Alaska Power Association: Accounting & Finance Conference

U S econom ic update

In te rest ra te update / ou tlook

O il m arke ts – supp ly / dem and

Transm iss ion d iscuss ion

In fras truc ture as a v ita l part o f the ru ra l econom y

Overview

C onfidentia l and P roprie ta ry 2

C onfidentia l and P roprie ta ry 3

C onfidentia l and P roprie ta ry 4

M odera te g row th (3 .9 percen t in 2Q 15)

Im prov ing jobs m arke t (5 .1 percen t unem ploym ent as o f S ep t 2015)

In fla tion under con tro l (.20% th rough A ugust TTM )

C ontinued apprec ia tion o f hom e va lues in m ost m arke ts

C orpora te p ro fits ho ld ing s teady

U.S. Economy – Key Indicators

C onfidentia l and P roprie ta ry 5

Historical Ten Year Treasury Yields

0.00%

2.00%

4.00%

6.00%

8.00%

10 .00%

12 .00%

14 .00%

16 .00%

18 .00%

S ep-05 S ep-15 S ep-25 S ep-35 S ep-45 S ep-55 S ep-65 S ep-75 S ep-85 S ep-95 S ep-05 S ep-15

10Y T reasu ryS ource : Federa l R eserve

C on fidentia l and P roprie ta ry 6

0.0

2.0

4 .0

6 .0

8 .0

10 .0

12 .0

A ug-75 A ug-80 A ug-85 A ug-90 A ug-95 A ug-00 A ug-05 A ug-10 A ug-1

Perc

ent

Unemployment Rate

Fed’s Focus

0.001.002.003.004.005.006.007.008.009.00

10.0011.0012.00

Ju l-75 Ju l-80 Ju l-85 Ju l-90 Ju l-95 Ju l-00 Ju l-05 Ju l-10 Ju l-15

CORE PCE Deflator (YoY)

S ource : B ureau o f Labor S ta tis tics , B ureau o f E conom ic A na lys is C on fidentia l and P roprie ta ry 7

Fed Balance Sheet

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15

Fed Balance Sheet Bank ReservesS ource : Federa l R eserve

C on fidentia l and P roprie ta ry 8

Will the Fed Move?

S ource : B loom berg

C on fidentia l and P roprie ta ry 9

World Stock Markets

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

10,000

12,000

14,000

16,000

18,000

20,000

22,000

Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15

Shanghai and Euro Stoxx (D

ow Jo

nes &

Nik

kei)

Dow Jones Nikkei EURO STOXX 50 Shanghai Stock ExchangeS ource : B loom berg

C on fidentia l and P roprie ta ry 10

S upp ly D riven P rice U ncerta in ty

Crude Oil:

Main Themes Driving Uncertainty in the Market

1) G loba l S upp ly and D em and D ynam ics

2 ) S h ifting O P E C P o licy

3 ) D ecoup ling o f U .S R ig C ounts and E nergy P roduction

4 ) G eopo litics

C onfidentia l and P roprie ta ry 12

Supply Growth Among Top Global Producers 2010-2015

S ource : In te rna tiona l E nergy A gency (IE A )

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2010 Q 3 2011 Q 1 2011 Q 3 2012 Q 1 2012 Q 3 2013 Q 1 2013 Q 3 2014 Q 1 2014 Q 3 2015 Q 1 2015 Q 3

N orth A m erica O P EC Form er S ovie rt U n ion

P ercent G row th R e la tive to 2010

C on fidentia l and P roprie ta ry 13

Global Demand Growth 2005-2014

-20

-10

0

10

20

30

40

50

60

C h ina M idd le E ast A frica O ther A s ia LatinA m erica

FS U P acific E urope A m ericas E urope

P ercen t G row th 2005-2014

C on fidentia l and P roprie ta ry 14

Chinese Oil Consumption versus Industrial Output

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2010Q 4

2011Q 1

2011Q 2

2011Q 3

2011Q 4

2012Q 1

2012Q 2

2012Q 3

2012Q 4

2013Q 1

2013Q 2

2013Q 3

2013Q 4

2014Q 1

2014Q 2

2014Q 3

2014Q 4

2015Q 1

2015Q 2

2015Q 3

O il C onsum ption C h inese Industria l P roduction

Y ear-over-Y ear G row th

C on fidentia l and P roprie ta ry 15

Decoupling of Rig Counts and Energy Production

50

100

150

200

250

300

350

400

450

600

800

1000

1200

1400

1600

1800

2000

2200

R ig C ount (Le ft A xis) R ig P roductiv ity (R igh t A x is)

N um ber o f U .S . R igs B arre ls per R ig per D ay

C on fidentia l and P roprie ta ry 16

• C ontinued production grow th am ong U .S . sha le producers

• U .S . re finery m ain tenance th rough the fa ll cou ld reduce dem and by 1 .3 m illion barre ls per day

• U .S . o il inventories rem ain w ay above average

• O P E C and R ussian production continues to rise

• Iran cou ld supp ly 1 m illion barre ls per day w ith in 5 m onths o f sanctions be ing lifted

• G loba l dem and, particu la rly in C h ina is like ly to rem ain s lugg ish

Overall Bearish Signs for Crude Prices

C onfidentia l and P roprie ta ry 17

Transmission Financing Update:

S trong repaym ent sources R egu la ted , p red ic tab le cash flow s A ccep tab le regu la ted deb t s truc tu re ; ho ldco deb t m ay be added S trong co lla te ra l va lue due to h igh m arke t va lua tion m u ltip les Low construction com p le tion risk

R egu la ted cap ita l s tructu re ensures opco w ill no t over-leverage

M in im a l, bu t recoverab le , on-go ing m a in tenance expenses

S upportive regu la to ry env ironm ent during and post construction . FE R C perm its : Forw ard tes t year Theore tica l cap ita l s truc tu re du ring construc tion C W IP revenues – deb t se rv ice supportab le du ring construc tion R O E ca lcu la ted on asse t base , no t vo lum e – revenue / ea rn ings ce rta in ty (Theore tica l) recovery on abandonm ent (bu t no da ta due to p ro jec t com p le tion )

N ew entran ts

S trong sponsors V arious assurances o f com m itted equ ity cap ita l E xperienced in investing , deve lop ing , execu ting , and opera ting transm iss ion

Transmission Investment – Fundamentals

C onfidentia l and P roprie ta ry 19

The chart be low is focused on P ro ject and C orpora te financings. G row ing s tructu res inc lude R E ITs and Y ie ld C os

C hart exc ludes qua lifica tion crite ria to b id on p ro jects

Transmission Investment – Types and Stage

B ank financing ava ilab le a t each s tage and pro ject type; debt cap ita l m arkets access becom es easier as cred it p ro file

im proves

LEAST RISK

Construction Strage Completion StageProject Financing Type Ex: Construction of a single line - wholly owned or JV Ex: Single line in service - wholly owned or JV(Opco only) Financing - Bank Construction Revolver - Bank Working Capital Revolver (smaller size)

- Debt Capital Markets (once in service)Terms - Parent / equity support during construction - Lighter covenants, particularly under Indenture

- Fairly robust covenants including Leverage ratio

Corporate Finance (Opco or Holdco) Type

Ex. Construction of multiple projects in early stages of overall completion

Ex. At or near completion of a project portfolio with the majority of projects reach completion

Financing - Bank Construction Revolver - Bank Revolver- Some Debt Capital Markets once sales generated - Debt Capital Markets (once majority in service)

Terms - Parent / equity support during construction - Parent / equity support depends on capital sources- Robust covenants, but less than single project - Covenants mirror corporate debt transactions

- Can add leverage at Holdco entity

MOST RISK

C onfidentia l and P roprie ta ry 20

M igra ting dem ograph ics

M obile genera tion R etiring coa l p lan ts ; new gas &

renew ab les

G rid com plex ity d riven by D G

G rid re liab ility

C yber security

E xis ting sys tem : T rack record , consum er con fidence / benefits , pub lic po licy

P artnersh ips

D isrup tive Techno logy C entra liza tion to decentra liza tion due to

renew ab les, s to rage, and D G

G rid com plex ity due to D G

S ubstitu tes : e lec trons vs . B TU s (gas p ipe line g row th vs . e lec tric transm iss ion g row th)

H igher financ ing cost - financ ia l regu la tion

In te rveners im pact on R O E s / C ap S truc tu re

Future of Transmission Financing

Opportunities – More Investment Due to? Threats

C onfidentia l and P roprie ta ry 21

C onfidentia l and P roprie ta ry 22

CoBank Presentation: Alaska Accounting & Finance Conference

B rock Tay lo r C oB ank