Sussex Economic Advisors, LLC (Sussex) and affiliates have relied upon certain public and other sources of information consistent with standard consulting practices. Sussex makes no warranties or guarantees regarding the accuracy of any estimates, projections or analyses contained herein. Those reviewing the information contained herein waive any claim against Sussex, its partners and employees. Sussex shall not be liable to any party reviewing this information.

• • Northeast Gas Association2016 Sales & Marketing Conference
  • The Energy Landscape: What a Difference a Year Makes! March 24, 2016

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Topics

• Energy Landscape Tim Lyons What has changed since last year?

Oil Heat Consumers Bill Wietecha How opinions changed in past year Implications Initiatives Tim Lyons

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• • What a Difference a Year Makes!

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Falling oil prices were a recent phenomenon $100 per barrel in Jul 2014 $45 per barrel in Jan 2015 Most consumers believed that low oil prices would not continue 65% believed the price of oil will go up in the future EIA was projecting prices would go up (but not to levels seen in 2014) $75 per barrel in 2016 Northeast gas utilities continued to hold a strong price advantage over heating oil

• • Sales and Marketing Conference: THEN
  • Source: EIA
  • Source: Bloomberg; Sussex analysis.

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Continued decline in oil prices Below $30 per barrel Morgan Stanley: In an oversupplied market, there is no intrinsic value for crude oil. $20-to-$25 oil price scenarios are possible simply due to currency (dollar appreciation) Oil companies Cost cutting, layoffs Falling U.S. rig counts EIAs short-term outlook 2016 $34 per barrel 2017 $40 per barrel

• • Sales and Marketing Conference: NOW
  • Source: Bloomberg; Sussex analysis.
  • Source: Bloomberg; Sussex analysis.

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Continued Decline in Retail Oil Prices

• • Source: U.S. Energy Information Administration (EIA), Sussex Analysis

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Impact on Other Industries

• • Plunging oil prices are set to hit the electric car industry hard, but Tesla vehicles won't be the worst affected. Tesla CEO Elon Musk

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• • Declining Oil Prices
  • Oil Industry Response

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Lower fuel bills 94% as primary or secondary reason 38% better long-term price expectation Improved energy efficiency 14% as primary reason 44% as secondary reason Environmentally friendly/ cleaner burning fuel 25% as secondary reason Similar response for reduce dependence on foreign oil

• • Oil Industry Survey: Whats Important to Oil Consumers?1
  • 1. Goldberg, Rich, Inside the mind of todays home heating oil customer, Indoor Comfort Marketing, September 2015. Source: http://www.indoorcomfortmarketing.com/inside-the-mind-of-todays-home-heating-oil-customer.html
  • Importance of Bioheat For those who are thinking of converting, this is a very big deal.

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Survey (Contd): Whats Driving Them To Convert?1

• • 36% likely to convert 7% extremely likely 29% somewhat likely New homeowners Almost 20% say they are extremely likely to convert Price outlook driving interest 41% think their fuel costs will be higher than other options in five years Only 6% think oil will be less than other fuels Recent price drop not fully appreciated it seems like consumers will need another year or two of lower oil prices to really rethink their calculations. If that happens, the playing field will certainly shift Not strong positive about oil Of those that want to stay with oil, only 18% cite that they are happy with oil

• 1. Goldberg, Rich, Inside the mind of todays home heating oil customer, Indoor Comfort Marketing, September 2015. Source: http://www.indoorcomfortmarketing.com/inside-the-mind-of-todays-home-heating-oil-customer.html

 

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Upfront conversion costs 40% believe it will cost less than $5,000 to convert Long payback 19% think its less than two years 46% think its two to five years, with little tolerance for a longer period Environmental concerns not a major factor Only 1% identify environmental issues with natural gas or electricity as a reason to stay with oil Nor are safety concerns Only 3% say they are staying with oil principally because of safety concerns with other fuels

• • Survey (Contd): Whats Holding Them Back?1
  • Bioheat is a potential game changer for those thinking about converting. ------------------------------------------------- However, less than 12% of oil customers know what Bioheat is.
  • 1. Goldberg, Rich, Inside the mind of todays home heating oil customer, Indoor Comfort Marketing, September 2015. Source: http://www.indoorcomfortmarketing.com/inside-the-mind-of-todays-home-heating-oil-customer.html

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Oil Industry Messaging Price

• • Heating oil is not more expensive than natural gas Statistics show that, depending on where you live, heating oil was less expensive than natural gas throughout most of the last 22 years Heating oil is more efficient than gas On average, heating oil burns about 16% more efficiently than gas Conversions are an expensive gamble Consumer Energy Council of America (CECA) recently stated, it's financially unwise for consumers to convert from oil to gas heat" Customer anecdotes Some dealers have heard from customers who regret switching to natural gas Heating oil systems have a longer life The average life expectancy of an oil heat appliance is 30 or more years if they are properly maintained. The average life expectancy of a natural gas furnace is only 11-14 years

• http://www.petro.com/why-petro/resources/articles/the-facts-about-oil-vs-gas-heating

 

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Is Cleaner than ever Oil heat is 95% cleaner than it was in the 1970s Is Green Heating oil burns so cleanly that its emissions aren't regulated by the Federal Clean Air Act Burns as Cleanly as Natural Gas National Oilheat Research Alliance study concluded that Bioheat fuel blends using ultra- low-sulfur heating oil can match or exceed the performance of natural gas in terms of reducing GHG emissions Is Renewable Oil heat is moving toward new, environmentally friendly, plant-based biofuel blends

• • Oil Industry Messaging (Contd) Environmentally Friendly
  • http://mybioheat.com/what-bioheat-is/

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Oil Industry Messaging (Contd) From the Oil Dealers

• • Price drop has been welcomed Having heating oil remain competitive is essential to the survival of the industry. (Falcon Oil in Blakely, PA) Prices are now low and have stabilized This is the lowest oil prices have been in 10 years and we expect them to go even lower Oil prices have stabilized and will stay here for a long time. If anything, they will go down even further We have programs where you can get a fixed low price and if it goes lower, you get the advantage Environmental Oil is as clean burning as natural gas and gas prices are going up. All the new technology is in oil and the government supports it Other It is a really exciting time for oil heating customers.Prices are low and the oil heating industry is transitioning to a superior fuel product. By adding biodiesel, a renewable, carbon-neutral fuel to low-sulfur heating oil, heating oil retailers are actually delivering a better product at a significantly lower price. What could be better?

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• • Oil Industry Response
  • Consumer Opinion

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Opinion Survey: Whats Changed Since Last Year?

• • Phone interviews in December 2015 and January 2016 with Northeast homeowners Use oil as primary heating fuel Located in or near major cities and suburbs; excluded rural locations Spoke to person that makes decisions about heating fuels Conducted by research specialists with extensive energy experience Authored by Bill Wietecha

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Current View of Oil Heat Consumers

• • Price decrease is now more apparent In the news; from their neighbors; from the dealers Of course, the warm winter has helped Less urgency to convert Less pain in staying with oil Still issues with oil Many dealers Confusing price options However, more willingness to deal with it as price is rightor at least better

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Findings: What Is Liked Best about Oil Heat?

• • Note: Multiple responses accepted.

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Findings (Contd): What Is Liked Least about Oil Heat?

• • Note: Multiple responses accepted.

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Price drop is more apparent 41% like oil for current price 55% see value for the cost More neutral responses among dislikes 29% have no real dislikes However, still issues being an oil heat customer Pricing packages are confusing Those who locked in prices months ago stand to pay more for oil

• • Key Takeaways
  • "You are taking a chance if you lock in to that price before the season comes around. You never know what you are going to get with oil. If I had my choice, I would rather go with gas or propane. Its very frustrating because you plan it, and years past its always gone up, and now it doesnt, and now you go, Is this really worth doing? I still have to call five dealers to get the best price. Everyone has a story. Oil prices are so unpredictable.

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Findings (Contd): Oil Price Today vs. Last Year?

• • Q: How has your oil price changed since last winter?

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Oil price decrease now readily apparent Warm temperatures have helped lower their bill

• • Todays Oil Prices (Contd): Key Takeaways
  • I am thrilled that this winter has been so mild. Oil prices are a lot less than the past few years. It sure helps that the price of oil is down considerably.

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Findings (Contd): Oil Price in Next 3 to 5 Years vs. Today?

• • Q: In the next 3 to 5 years, do you think the price of oil will: go up, stay the same, or go down?

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Continued concern about future oil prices

• • Future Oil Prices (Contd): Key Takeaways
  • If I could only believe that these prices will hold Oil is like this. The price is low when there is a mild winter. It will be $3 a gallon when we have a cold winter. Oil prices are so inconsistent. My dealer told me that oil is going to stay [low]. And if that is true, I will stick with oil and not switch to gas.

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Findings (Contd): What Drives Heating Fuel Decisions?

• • Q: Here are some reasons that homeowners choose a heating fuel. Please score each of these on a scale of 1 to 10, with 1 being not important to your choice of heating fuel and 10 begin extremely important to your choice of heating fuel.

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Findings (Contd): Motivations for Switching

• • Note: Multiple responses accepted.
  • Q: What would make you switch to a new heating fuel?

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Findings (Contd): Influence of This Years Price in Switch to Gas?

• • Q: How has the price change since last winter influenced your likelihood of switching to natural gas?

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Declining oil prices have reduced interest in converting to natural gas Many are in a wait-and-see mode Economics Heating system Homeowners are now looking for deals to switch vs. standard offering

• • Switching to Gas (Contd): Key Takeaways
  • I have been considering natural gas, but with oil prices what they are; they would have to offer a sweet deal on a new furnace. I was ready to make the switch to gasbut I would have been at break even because of all the efficiencies in three years. I am holding off. I was planning on switching to natural gas last winter, but with oil prices so low, I am going to wait. They brought the gas line to my street two years ago, but it is just too much to make the switch. If oil was $2.80 a gallon, its a different story, but right now, its [low]. If my furnace died, I would switch to gas. But oil prices are such that it just isnt worth spending all that money. Im in a wait and see mode.

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Findings (Contd): Consumers Take Long-Term View on Prices

• • Q: If I told you that over the past five years, the average price of natural gas has been between 25-35% less than oil, but right now it is only 15% less than oil, would that influence your decision to switch to natural gas?

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Findings (Contd): Likelihood of Switching at Various Savings

• • Percentage reflects those scoring 7 or higher. Ratings do not factor in conversion costs.
  • Q: What would you score your likelihood of switching to natural gas if the price of natural gas were [10%, 30%, 50%] less than the price of oil, with 1 being no interest and 10 begin extremely interested?

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• • Research Findings
  • Marketing Initiatives

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• • Marketing Initiatives

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Modify Contribution Policy Avista (Washington)

• • Purpose Opportunity to expand natural gas distribution system; promote economic development; address barriers to conversion Increase construction cost allowance through change in line extension method Residential heating customer: increases allowance to $3,789 from $1,920 New method: Perpetual Net Present Value (PNPV) method PNPV = New Customer Margin/Rate of Return Apply excess construction cost allowance as a rebate for customer equipment Applies only to those customers converting to natural gas from another fuel source E.g., $3,789 in allowance less $2,345 in average construction cost = $1,444 in excess allowance

• https://www.avistautilities.com/business/builder/Pages/default.aspx

 

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Connecticut Natural Gas: East Hampton expansion 11-mile, $5.7 million expansion Agreement with town includes: Convert nine schools and municipal buildings Five-year, $0.5 million tax break Pay for repaving costs Southern Connecticut Natural Gas: Deep River expansion 4-mile expansion into a new community Municipal buildings Large businesses. Yankee Gas: Wilton expansion 3.5-mile expansion Downtown business district, municipal buildings

• • Partnerships with Communities, Large Businesses CT
  • PURA Order: it is reasonable to approve the LDCs purchase of the capacity contracts, so that they can compete with a lower home heating oil price by accessing the lower cost Marcellus Shale gas. Public Utilities Regulatory Authority (PURA), Docket No. 13-06-02RE02, at 11.
  • https://www.flickr.com/photos/yankeegas/14906049836/in/photostream/

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Vermont Gas and NG Advantage partnership Developed Gas Island in Middlebury, VT Isolated network in advance of gas expansion project Serves Cabot Cheese, Middlebury College Plans to connect to renewable natural gas plant on nearby farm NG Advantage Serves International Papers mill in Ticonderoga, NY 14-20 trucks per day

• • Partnerships with Large Businesses (Contd)
  • http://www.ngadvantage.com/sites/default/files/media/white_papers/gas_island.pdf
  • http://www.ngadvantage.com/sites/default/files/media/photos/truck-being-filled2.jpg

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Target Area Build-Out (TAB) program Designed to build out distribution system incrementally into target areas Replace upfront customer contribution (CIAC) with monthly surcharge for a 10-year period Applied to all customers within the TAB area Residential heating surcharge is $95 per year, or 7% of annual bill Approved by Maine Public Utilities Commission in December 2015 First expansion into Saco Planned construction in Spring 2016

• • Deploy Creative Rate Mechanisms Unitil (Maine)
  • http://unitil.com/energy-for-residents/gas-information/gas-expansion-project-saco

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Gas Industry Messaging Savings

• • http://www.nationalfuelgas.com/forhome/PA/SaveMoney.aspx
  • http://www.nationalfuelgas.com/forhome/NaturalLivingMagazine.aspx

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Messaging (Contd) New Programs

• • https://www.columbiagaspa.com/natural-gas-service/tap-and-save
  • http://www.njng.com/my-home/convert-gas/rebate-info.asp
  • http://www.southjerseygas.com/become-a-customer/switch-natural-gas-finance-offer.html

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Messaging (Contd) Initiatives

• • http://www.libertyutilities.com/east/gas/about/news_07-06-15.html
  • https://www.eversource.com/Content/ct-c/residential/switch-to-gas/gas-expansion

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Three Takeaways

• • Find the Opportunities
  • Develop Creative Approaches
  • Reconsider Position in the Marketplace
  • New offerings New markets New business partnerships
  • Commercial vs. residential On-system vs. off-system Equipment replacement vs. conversion
  • Market segmentation Customers Offerings and value proposition Key competitors

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Tim Lyons Partner ScottMadden, Inc. (formerly Sussex Economic Advisors) 802-497-0761 802-598-1651 tlyons@www.scottmadden.com

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Timothy S. Lyons, Partner, ScottMadden, Inc. (formerly Sussex Economic Advisors, LLC) Mr. Lyons has 30 years of experience in the energy industry and has held a number of senior positions at several natural gas utilities and energy consulting firms. His utility experience includes managing marketing and sales, rates and regulatory affairs, and customer service departments. Mr. Lyons consulting experience includes rate and regulatory support, marketing and competitive intelligence for utilities and energy companies. Mr. Lyons assignments include: LDC distribution expansion, natural gas marketing and sales programs; customer service programs; new rate structures and designs; retail access programs; and creative gas purchase strategies. He has testified before public utilities commissions in Connecticut, Maine, Massachusetts, Rhode Island and Vermont. Mr. Lyons is published in American Gas Association, Public Utilities Fortnightly and Power and Gas Marketing and has presented before a number of industry groups. Prior to joining Sussex, he served as Vice President of Sales and Marketing for Vermont Gas, Vice President of Marketing and Regulatory Affairs for Providence Gas (now part of National Grid), Director of Rates at Boston Gas (also part of National Grid), and Project Director at Quantec Management Consulting. Mr. Lyons holds a B.A. in Mathematics and Economics from St. Anselm College, an M.A. in Economics from the Pennsylvania State University, and an M.B.A. with a concentration in Finance from Babson College. Bill Wietecha, Marketing Specialist Bill is a marketing specialist with over 35 years of experience as an account director at major, national advertising agencies until 1994, when he opened his own marketing firm, The BRW Group. Bill has worked with numerous Fortune 100 brands including Sears, Starbucks, McDonalds, General Mills, The Hartford, IBM and scores of others across numerous industries. In the past 10 years, Bill has focused on the energy industry. Working with a number of Northeast gas utilities on strategic, research based projects. Bill has been at the forefront of consumer attitudes towards home heating fuels. Bills team has performed phone interviews with over one hundred thousand New England homeowners and have uncovered key strategic opportunities that have helped guide critical decisions about gas expansion. Bills unique approach has helped his clients get below the surface to understand not only the functional aspects of homeowner decision making, but the emotions behind the decision that play an integral role in maximizing conversion strategies.

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References

• • Slide 4: http://www.nytimes.com/2016/01/13/business/energy-environment/bp-jobs-oil-prices.html?_r=0 Slide 7: http://thetimes-tribune.com/news/business/heating-oil-price-plunges-migration-to-natural-gas-slows-1.2001256; http://www.courant.com/business/hc-ap-natural-gas-expansion-1111-20151110-story.html; http://www.burlingtonfreepress.com/story/news/local/2015/10/18/new-england-low-heating-oil-prices-buy-time/74189280/ Slide 8: http://www.forbes.com/sites/michaellynch/2016/01/14/will-low-gasoline-prices-whipsaw-the-auto-industry-again/#7dcc7ff05e7e; http://money.cnn.com/2016/01/25/autos/elon-musk-oil-prices-china/; http://electricdrive.org/index.php?ht=d/sp/i/20952/pid/20952 Slide 13: http://www.petro.com/why-petro/resources/articles/the-facts-about-oil-vs-gas-heating; http://americanenergycoalition.com/get-facts/truth-vs-myth/; http://www.petro.com/why-petro/resources/articles/oil-heat---what-you-need-to-know Slide 14: https://www.laurelfueloil.com/oilheatBenefits.php; https://www.macfarlaneenergy.com/oilheatBenefits.php; http://oilandenergyonline.com/heating-oil-that-outperforms-natural-gas/; https://callfreds.com/heating-oil/benefits-of-oil-heat/ ; https://heatingoilusa.wordpress.com/2015/12/08/the-benefits-of-oil-heat-over-natural-gas/ Slide 15: http://thetimes-tribune.com/news/business/heating-oil-price-plunges-migration-to-natural-gas-slows-1.2001256; http://southcentralpaenergy.org/category/heating-oil/; Interviews with oil dealers Slide 21: http://www.npr.org/2016/01/25/464003319/homeowners-who-played-the-odds-on-oil-heating-costs-lose-out; http://www.wfmz.com/news/news-regional-berks/home-heating-oil-prices-falling/30978746 Slide 23: http://money.cnn.com/2016/02/22/news/economy/heating-oil-price-drop/ Slide 34: https://www.avistautilities.com/services/energypricing/or/curgas/Documents/WA%20151%20Web.pdf; http://www.utc.wa.gov/docs/Pages/DocketLookup.aspx (Filing UG-152394) Slide 35: http://www.courant.com/community/east-hampton/hc-east-hampton-gas-line-extension-1112-20151111-story.html; http://wtnh.com/2015/11/12/scg-introduces-deep-river-to-natural-gas-service/; http://www.wiltonbulletin.com/24121/governor-malloy-helps-break-ground-on-yankee-gas-expansion/ Slide 36: http://www.ngadvantage.com/vermont-gas-and-ng-advantage-create-first-%E2%80%9Cgas-island%E2%80%9D-advance-pipeline-expansion-provide-cng; http://www.ngadvantage.com/international-paper-extends-natural-gas-%E2%80%9Cvirtual-pipeline%E2%80%9D-contract-ng-advantage-ticonderoga-ny-mill Slide 37: http://www.sacomaine.org/PDF_files/Unitil%20file%201-27-16.pdf

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