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MERGERS & ACQUISITIONS: PICKING UP THE PACE SCOTTMADDEN, INC. | 5 Low interest rates, rising importance of natural gas, and a search for growth sends energy companies shopping. Convergence Is the Word; Rate Base Investment Is the Melody We continue to believe that additional convergence mergers will be announced in 2016. In addition to pursuing local gas distribution utilities, we would not be surprised if an electric company (or two) were to pursue a natural gas pipeline company. – Michael Worms, BMO Capital Markets NOTES: *Figures represent total transaction values (including assumed debt) based on year announced. ROE means return on equity. $60,000 $55,313 $53,779 $ Millions $50,000 $40,000 $38,183 Southwest $30,000 Southeast $18,254 $20,000 $0 Undesignated/ Multi-Region West $32,559 Northeast $7,699 $10,000 Midwest Mid Atlantic 2010 2011 2012 2013 2014 2015 Source: SNL Financial Historical Deal Count by Target Region (2010-2015) 14 12 Number of Deals • Energy companies face organic growth headwinds, including low usage growth, falling allowable ROEs, and compressed wholesale margins. In this environment, acquisition continues to be an appealing growth strategy (see charts at right) • Major acquisitions have been announced since Spring 2015, with seven significant transactions (totaling nearly $50 billion) involving natural gas distribution properties: ›› Emera/TECO Energy Southern Co./ ›› Dominion/Questar AGL Resources ›› Fortis/ITC Holdings ›› Duke Energy/ ›› Algonquin/Empire Piedmont District Electric ›› Black Hills/SourceGas • For Southern and Duke, natural gas infrastructure platforms (given the shift from coal to gas) and territory overlap were attractive features of their prospective partners • Along with geographic and/or business mix diversification, growth through infrastructure investment was cited as a main driver for these combinations ›› Regulated, rate base growth opportunities ›› Incremental capex through infrastructure replacement programs, pipeline expansions, and investment in midstream and storage Value of Announced Gas Utility and Power Corporate Acquisitions by Region* (in $ Millions) (2010-2015) 12 Undesignated/ Multi-Region 11 10 9 9 8 West 7 6 Southeast 5 Northeast 4 Midwest 2 0 Southwest Mid Atlantic 2010 2011 2012 2013 2014 2015 Source: SNL Financial