CEA Phase I Valuation Executive Summary

CITY OF SAN DIEGO

PRELIMINARY MUNICIPALIZATION ASSESSMENT

EXECUTIVE SUMMARY

PREPARED FOR:

SAN DIEGO GAS & ELECTRIC

FEBRUARY 16, 2024

CEADVISORS COM

©2024 CONCENTRIC ENERGY ADVISORS, INC ALL RIGHTS RESERVED

EXECUTIVE SUMMARY

OVERVIEW

Concentric Energy Advisors, Inc. (“Concentric”) understands that certain parties have proposed to municipalize the electric distribution assets of San Diego Gas & Electric Company (“SDG&E”) within the City of San Diego (“City”) and create a publicly-owned municipal utility. SDG&E retained Concentric to develop a preliminary valuation of the associated SDG&E assets.

The separation of an electric distribution system is operationally and financially complex. There are four major categories of costs and economic impact that must be considered:

• Value of the Assets - the fair value of the assets to be acquired from SDG&E;

• Separation & Reintegration Costs - the costs associated with separating the assets from SDG&E’s system and reintegrating to form a new municipal utility;

• Startup Costs - the cost to purchase new facilities, staff and finance the new utility; and

• Foregone Revenues - lost streams of revenue that SDG&E would have otherwise paid to the City in the absence of municipalization. 1

Concentric preliminarily estimates that the total direct costs of a municipalization to the City of San Diego would be between $7.4 billion, in the low case, and $9.3 billion, in the high case, plus a potential $3.9 billion in foregone City revenues. 1

Concentric developed preliminary (Phase I) estimates of the economic impact for each category. The estimates are based on a combination of Company data, publicly available or subscription data on market values, interest rate and inflation forecasts, and the application of cost estimates from this and other proposed municipalizations Concentric notes that all costs are preliminary, and are provided as a range expressing some, but not all, of the uncertainty around the estimate. In the event of more concrete steps supporting municipalization, a more detailed (Phase II) analysis of the value of the assets, separation and reintegration costs, and startup costs would be required. The preliminary estimates also do not include several cost components yet to be considered, such as stranded assets, unrecovered balancing accounts, wildfire mitigation cross-subsidies, debt refinancing and transaction costs. In addition, these costs are expected to change over time due to the impacts of inflation on construction and purchasing costs, shifts in interest rates and financial markets, and the Company’s ongoing investments in its system.

1 The City would need to make a determination as to whether it would recover some or all of these current payments by SDG&E to the City in electric rates. These revenues would otherwise need to be recovered through an alternative mechanism, or lost, following the municipalization.

Economic Impact

$7.4 - $9.3B in direct costs plus a potential $3.9B in foregone city revenues Value of

$3.95 - $4.37B

Separation & Reintegration

$3.16 - $4.16B

PHASE I VALUATION METHODOLOGY

Valuation of Assets

$0.30 - $0.80B

$3.9B

The valuation of assets is the cost associated with purchasing the physical assets, including substations, transformers, and other equipment, from SDG&E. As a basis for the preliminary valuation, these assets were limited to those within the bounds of the City of San Diego, and the transaction date was assumed to be January 1, 2026. 2 Concentric approached this valuation using “fair value” principles, designed to estimate what a third-party buyer would pay for these assets in a competitive arms-length market solicitation. Concentric routinely works with buyers and sellers of utility assets and employs this expertise to arrive at high-level initial estimates.

Concentric estimated the value of assets using the following methodology:

A Market-Based Transaction Multiple is necessary to capture the fair-market value of the Company’s assets that would be expected to trade at a value in excess of net book value (“NBV”). The multiple was developed based on two methodologies:

1. The median ratio of the total enterprise value of 46 publicly-traded U.S. gas and electric utilities, as defined by Value Line, divided by their net property, plant, and equipment (“PP&E”), averaged over the last seven years, yielding a ratio of 1.33; and

2. The average ratio of the transaction value of selected comparable utility acquisitions in the U.S. over the last seven years, divided by the net PP&E at the time of acquisition, yielding a ratio of 1.47.

This approach is appropriate for a preliminary valuation based on the limited information known at this time. In the event of a Phase II analysis, additional approaches would need to be considered.

2 See Appendix: Key Assumptions for full list of assumptions used in the analysis.

Concentric estimates that the asset valuation is $3.95 billion, in the low case, and $4.37 billion, in the high case.

Separation & Reintegration Costs

Separation and reintegration costs are those associated with separating the assets from SDG&E’s system and reintegrating them into a new municipal utility. The electric transmission and distribution system is an integrated system with complex interconnections, enabling the reliable and efficient flow of electricity to meet the demands of the utility’s customers. Separating an electrical system into two distinct systems is a complex task that requires planning, engineering, and implementation. The complexity depends on various factors, such as the size and type of the existing system, the reasons for separation, safety considerations, and the desired functionality of the new systems. Separation of the transmission and distribution system, and the distribution system along the City of San Diego boundary, is estimated by the Company to require:

• Reconfiguring and rebuilding of 41 transmission and distribution substations;

• Building of 4 new distribution substations;

• Separation of over 550 distribution circuit boundary crossings and reconfiguring of the distribution circuits; and

• Separation of 120 miles of distribution circuit that is currently on transmission structures.

3 Based on SDG&E internal estimates

4 Escalation based on forecast ’23-’25 rate base growth

5 Based on forecast Dec ’25 CWIP balances; note that it is necessary to include the growth in net book value and CWIP balances through the transaction date to capture the projected value of the assets at the time the City of San Diego would purchase the assets from SDG&E.

Based on this scope of work, the preliminary estimates of the cost to accomplish separation are in the range of $3.16 billion in the low case, to $4.16 billion in the high case.

$0.33B

The estimates presented above are based on the proposed separation boundaries in the municipal electric utility ballot initiative. Under this proposal, the City would acquire SDG&E’s distribution assets within the City boundaries. This will require separation between SDG&E’s high voltage transmission system (138kV or 69 kV) and SDG&E’s medium voltage distribution system (12 kV or 4.16 kV) at the transformers at each substation inside the City boundaries 7 Until now, no economic analysis or cost estimates have been completed on the ballot initiative proposal.

The City has completed preliminary analysis and cost estimates in a study released in 2023, which envisioned the acquisition of a different set of utility assets compared to the ballot initiative. The separation estimates should therefore be expected to differ from those provided in the City’s study. As Concentric understands the City’s study, it did not include the separation at each substation between the transmission system and distribution system, but rather, included the separation of the transmission system and distribution system at the City boundaries. In the City’s study, the City would acquire the transmission assets within the City boundaries, thus there was no need to separate them at each substation 8 The differences in the assumption of where the systems are separated lead to some of the differences in the valuation and cost estimation approaches.

Of note, the estimated costs of separation are equivalent to those of the acquired assets This relationship is similar in the study commissioned by the City of Chicago, where separation costs were estimated to be $2.7 - $5.0 billion for the acquisition of Commonwealth Edison’s distribution plant within the City of Chicago valued at $4.0 - $5.7 billion. 9

6 “Distribution underbuild” refers to distribution voltage circuits that run underneath transmission circuits on the same pole, designed to reduce the number of poles in use

7 Petition within the City of San Diego for the Purpose of Replacing SDGE with Not-For-Profit Municipal Electric Distribution Utility, “Utility Distribution System” definition, November 16, 2023.

8 Public Power Feasibility Study Phase I Report, prepared for the City of San Diego, July 2023, NewGen Strategies and Solutions LLC, at 5-15.

9 Preliminary Municipal Utility Feasibility Study, prepared for the City of Chicago Illinois, August 2020, NewGen Strategies and Solutions LLC, at 1-5 to 1-6.

Startup Costs

Startup costs include those associated with starting a new municipal electric utility These include, but are not limited to:

• Facilities (e.g., operations and maintenance yard, customer service center, control center)

• Equipment inventory

• Fleet vehicles

• Staffing

• IT Systems (e.g., billing, general IT)

• Operations systems (e.g., DMS, communications networks, SCADA)

• Capital reserve fund

• Cash working capital

• Transaction costs (e.g., underwriting and debt issuance costs, legal expenses).

Concentric preliminarily estimates startup costs will range from $300 million in the low case, to $800 million in the high case. These costs are based on estimates of startup costs for the cities of San Diego and Chicago provided in other municipalization feasibility reports.10

Foregone Revenues

SDG&E currently provides several sources of revenue to the City. Assuming a municipal utility is established and SDG&E no longer serves electric customers in San Diego, SDG&E would no longer pay franchise fees, franchise renewal fees, property taxes, or general fund contributions to the City for its electric distribution assets. Concentric understands these streams of revenue to be as follows:

Revenue Stream Status

Franchise Fees

Property Taxes

Paid annually; $58.8 million paid in 2022

Paid annually; $65.4 million paid in 2022

Franchise Renewal Fee $70.0 million (amortized over twenty years starting in 2021)

General Fund Contribution $20.0 million (amortized over twenty years starting in 2021)

The foregone revenue streams are assumed to last indefinitely but are valued on a fifty-year discounted cash flow basis. Concentric estimates the preliminary net present value (“NPV”) of these four lost revenue streams to be approximately $3.90 billion over the next fifty years. 11

ADDITIONAL CONSIDERATIONS: COSTS OF FINANCING THE MUNICIPAL UTILITY

In addition to the costs of acquiring, integrating, and starting up a new utility, the City of San Diego must also consider the ongoing impacts of financing these initial outlays. These costs are not included in the total economic impact cited in this Executive Summary but are still critical to evaluating the overall framework of starting a municipal utility.

For example, assuming the new municipal utility would be 100% financed with debt, the financing requirements would be between $7.4 billion and $9.3 billion to cover the direct costs of the acquisition and startup based on our preliminary estimates. Concentric further assumes that the acquisition of SDG&E assets would be covered by taxable debt, while the other costs, including separation and reintegration and startup costs, would be financed by tax-exempt debt. The current cost of municipal debt is currently in the range of 3.5% (tax-exempt) to 5.0% (taxable). These rates compare favorably with SDG&E’s cost of capital currently allowed in rates, but that benefit is exceeded by the larger investment required by the City to acquire, separate, integrate and start up the new utility.

$7.4-$9.3 Billion

Sep. & Reint. Costs, Startup Costs

$320-$390 Million

Debt Service

Billion

City-Proportion of 2026 Rate Base

Million

Based on these preliminary estimates, the municipal utility’s annual debt service would be $320 million to $390 million. The annual rate of return on SDG&E’s city-proportion rate base is approximately $270 million Consequently, Concentric estimates that the debt service costs of a municipal utility, even with lower-cost debt financing, exceeds the costs to customers under SDG&E’s ownership.

11 These estimates assumed forecast inflation sourced by Blue Chip Financial Forecasts and a municipal discount rate based on a weighted average of expected tax-exempt and taxable debt costs. See Appendix: Key Assumptions

PHASE II VALUATION

The Phase I analysis presented in this Executive Summary provides preliminary estimates that may change with time and/or updates to methodologies, as well as more in-depth engineering and accounting analysis of SDG&E’s assets. A Phase II feasibility study would provide a more detailed analysis of asset value, separation and reintegration costs, startup costs, and foregone revenues, as well as a rate comparison between SDG&E’s expected rates if the City were to remain within SDG&E’s service territory as compared to an estimate of the City’s municipal rates after acquisition of assets by the City.

In California, the valuation of utility property for condemnation would likely be litigated before the California Public Utilities Commission (“CPUC”) or state courts to ensure just compensation. Valuation methods in such proceedings often include alternative methodologies such as Reproduction Cost New Less Depreciation, Replacement Cost New Less Depreciation, or Original Cost Less Depreciation. Concentric’s preliminary valuation of SDG&E’s assets utilizes a market-based approach, which we believe is also appropriate It is important to note that a lack of standardized approaches characterizes the valuation process and often means that fair market value is derived from a range of estimates

CONCLUSIONS

Creating a new municipal utility in the City of San Diego is operationally and financially complex. Concentric estimates the total direct costs of municipalization to the City of San Diego to be $7.4 billion to $9.3 billion, based on preliminary estimates of physical asset valuation, separation and reintegration costs, and startup costs. Foregone revenues to the City may add an additional $3.9 billion to the total economic impact. Based on the estimated direct costs of starting up the utility, the annual cost of debt service for the City would exceed the cost of capital in SDG&E’s current electric rates, negating the benefits of the City’s lower-cost debt

The estimates in this report focus on the immediate purchase price and direct expenses associated with acquiring the distribution assets within the City of San Diego. These estimates do not incorporate long-term planned and unplanned investments in the SDG&E system beyond the preliminary, assumed acquisition date of January 1, 2026 The process of an acquisition and commencement of municipal utility operations would likely take several years beyond 2026 to complete (e.g., the City’s consultant has estimated will take a minimum of eight to ten years). Additionally, the estimates do not address the impact of inflation on investments over a longer acquisition period (e.g., inflationary upward pressure on separation costs). Finally, stranded costs, representing both past and future investments in the SDG&E system, made to benefit all SDG&E customers, are not factored into the valuation. These costs are significant and arise from infrastructure improvements, environmental compliance, or other system improvements necessary

to comply with regulatory obligations and to maintain and enhance the long-term safety and reliability of the SDG&E system. We believe it is crucial for decision-makers to consider these factors beyond the immediate purchase price and separation costs.

APPENDIX: KEY ASSUMPTIONS

• Economic impacts are expressed in 2024 dollars.

• The portion of electric SDG&E assets within the city bounds of San Diego were used exclusively.

• The value of SDG&E assets to be municipalized is forecast at 2026 levels, discounted back to 2024 dollars

• Rate base, CWIP, net book value, and separation & reintegration costs were provided by SDG&E

• A global 2.2% inflation rate was assumed through 2075 based on current Blue Chip Financial Forecast consensus estimates for CPI The only exception was the inflation of separation costs provided by the Company, which were inflated using electric construction cost indices provided by Global Insights.

• Current bond yields on AA-rated municipal bonds were researched on Bloomberg and estimated at 4.5% based on a weighted average of expected tax-exempt and taxable debt costs.

• Foregone revenue streams were assumed to last indefinitely, but were valued on a fifty-year cash flow basis.

• Franchise fees and property taxes were forecast to grow at rates equal to inflation.

• For purposes of estimating foregone revenues, the franchise was assumed to be renewed on July 1, 2021, and renew once every 20 years.

• The effective transaction date was assumed to be January 1, 2026.

ABOUT CONCENTRIC

Concentric Energy Advisors was founded in 2002 by a small group of executive-level consultants committed to establishing a mid-sized energy consulting firm with capabilities and a reputation unsurpassed by any firm in North America. Concentric has approximately seventy employees and is headquartered in Marlborough, Massachusetts with an office in Washington, DC. Our wholly-owned Canadian subsidiary, Concentric Advisors, ULC is headquartered in Calgary, Alberta, Canada. Our energy industry experts have held positions with utility companies, regulatory agencies, integrated energy companies, regional transmission organizations, retail marketing companies, and utility management consulting firms.

Concentric provides a comprehensive and integrated suite of services to every segment of the energy sector including strategic, financial, regulatory, planning, and ratemaking services. We have evolved with the industry and are actively supporting utilities and other stakeholders as they navigate the energy transition in response to clean energy policies that are being implemented throughout North America.

Our experts stay abreast of the latest developments in regulatory policy and routinely testify before Canadian and U.S. regulators on the above topics. We have over 20 experts who have appeared in regulatory proceedings across North America addressing policy and challenging analytical topics, backed up by a team of consultants who are experienced in all aspects of developing the financial, economic, and technical data filed as part of regulatory proceedings. Many of our assignments contain valuation and economic assessments, and conclude with expert reports or written testimony supporting our findings.