SCOTTMADDEN, INC. | 4 EXECUTIVE SUMMARY As Yogi Berra Might Say… Yogi Berra once said, “You’ve got to be careful if you don’t know where you’re going, ’cause you might not get there!” That phrase characterizes the uncharted territory in which the energy utility industry finds itself today, the challenge of making strategic decisions, and the importance of setting a direction. Continued low natural gas prices and increasing interest in renewable energy resources are affecting viability of non-greenhouse gas non-emitting nuclear plants as well as other generation resources. The EPA’s proposed Clean Power Plan remains in litigation, with states divided on whether to plan for implementation, or what that might look like. And utilities are seeking earnings growth in the face of continued slow to flat energy consumption growth. These trends call for some orientation on the part of industry decision makers: a road map, sign, and markers, and a sense of direction. Some Highlights of this ScottMadden Energy Industry Update Evolving supply and demand patterns • Declining energy consumption growth continues to be an electric industry phenomenon, even as the world slowly grows out of the Great Recession. But drivers of this trend are not as simple as the conventional wisdom. Instead, they are more multi-dimensional and nuanced; one must take a look at things like geography and customer mix along with drivers of energy intensity • On the supply side, increasing levels of renewables are strengthening the projected “duck curve” effect sooner than expected, with implications for the grid and other power supply resources. However, despite what many believe, the duck curve (as currently observed) is not caused by rooftop solar. In fact, an understanding of the real cause suggests “ducks” could be migrating from California to other states sooner than expected Evolving regulatory constructs • As distributed resources proliferate, and natural gas prices threaten some installed generation, adjustments to market constructs are creating a hybrid system—one that is neither fish nor fowl—with ramifications for energy investment and conflicting directives between state and federal regulators • New York’s Public Service Commission has issued its Track 2 Order in its Reforming the Energy Vision docket, ushering in a series of utility filings that potentially rethink incentives, performance, and rate design, seeking to encourage non-wires alternatives while keeping electricity affordable—a potentially tall order • Meanwhile, Mexico continues to restructure its energy industries, seeking to grow investment, lower rates, and expand energy access, while employing some mechanisms familiar to the United States and Canada (such as independent system operators) and diminishing the traditional roles of state-sponsored energy champions Adapting utility strategies • Utility executives are looking at different strategies—organic and other—to grow earnings in light of flagging growth in volumetric sales. Some of these strategies are “déjà vu all over again” approaches like energy services and rate base investment • Mergers and acquisitions are one method of growth, and a number of large transactions have been recently announced. But even where the acquirers are similar (e.g., large integrated utilities) as are their M&A partners (e.g., large gas companies), rationales and strategies differ