1. DRIVERS AND ISSUES NATURAL GAS EXPANSION NASUCA, June 8, 2015 Rebecca Bachelder President, Blueflame Consulting, LLC

2. NATURAL GAS EXPANSION DISCUSSION Fuel switching to natural gas is increasing due to price and environmental benefits There are market pressures to expand access to natural gas for consumers where gas is not currently available due to price differentials between gas and alternate fuels Legislative and/or Regulatory Policy needs to define who will pay Ratemaking modifications need to be made to accommodate policy 2

3. NATURAL GAS RESERVES HAVE BECOME PLENTIFUL 1.Marcellus (PA, WV) 2.Barnett (TX) 3.Fayetteville (AR) 4.San Juan Basin (CO, NM) 5.Haynesville (LA) As of 2013: 354 Tcf proved reserves 3 Source: EIA

4. NATURAL GAS HOLDS A DISTINCT PRICE ADVANTAGE OVER ALTERNATE FUELS 4 Source: EIA

5. NATURAL GAS ACCESS TO RESIDENTIAL CONSUMERS Total Homes Primary Homes w/ Natural Gas % Homes w/ Natural Gas Homes w/ Fuel Oil % Homes w/ Fuel Oil Homes heating w/ Electricity %Homes heating w/ Electricity Homes Heating w/ Propane Homes w/ Propane Total U.S. 1 (millions) 113.669.260.9%7.36.4%58.051.1%8.07.0% Total Northeast 20.813.866.3%6.028.8%6.330.3%1.15.3% CT, ME, NH, RI, VT 3.01.136.7%1.756.7%0.930.0%0.26.7% PA 4.92.346.9%1.020.4%2.653.1%0.612.2% Total Midwest 25.919.474.9%0.51.9%10.841.7%2.59.7% MO 2.31.356.5% N/A1.460.9%0.3N/A Total South 42.117.742.0%0.61.4%29.770.5%3.37.8% FL 7.01.014.3% N/A5.882.9%0.22.9% NC, SC 5.41.833.3% N/A4.175.9%0.713.0% AL, KY, MS, TN 7.02.840.0% N/A5.071.4%1.014.3% DC, DE, MD, VA, WV 6.42.945.3%0.57.8%4.671.9%0.69.4% AR, LA, OK, GA, TX 16.29.156.2% N/A10.263.0%0.63.7% Total West 24.818.373.8%0.20.8%11.144.8%1.14.4% AZ 2.31.252.2% N/A1.460.9% N/A AK, HI, OR, WA 4.71.940.4%0.12.1%2.961.7%0.12.1% Total Less Than National Avg 59.225.442.9% 3.3 5.6% 38.9 65.7% 4.3 7.3% 1Total U.S. includes all primary occupied housing units in the 50 States and the District of Columbia. Vacant housing units, seasonal units, second homes, military housing, and group quarters are excluded. Some homes reported more than one fuel source for heating. 5 Only 61 Percent of homes in the U.S. have access to Natural Gas Source: EIA

6. BALANCING COSTS AND BENEFITS What are the costs and benefits of line extensions from perspectives of: Utility Existing Customers New Customers Local Economy Environment Who will be funding the expansion: Shareholders Existing Customers New Customers State or Local Governments (Tax Payers) 6

7. TRADITIONAL APPROACH TO NEW CUSTOMER ADDITIONS New Customers pay entire cost of connection - Or - Use an economic analysis to determine new customer contribution to construction costs Utilize IRR or NPV analysis Assume number of years to allow for return Timing and level of revenues Costs New customers that fail the hurdle rate test must pay a Contribution in Aid of Construction, CIAC 7

8. COSTS TO INCLUDE TO EVALUATE NEW CUSTOMERS Capital costs of the main and service Labor & Materials Construction Overheads Carrying charges Incremental or Long Run Marginal Costs Increased Property Taxes Billing and Payment Costs Incremental Operations & Maintenance Expense Incremental Administrative and General Expense Working Capital Depreciation Taxes 8

9. REVENUES HAVE BECOME MORE COMPLICATED 9 Unbundled Base Rates LDC Distribution Costs Return on Rate Base Rate Trackers Collect Costs Dollar for Dollar Cast Iron & Bare Steel Pipe Replacement Programs Post Retirement Benefits Bad Debt Cost Recovery On-System Production & Storage Gas Costs Pipeline Demand Charges Delivered Gas

10. WHAT REVENUES SHOULD BE INCLUDED IN THE NEW CUSTOMER EVALUATION ? Gross Margin Revenues Base Revenues Tracker Revenues for costs that the utility would normally include in Cost of Service Pension and PBOPS GSEP – System Replacement Costs Bad Debt On-System Production and Storage facilities Other Distribution Service related costs that would normally be included in Cost of Service 10

11. BARRIERS TO CUSTOMER CONVERSION 11 Equipment Cost Installation Cost Line Extension Policies

12. MECHANISMS THAT COULD BE USED TO FACILITATE CUSTOMER ADDITIONS Economic Analysis Include Tracker revenues that provide contributions to costs paid by existing customers Expand the period over which the upfront capital costs are collected in revenues Allow LDC to group new customer projects together Allow LDC to estimate the number of conversions a project will yield over a defined number of years 12

13. NON-TRADITIONAL MECHANISMS On-Bill Financing of Capital Additions Through Rate Mechanism 3 rd Party Utilize opportunistic funds to finance uneconomic expansion Non-Firm Margins Pipeline Refunds Existing customers contribute to new customer additions New rate mechanism Cost recovery rolled into base rates 13

14. CAUTIONS Alternate Fuel price spreads may not hold vs. alternate fuel Larger LDC rate increases may make gas prices less competitive. Increased capital replacement - GSEP Increased labor costs due to more rapid replacement and expansion activity for all LDCs and a diminishing labor pool. LDC’s ability to estimate Capital Costs accurately LDC’s ability to forecast timing of new additions Additional regulatory oversight required More reporting More review required by regulators 14

15. QUESTIONS? Thank you! Rebecca Bachelder, President Blueflame Consulting, LLC rbachelder@bflame.com Office:781-662-8584 15 Rebecca Bachelder, President Blueflame Consulting, LLC rbachelder@bflame.com Office:781-662-8584