.

Note: data for these areas should include as much historical, current, and forward-looking information as is appropriate.

38 Shareholder Activism Results of IOU Shareholder Proposals in 2017

80%

70% ExxonMobil** OXY** 60% Pass PPL 50%

40%

Fail 30%

20%

10%

0% Proxy Emissions Renewables Two Degree Political Other Access Reporting (2) Scenario Spending (2) (3) (2) (9) (5*)

9 of the 23 (39%) shareholder proposals were related to “Two Degree” reporting. Despite being the first year many were introduced, the Two Degree proposals received significant votes in favor and was accepted by shareholders of one member company.

Notes: *Only four results charted because one proposal was withdrawn prior to shareholder meeting after discussion with company. 39 **ExxonMobil and Occidental Petroleum had Two Degree shareholder proposals pass in 2017. XOM and OXY are shown for information only and not included otherwise. Source: Member Company Survey, Proxy Monitor, SEC. Stakeholder Outreach

Investors Related Trade Groups API, IPIECA (petroleum) Continue to expand AGA, APPA, NRECA (electric & gas)

Members Proxy Services Credit Rating Agencies and Institutional Shareholder Services (ISS), Moody’s, S&P, Fitch Glass, Lewis & Co, Egan-Jones Proxy EEI Services, etc.

ESG Data Providers Interest Groups Sustainalytics, MSCI, Bloomberg, Ceres, SASB, etc. RobecoSAM, etc.

40 VII. Security How Industry & Government Work Together to Protect Critical Infrastructure

Purpose The ESCC is the principal liaison between the electric sector and the federal government for coordinating efforts to prepare for, and respond to, national-level disasters or threats to critical infrastructure.

42 42 Cross-Sector Coordination

• Interdependences across lifeline sectors (Communications, Downstream Natural Gas, Financial Services, Transportation, & Water) • Focus on communications sector • Development of the Strategic Infrastructure Coordination Council (SICC)

43 Cyber Mutual Assistance

• A New Approach – Not just reactive • CMA Coordinator – Senior level expert • Open to all electric generation, transmission, distribution, and downstream natural gas entities • Currently, 117 members • Participants reimbursed for costs incurred while providing emergency cyber assistance • Voluntary program – NDA required

44 Recap

I. Financial Results II. Grid Mod III. Tax Reform IV. Energy Supply V. FERC VI. ESG VII. Security (Cyber & Physical)

45 Richard McMahon Jr. Vice President, Energy Supply and Finance [email protected]