Alaska Power Association: Accounting & Finance Conference

Alaska Power Association: Accounting & Finance Conference

Overview US economic update Interest rate update / outlook Oil markets supply / demand Transmission discussion Infrastructure as a vital part of the rural economy Confidential and Proprietary 2

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U.S. Economy Key Indicators Moderate growth (3.9 percent in 2Q15) Improving jobs market (5.1 percent unemployment as of Sept 2015) Inflation under control (.20% through August TTM) Continued appreciation of home values in most markets Corporate profits holding steady Confidential and Proprietary 5

Historical Ten Year Treasury Yields 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Sep-05 Sep-15 Sep-25 Sep-35 Sep-45 Sep-55 Sep-65 Sep-75 Sep-85 Sep-95 Sep-05 Sep-15 Source: Federal Reserve 10Y Treasury Confidential and Proprietary 6

Fed s Focus 12.0 Unemployment Rate 10.0 Percent 8.0 6.0 4.0 2.0 0.0 Aug-75 Aug-80 Aug-85 Aug-90 Aug-95 Aug-00 Aug-05 Aug-10 Aug-1 12.00 11.00 10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 CORE PCE Deflator (YoY) 0.00 Jul-75 Jul-80 Jul-85 Jul-90 Jul-95 Jul-00 Jul-05 Jul-10 Jul-15 Source: Bureau of Labor Statistics, Bureau of Economic Analysis Confidential and Proprietary 7

Fed Balance Sheet 5,000,000 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 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 Source: Federal Reserve Confidential and Proprietary 8 Fed Balance Sheet Bank Reserves

Will the Fed Move? Source: Bloomberg Confidential and Proprietary 9

World Stock Markets 22,000 5,500 20,000 5,000 (Dow Jones & Nikkei) 18,000 16,000 14,000 4,500 4,000 3,500 3,000 Shanghai and Euro Stoxx 12,000 2,500 10,000 2,000 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 Source: Bloomberg Dow Jones Nikkei EURO STOXX 50 Shanghai Stock Exchange Confidential and Proprietary 10

Crude Oil: Supply Driven P rice U ncertainty

Main Themes Driving Uncertainty in the Market 1) Global Supply and Demand Dynamics 2) Shifting OPEC Policy 3) Decoupling of U.S Rig Counts and Energy Production 4) Geopolitics Confidential and Proprietary 12

Source: International Energy Agency (IEA) Supply Growth Among Top Global Producers 2010-2015 Percent Growth Relative to 2010 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2010 Q3 2011 Q1 2011 Q3 2012 Q1 2012 Q3 2013 Q1 2013 Q3 2014 Q1 2014 Q3 2015 Q1 2015 Q3 Confidential and Proprietary 13 North America OPEC Former Soviert Union

Global Demand Growth 2005-2014 Percent Growth 2005-2014 60 50 40 30 20 10 0-10 -20 China Middle East Africa Other Asia Latin America Confidential and Proprietary 14 FSU Pacific Europe Americas Europe

Chinese Oil Consumption versus Industrial Output Year-over-Year Growth 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 Oil Consumption Chinese Industrial Production Confidential and Proprietary 15

Decoupling of Rig Counts and Energy Production Number of U.S. Rigs 2200 2000 1800 1600 1400 1200 1000 800 600 Barrels per Rig per Day 450 400 350 300 250 200 150 100 50 Rig Count (Left Axis) Confidential and Proprietary 16 Rig Productivity (Right Axis)

Overall Bearish Signs for Crude Prices Continued production growth among U.S. shale producers U.S. refinery maintenance through the fall could reduce demand by 1.3 million barrels per day U.S. oil inventories remain way above average OPEC and Russian production continues to rise Iran could supply 1 million barrels per day within 5 months of sanctions being lifted Global demand, particularly in China is likely to remain sluggish Confidential and Proprietary 17

Transmission Financing Update:

Transmission Investment Fundamentals Strong repayment sources Regulated, predictable cash flows Acceptable regulated debt structure; holdco debt may be added Strong collateral value due to high market valuation multiples Low construction completion risk Regulated capital structure ensures opco will not over-leverage Minimal, but recoverable, on-going maintenance expenses Supportive regulatory environment during and post construction. FERC permits: Forward test year Theoretical capital structure during construction CWIP revenues debt service supportable during construction ROE calculated on asset base, not volume revenue / earnings certainty (Theoretical) recovery on abandonment (but no data due to project completion) New entrants Strong sponsors Various assurances of committed equity capital Experienced in investing, developing, executing, and operating transmission Confidential and Proprietary 19

Transmission Investment Types and Stage The chart below is focused on Project and Corporate financings. Growing structures include REITs and Yield Cos Chart excludes qualification criteria to bid on projects MOST RISK Construction Strage Completion Stage Project 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 Confidential and Proprietary 20 Bank financing available at each stage and project type; debt capital markets access becomes easier as credit profile improves LEAST RISK

Future of Transmission Financing Opportunities More Investment Due to? Migrating demographics Mobile generation Retiring coal plants; new gas & renewables Grid complexity driven by DG Grid reliability Cyber security Existing system: Track record, consumer confidence / benefits, public policy Threats Disruptive Technology Centralization to decentralization due to renewables, storage, and DG Grid complexity due to DG Substitutes: electrons vs. BTUs (gas pipeline growth vs. electric transmission growth) Higher financing cost - financial regulation Interveners impact on ROEs / Cap Structure Partnerships Confidential and Proprietary 21

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CoBank Presentation: Alaska Accounting & Finance Conference Brock Taylor CoBank