EEI – ScottMadden Strategic Issues Survey

1. EEI – ScottMadden Strategic Issues Survey EEI Strategy Roundtable Meeting

2. Contents • Introduction • Strategic Issues • Top Concerns of Leading Industry Strategists • Survey Results on Key Issues • Bridging the Gap • Financial Crisis • Conclusions

3. Introduction The Roundtable • ScottMadden facilitated a strategic issues session on February 4, 2009 at the Edison Electric Institute’s 2009 Strategic Issues Conference held in Savannah, GA • Leading utility strategists identified and ranked the major strategic issues facing their companies • The top issues were categorized and examined more closely • Leading industry strategists posed specific questions about these issues • Conference attendees answered the questions using hand-held audience response units The Participants • Many attendees were Directors or VPs of strategic planning and other key functions at leading U.S. utilities. Other attendees included leading industry suppliers and consultants • There were 36 respondents in the survey • 57% were U.S. electric companies • 43% were vendors, suppliers, or consultants • Not all participants responded to all questions; some questions were posed to utilities only

4. Strategic Issues: Top Concerns • The strategists participating in the conference identified issues in two categories • Current issues: those impacting the industry today • Horizon issues: those that are looming and will have significant impacts in the future • Strategists then ranked the issues within each category as to relative importance • For “Bridging the Gap” and “Financial Crisis,” the strategists then posed questions of each other which were answered using the audience response units (please see pages that follow) 16.29 13.06 12.50 10.18 3.91 1.06 14.91 11.81 10.03 8.21 6.59 3.82

5. Strategic Issues: Bridging the Gap “Bridging the Gap” encompasses both the gap between public policy objectives, such as renewables, carbon, etc., and what can physically be achieved by the industry, and the gap between the rates required to fund these policies and current rates. Strategists’ questions and answers follow • Do you have the resources (labor, $, etc.) to implement the coming policy changes? • Only 19% of electric utility respondents feel they have the resources required • Responses from non-electric participants were evenly split • What are your highest capital spend priorities? (up to three responses were allowed) • New T&D and renewables/carbon reduction were highest on the list; traditional generation was last New T&D 87% Renewables/carbon reduction 60% Refitting/refurbishing generation 33% Refitting/refurbishing T&D 33% Other (non-supply, non T&D), e.g., IT 27% New generation traditional 20%

6. Strategic Issues: Bridging the Gap (Cont’d) • What are the best ways to bridge gaps with rates? • 33% of respondents felt that traditional ROE (cost-based rate of return with a target ROE) was the best way to bridge gaps with rates • Over half of the group selected either riders or performance based rates as a means for recovery • No one selected deferral accounts or felt that recovery could not be obtained Traditional ROE 33% Riders 27% Performance based rates 27% Decoupling 13% Deferral accounts 0% Nothing, we can’t get recovery 0% • What is the ideal rate case term? • The responses strongly favored multi-year over one-year rate case terms

7. Strategic Issues: Bridging the Gap (Cont’d) • How does your company view carbon legislation? • Respondents had disparate views on carbon legislation reflecting the uncertainty in the industry • Respondents were evenly split between those who saw it as a manageable risk and those who saw it potentially having serious adverse consequences • About a quarter saw carbon as an opportunity Manageable risk 35% Risk that will seriously impact your market cap 35% Opportunity 24% We can worry about that tomorrow 6% • Is your utility company planning on accessing stimulus money for EE or Smart Grid? • The vast majority of responses said that they did believe they would benefit from stimulus money

8. Strategic Issues: Bridging the Gap (Cont’d) • How do you handle the most extreme voices in the environmental/conservation movement? • Responses suggest that the industry is seeking collaboration with the most extreme voices Engage them in the process 62% 19% Listen to them Do not listen to them 13% Significantly change your plans to accommodate 6% Ignore 0% • Are you finding it easier or more difficult to explain to the public what you are doing and why? • Four out of five respondents are finding it more or much more difficult to explain what they are doing to the public

9. Strategic Issues: Financial Crisis The financial crisis issue includes opinions of the severity and duration of the current economic downturn as well as expected impacts • How bad is the economy going to get? • The majority of respondents expect the economy to be as bad as the recession/malaise in the late 70s/early 80s • 15% expect it to be as bad as the depression • When will we emerge from the recession? • No one expects the economy to emerge from recession this year • The majority said it would be 2010 or 2011 before we see renewed economic growth • 11% said that it would be even longer than that

10. Strategic Issues: Financial Crisis (Cont’d) • Is your company having trouble accessing capital? • Despite what is generally considered to be a tight credit market, the responses suggest that capital is still accessible • However, there was some discussion about the cost associated with obtaining capital • Half had no trouble with access, while 41% reported increased difficulty • No one reported it was very difficult • Do you see any utilities declaring bankruptcy in the next five years due to the financial crisis? • 27% of respondents foresee utilities declaring bankruptcy in the next five years

11. Strategic Issues: Financial Crisis (Cont’d) • Will the stimulus bill provide significant opportunities for utilities in the renewables and energy efficiency areas to make money? • 64% of respondents don’t believe that the stimulus bill will improve the profitability of renewables and energy efficiency • How much have you reduced your capital budget in 2009? • 35% have not cut capital spending • 65% of respondents have reduced their capital budgets in 2009 • The majority (41%) have reduced by 15% or less • 24% have made more substantial cuts

12. Strategic Issues: Financial Crisis (Cont’d) • What explains the reason for the announced Cap Ex reductions in 2009 (and beyond)? • Responses pointed to interest rates as the reason for Cap Ex reductions in 2009. While the risk-free rate is very low, risk premiums are extremely high • No one cited lack of access to credit markets as a reason Interest rates too high 56% Terms unacceptable 22% Concern over rate recovery 22% Can’t access credit markets 0% • Is your company cutting back on routine maintenance and sustenance capital? • Half of the respondents have not cut back on routine maintenance • About one in six have made cuts greater than 10% and about one in ten have reduced maintenance by 20%-30%

13. Strategic Issues: Financial Crisis (Cont’d) • In light of the credit crisis and need to reduce capital spending, do you see room for long-term strategic initiatives? • Responses were split on the feasibility of strategic initiatives given the current financial crisis • Nearly 60% of the responses said they were still looking to the long term • About 40% however, said the crisis had caused them to focus on the near term, at the expense of strategic initiatives

14. Conclusions • The industry is being reshaped by the changes in public policy and the financial crisis • Leading strategists are: • Skeptical that the gaps between public policy and the physical and financial realities of the business can easily be bridged • Concerned that the recession will be quite long and, in severity, reminiscent of the 70s/80s • However, their companies are healthy, have access to capital, and are generally adjusting strategies, budgets, and operations to the new realities, not making wholesale changes

15. Contact Information Stuart M. Pearman Partner and Energy Practice Area Leader ScottMadden, Inc. 2626 Glenwood Avenue Suite 480 Raleigh, NC 27608 Phone 919-781-4191 spearman@scottmadden.com scottmadden.com