EIM_2016_Annual_Report

R e f l e c t i n g o n t h e P a s t , I l l u m i n a t i n g t h e F u t u r e .

2 0 1 6 A n n u a l R e p o r t

E I M 2 0 1 6 A N N U A L R E P O R T

C O N T E N T

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P r e s i d e n t ’ s L e t t e r

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P e a r l s t r e e t

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S c h o e l l k o p f

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G r e at B a r r i n g t o n

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P e ñ a S tat i o n

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U lt r a s o n i c S e n s i n g T e c h n o l o g y

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S o l a r p o w e r i n i t i at i v e s

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F i n a n c i a l s

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E I M D i r e c t o r s

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B o a r d C o m m i t t e e s

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I n s u r a n c e A d v i s o r y C o m m i t t e e

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O f f i c e r s

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M e m b e r s

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C o m p a n y L o c at i o n s

A p p ly i n g l e s s o n s f r om t h e pa s t t o c r e a t e a s t r o n g e r f u t u r e . F r o m t h e P r e s i d e n t a n d C h i e f E x e c u t i v e O f f i c e r

million in capital. A second milestone was surpassing $2 billion in total inception-to-date gross claim payments. The ability and willingness to pay claims is a foundational principle, and EIM’s more than $2 billion in gross claim payments since 1986 underscores this longstanding commitment. The third 2016 milestone was the EIM Board- approved Member Company distribution of $25 million. This 20% increase over 2015 marks the fifth consecutive year that EIM has returned capital to members, bringing total distributions to more than $280 million. All three benchmarks reflect EIM’s ongoing ability to meet challenging market conditions, while continuing to provide a stable, responsive risk management vehicle for Member Companies. In addition, seven key financial benchmarks were tracked over the course of the 2014-16 plan. EIM consistently met or exceeded five of these each year, bettering all seven over the three-year period. Surplus: Not only did EIM’s surplus growth exceed projections each year, surplus increased by 15.5% from $890 million to $1.028 billion. This topped the plan’s original target of $964 million by $64 million, or 6.6%.

At February 2017’s Risk Managers Information Meeting, EIM adopted the theme, “Reflecting on the Past, Illuminating the Future,” illustrating how experience has made the Company stronger. From the 2002-03 systemic energy industry Directors and Officers liability losses, to 2007’s unprecedented wildfire losses, to the stock market collapse in 2008, each challenge successfully met has strengthened EIM, making the Company more resilient and better prepared for the future. R e f l e c t i n g o n t h e P a s t Last year marked the completion of a three-year strategic plan incorporating many of the lessons learned throughout EIM’s 31-year history. While 2016 was a strong year from an operating, underwriting and investment perspective, it was equally satisfying to see 2014-16 performance metrics meet or exceed projections—even in the face of substantial loss activity and a volatile investment environment. Three 2016 milestones deserve note. First, a policyholders’ surplus in excess of $1 billion was reported for the first fiscal year in Company history. The closing surplus of $1.028 billion represents a significant accomplishment when you consider that EIM started in 1986 with $75

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Three-Year Average Surplus Growth: Targeted at 4% a year, EIM’s three-year annual average surplus growth was $46 million, or 5.2% annually, 30% better than planned. Net Premium Earned: Ending 2016 at $140 million or slightly above the original projection of $135 million, this benchmark exceeded budget in each of the three plan years. Net Expense Ratio: Net expense ratio consistently met or surpassed the 9% annual target, averaging 8%. Risk Capacity: Risk capacity is the measure of capital needed to sustain a 1:200TVaR event while retaining sufficient surplus for an “A” rating from A.M. Best. EIM exceeded the 100% benchmark each year, closing 2016 at 135%, or 35% better than forecast. Net Loss Ratio: Above plan at 96% in 2015, the net loss ratio rebounded in 2016 to 68%. EIM achieved a three-year average net loss ratio of 77%, bettering EIM’s targeted 90% ratio by 14.4%. The net loss ratio and net expense ratio produced a three-year average combined ratio of 85%, a 14% improvement over the targeted 99% net combined loss ratio. Investment Return: The 2015 investment return on EIM’s $1.9 billion portfolio was 2%, falling 50% short of target. In 2016, however, EIM returned 4.5% on the portfolio, bringing the average three-year investment return to 4.7%, or 17.5% better than forecast. Much of EIM’s strong performance over the last three years is rooted in a rigorous enterprise risk management (ERM) process initiated in 2009. The process incorporates the many lessons learned from historical events. As an

example, EIM’s updated investment guidelines allow for more diversification in the portfolio and minimize downside risk, while prudently capitalizing on upside opportunities. Similarly, new underwriting tools ensure that EIM product pricing better corresponds to the risk assumed. These straightforward tenets limit combined investment and underwriting risk to no more than a 10% likelihood of a 20% drop in surplus during any given year. The ERM process positions EIM to weather not only financial hurricanes, but natural disasters and systemic losses as well. Both Energy Insurance Services, Inc. and Energy Captive Management, LLC have adopted similar ERM platforms, developing risk metrics focused on alternative risk solutions and administrative support provided to EIM members. I l l u m i n a t i n g t h e F u t u r e As EIM embarks on its updated 2017-2019 strategic plan, the Company will continue to build on a tradition

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from an engaged Board of Directors, and an active Insurance Advisory Committee. Even in a competitive insurance market, EIM has benefited greatly from the contributions of each. We look forward to similar support in the future, which will be augmented by experienced and dedicated EIM, EIS and ECM staff. Reflecting EIM’s longtime collaboration with Member Companies, this annual report highlights historical energy industry milestones, contrasting them with emerging innovations. Although separated by more than a century, these accomplishments are connected by the common thread of experience leading to a more enlightened future. As we consider EIM’s decades-long history, there have indeed been many lessons learned. All have served to create a more effective organization—one financially stronger and better positioned to effectively respond to Member Company needs. Although this learning process will continue, EIM’s past has undoubtedly provided the beacon for a brighter, more illuminated future.

of consistency and stability. The updated plan addresses anticipated short and long-term changes in the utility and energy services industries, including continued consolidation, evolving technology, and fundamental shifts in the generation, transmission and distribution infrastructure. Some of these changes may impact EIM over the next 12-36 months. Others may not be fully felt for five to 10 years. This changing landscape will unfold amidst an ongoing competitive insurance marketplace, applying continued pressure on EIM to maintain Member Company loyalty while sustaining adequate premium levels for all lines of business. EIM firmly believes its mutual structure, Member Company commitment, and differentiated coverage terms (particularly on its excess General Liability policy) will enable it to meet these challenges. Over the next three years, EIM will again monitor the seven key financial benchmarks that underscored the Company’s recently concluded strategic plan. Policyholders’ surplus, after Board-authorized distributions and taxes, will slowly and steadily increase at an annual rate of about 2.5%. This growth will be driven by an expected net loss ratio of 90%, coupled with a net expense ratio of 8%. Investment return is projected at 3.6%. After remaining flat in 2017 due to ongoing industry consolidation, net premium earned will grow by 2.5-3.5% in each of the ensuing fiscal years, driven by increased cyber liability coverage, new business opportunities and a small expansion of EIM’s property portfolio. Risk capacity will remain targeted at 100%. Any excess capital will be earmarked for either new or expanded lines of business or returned to Member Companies via distributions. The success of EIM’s updated strategic plan depends on sustained Member Company support, continued guidance

Scott K. Goodell President and Chief Executive Officer

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T h e P e a r l S t r e e t G e n e r a t i n g S t a t i o n E d i s o n ’ s L i g h t B u l b M o m e n t W a s n ’ t A c t u a l l y t h e L i g h t B u l b .

Although most people credit the invention of the light bulb to Thomas Alva Edison’s 1879 creation, he was far from the first to invent electric lighting. Sir Humphrey Davy, a British chemist and physicist, introduced electric arc lighting in 1808. Afterward, many others contributed to the light bulb’s development. Edison was simply the first among them to develop an invention practical enough for commercial and As important as Edison’s incandescent light bulb was to the popularization of electric lighting, the part of the story that’s less well known, however, is the great lengths Edison went to gain such popularity. His brightest idea may well have been the legendary Pearl Street Generating Station, without which his incandescent bulb might have gone little further than the drawing board. Established in 1882, the Pearl Street Station’s generation of electricity made Edison’s invention practical for nearby businesses and homes. residential use. For this reason, Edison and his incandescent light bulb are almost universally associated with electric lighting in the U.S.

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Thomas Edison, head of Edison Illuminating Company, Pearl Street, Manhattan, circa 1895.

and Westchester County. The company’s success is due in large part to Edison’s continued wise business decisions. As a result, his incandescent electric light bulb is widely credited with having revolutionized the American lifestyle. Although the Pearl Street Station has long since been demolished, those in the know still recognize it as the true source behind America’s love affair with electric lighting. It could easily be argued, therefore, that Edison’s greatest light bulb moment was not so much his invention of the incandescent bulb, but rather the generating station he built to power it. The Pearl Street Generating Station not only ensured the light bulb’s popularity. It earned Edison a place in American history.

Established in 1882, the Pearl Street Station’s generation of electricity made Edison’s invention practical for nearby businesses and homes. Edison knew this would be the case. He’d done a great deal of marketing research beforehand. He carefully chose the station’s location precisely for its densely populated neighborhood with an ideal mix of both commercial and residential customers. It was by no means accidental that the Pearl Street location he settled on happened to be in a one-quarter square mile stretch in the heart of lower Manhattan’s business district— which would eventually become the financial capital of the United States. The Pearl Street Station opened at 3:00 on the afternoon of September 4, 1882, delivering a complete system for the provision of electric lighting to 82 residential and commercial customers. Edison’s choice location quickly paid off. By 1884, the power station’s customer base had grown to 508. Many of Edison’s clever business decisions paid off as well. For starters, he replaced the station’s original Porter-Allen high-speed steam engines with new, more reliable ones from Arlington & Sims. These proved to be much more suitable for powering his dynamos. Another smart decision was to reduce the amount of costly copper needed for a two-wire, 110-V configuration by replacing it with a 220-V, three-wire design. This resulted in significant cost savings as Edison’s power grid continued to grow. And continue to grow, it did. The Edison Electric Illuminating Company went on to become Con Edison, which today serves both New York City

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The Battery and Control Room in the first Edison Electric Lighting Station at Pearl Street.

T h e S c h o e l l k o p f P o w e r P l a n t T h e D a y t h e P o w e r P l a n t W e n t D o w n

One of the first hydroelectric plants in the U.S., the Schoellkopf Power Plant was built on land purchased by Jacob Friedrich Schoellkopf in 1877. Schoellkopf paid $71,000 for the water, power rights and hydraulic canal land situated above Niagara Gorge, just 1,600 feet downriver from the Rainbow Bridge on the American Falls. An astute businessman, Schoellkopf quickly recognized the potential for electricity and harnessed the power of Niagara Falls to supply the area’s needs. He adapted current technology to create one of the first hydroelectric generating stations in the world. The plant gained fame in 1881 when Schoellkopf offered power from his water turbines to generate the first electric lighting used for the “Illumination of Niagara Falls.” Thanks to a growing need for electricity, Schoellkopf’s venture continued to expand. After his death in 1903, his sons took over the power business, building a second power station in 1904. In 1918, the Schoellkopf plant merged with Niagara Falls Power Company and became known by that name. The original Schoellkopf Power Plant has since become best known for the events of June 7, 1956. This was the day much of the plant came tumbling down into the Niagara River below. Two-thirds of the plant was destroyed, one worker was killed, and an entire city of 100,000 was left without power.

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Built from 1905–1914, Station 3A contained generators distributing power locally via underground cables. Courtesy of the Niagara Falls Public Library.

Early that morning, workers had noticed water leaking from the power station’s walls. After working feverishly throughout the day to stop the leak, most evacuated around 5:30 that afternoon. Soon after, a loud roar was heard, the wall opened up, and debris rained down the side of the gorge. Two other roars followed in rapid succession, leaving white smoke billowing into the air. Of the approximately 40 workers who had been inside, miraculously, all but one survived. Foreman Richard Draper was thrust from the building at the time of the collapse and found dead in the water days later. All other workers managed to escape or were rescued from the river below. The disastrous events also hurled six turbine generators down the side of the 220 foot gorge. Only one of three plant sections survived. Total damages were estimated at more than $100 million dollars. The cause? Apparently, cuts in the rock face made over the years had allowed gradual erosion, leaving the wall vulnerable. Thankfully, the power loss was quickly offset by the Ontario Hydro Electric Commission, which provided electricity to the area left without power. The remaining section of the original Schoellkopf plant remained in production at reduced volume until 1961. At that time, a new plant was commissioned. Today, the only remnant of the original Schoellkopf Power Plant is the stone beautification wall, now listed in the National Register of Historic Places. At certain times of the year, however, the river’s flow reveals glimpses of the old plant beneath its surface, including a few twisted steel girders and a wrecked generator turbine.

In 1956, a series of five rock falls from the cliff behind the station estimated at 120,000 tons destroyed Stations 3B and 3C and damaged Station 3A,

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resulting in a total loss of power from all units. Courtesy of the Niagara Falls Public Library.

T h e G r e a t B a r r i n g t o n E l e c t r i f i c a t i o n T h e E v e n t t h a t T r a n s f o r m e d E l e c t r i c i t y

In 1886, not long after Thomas Edison lit up New York City with his power plant, an engineer by the name of William Stanley was tasked with finding a way to distribute electricity to the widespread population. Backed by the generous resources of George Westinghouse, and relying on previous work in Paris by Lucien Gaulard and John D. Gibbs, Stanley set out to develop a prototype distribution system.

William Stanley came up with an E-shaped core that placed induction cells in parallel rather than in series. The problem he needed to solve was that the direct current (DC) used to generate electricity at the time was difficult to transmit over long distances. Although the current produced by the power plants was generated at a low voltage, a much higher voltage was needed to send electricity through wires to customers farther away from a power plant. To overcome this obstacle, the current not only had to be stepped up to make the long trip, but it would need to be stepped down again before it could enter its final destination. Otherwise, the high voltage would create a safety hazard, blowing out the appliances it was meant to power. Westinghouse astutely purchased the rights to the early transformer Gaulard and Gibbs had developed in Paris. Working with this design, and inspired by Charles F. Brush’s work on batteries, Stanley came up with an E-shaped core that placed induction cells in parallel rather than in series. An expert in electromagnetic fields, Stanley designed his transformer with wrapped coils to alternate the voltage from

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William Stanley’s first transformer built in 1885, for single phase AC power.

low to high for transmittal through the wires. His system then used a reverse design on the opposite end to safely lower the voltage back down again. The result is what we know today as alternating current or AC power. Most significantly, what Stanley invented, and successfully demonstrated in Great Barrington in March, 1886, was the first complete distribution system for electrical current. This gave Westinghouse the confidence to financially back the AC system with his significant resources. Soon after, General Electric came on the scene, and the rest is history. Stanley’s initial prototype led to further advances and improvements in the distribution system, making AC the generally accepted current over DC and the perfectly adequate ZBD system developed in Hungary around the same time. Stanley’s Great Barrington transformer has since evolved into the power distribution system still in general use today. Westinghouse astutely purchased the rights to the early transformer Gaulard and Gibbs had developed in Paris. Had it not been for Andrew Carnegie, however, the Great Barrington Electrification would have likely been known by a much different name. Stanley’s initial work took place in Pittsburgh, Pennsylvania, until he developed a breathing problem due to the air pollution generated by Carnegie’s steel mills. Advised by his doctor to relocate, Stanley moved his lab, his equipment and, ultimately, his history-making moment to Great Barrington, Massachusetts.

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This Westinghouse AC generator from the late 1890s was one of the first generators using three-phase AC power incorporating Stanley’s designs.

P e ñ a S t a t i o n N e x t T h e C i t y o f t h e F u t u r e G e t s B r i g h t e r b y t h e M i n u t e .

For anyone looking to live in the city of the future, the wait is nearly over. Thanks to a partnership between Xcel Energy, Panasonic, the City of Denver and others, construction on Peña Station NEXT is well underway. When completed, this futuristic city, located near Denver International Airport and connected to downtown Denver by light rail, will be home to an apartment complex, hotel, parking, and road and transportation infrastructure. Even more impressive, it will feature smart street lighting, ultra-fast, community Wi-Fi, electric vehicle charging stations, autonomous vehicles, a smart bus shelter, environmental sensing, interactive digital signage and a solar-plus-storage microgrid. Peña Station NEXT will also be home to the technology and operations hub for Panasonic Enterprise Solutions Company and Panasonic CityNOW. Through a public/private partnership, Xcel Energy and Panasonic have installed a multi-use Younicos battery storage system at Panasonic that also can act as a microgrid. In case of a grid outage, the battery can be switched to a microgrid function to support critical Panasonic functions. This unique opportunity is funded through the utility’s Innovative Clean Technology (ICT) program. Initially approved by the Colorado Public Utilities in 2009, Xcel Energy’s ICT program allows it to test and evaluate an emerging technology’s cost, reliability and environment performance on a small, demonstration scale to determine if it is cost effective and ready to be deployed more widely for Xcel Energy customers. The program also

L-R Xcel Energy employees Beth Chacon, director of Grid Storage and Emerging Technologies and André Gouin, business technology consultant, look at the Y.Cubes that comprise the Younicos battery for the Panasonic battery demonstration project.

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The Panasonic battery was installed in early March 2017. It is connected to a meter and the blue islanding switch which can turn it into a microgrid in the event of an electric grid power outage.

aims to lower greenhouse gas emissions and provide other environmental benefits, such as lowering carbon emissions. “After the two-year microgrid pilot is complete, the battery will be set at its optimal settings for the rest of its 10-year life span,” said Beth Chacon, Xcel Energy’s Director of Grid Storage and Emerging Technologies.

“All partners involved in the project look forward to learning how to leverage this type of battery storage to increase electric grid reliability,” Chacon continued. “We look forward to understanding how this technology can support a more modern grid with high amounts of renewable energy on the system,” Chacon continued.

Beth Chacon

For now, the battery storage system shows great promise of becoming a nimble, growing and potentially price-competitive resource. As battery prices fall and more is learned about the technology, there will be additional applications, all providing benefits to the utility and its customers. Meanwhile, Panasonic and Xcel Energy continue to advance solutions to speed grid integration, making Peña Station NEXT a proving ground for bringing an aging power grid into the future. These solutions coincide with broader efforts to modernize the power grid. If nothing else, innovative solutions such as these are making futuristic cities like Denver’s Peña Station NEXT a fast- emerging reality. They are also proving that the future of our current power grid system may be brighter than initially anticipated. And quite possibly, a lot smarter, too.

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A look inside the islanding switch that can turn the Younicos multi-use battery at Panasonic into a microgrid to support critical functions for Panasonic in the event of an electric grid power outage.

D o m i n i o n T r a n s m i s s i o n , I n c . ’ s u s e o f U l t r a s o n i c S e n s i n g t e c h n o l o g y f r o m S e n s o r N e t w o r k s , I n c . I l l u m i n a t i n g t h e F u t u r e u s i n g S e n s o r T e c h n o l o g y t o B y p a s s D o w n t i m e

A recent Dominion Transmission, Inc. (DTI) inline inspection (ILI) report showed internal corrosion indications at two (2) separate locations on a 24” natural gas transmission pipeline in Central Pennsylvania. Dominion excavated the sites, and secured a third-party vendor to perform digital X-ray and ultrasonic (UT) C-scan mapping on the affected areas. An engineering assessment confirmed that the pipeline was safe to operate under current operating parameters. DTI elected to install ultrasonic sensors from Sensor Networks, Inc. (SNI), in order to proactively monitor these indications of internal corrosion. Future ILI inspections will compare the ILI data to the sensor information, providing another method of confirming the accuracy of the ILI assessment. At Site #1, a smartPIMS Modbus was installed with eight (8) dual element sensor probes. At Site #2, one (1) smartPIMS Modbus was installed with four (4) dual element sensor probes. One (1) matPIMS 1x15 mat was also installed. These sensor probes were permanently attached to the pipeline. The pipeline was then backfilled along with the sensors. The sensors allow DTI to monitor the internal corrosion indications as identified by the ILI data. A DTI Corrosion Technician will visit the site each month to download pipe-wall thickness data readings onto a tablet, using proprietary software from SNI. These monthly wall thickness readings will determine whether there is ongoing corrosion, and if so, the rate of corrosion. SNI is a U.S.-based technology company that designs and manufactures ultrasound-based sensors. These sensors can be attached to assets and infrastructure such as DTI’s

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Dominion excavation site where sensors were installed.

Once sensors are installed, they are coated

and wrapped to the pipeline with communication cables connecting to an enclosure above ground where readings will be taken.

pipelines. Installation can be either permanent or temporary. Once installed, the sensors can monitor known areas of internal corrosion to evaluate ongoing integrity. The sensors can also be used to evaluate potentially problematic areas. Prior to this technology, asset owners gathered data manually in order to plan maintenance and make critical decisions about asset integrity. Today, sensors can be installed not only in locations where corrosion is suspected, but in areas where the manual gathering of data is difficult, expensive or unsafe. Access to high quality, timely data allows the owner to monitor the asset like never before, enhancing the ability to develop better, predictive-based maintenance schedules. “Sensor Networks Inc. is very pleased and proud to have this unique opportunity to work with Dominion and deploy our Ultrasonic IoT corrosion monitoring system on their infrastructure” said Dr. James Barshinger – Company President & CTO. “Remotely tracking the growth of these individual pits and general corrosion rates in a buried pipeline is a perfect application for our technology coupled with remote client access to the data through our web portal.” Sensors have been installed in refineries and petrochemical plants; pipelines for storage, transmission, distribution, midstream and liquids; and power generation facilities. Once installed, these sensors monitor metal loss on a specified interval, either manually or wirelessly. These sensors can generate a corrosion rate by measuring wall thickness values over a time period, and can alert the operator when desired thresholds are reached. The data helps the owner’s process control and inspection teams assess risks and extend the life of the asset. Adopters of sensor technologies are able to monitor their facilities in a way that saves time, money and downtime.

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Sensors installed on identified spots after excavation.

A w a r d - w i n n i n g u n i v e r s a l s o l a r p r o j e c t s p r o v i d e p o w e r t o a l l P S E & G e l e c t r i c c u s t o m e r s

Established in 1903, PSEG is a diversified energy company that has long held a key role in powering New Jersey’s economy and supporting the Garden State’s quality of life. In addition to being New Jersey’s largest electricity provider, PSEG is among the nation’s leading solar developers. PSEG has long been recognized for its environmentally responsible operations. It has been included in the Dow Jones North American Sustainability list for nine consecutive years. PSEG’s two largest subsidiaries, Public Service Electric & Gas (PSE&G) and PSEG Power, each have a solar development business. The company’s regulated electric and gas utility, PSE&G, either owns or has helped finance more than 215 megawatts- dc of solar capacity in New Jersey through its Solar Loan and Solar 4 All ® programs. The Solar Loan effort helps finance the installation of solar systems for homes and businesses in the utility’s electric service territory. Solar 4 All ® develops grid-connected, universal solar projects that provide solar power to all PSE&G electric customers. Solar 4 All ® has been recognized with awards from the Solar Electric Power Alliance, New Jersey Business and Industry Association, PowerGrid International Magazine, and the New Jersey Association of Energy Engineers. Solar 4 All ® currently has more than 174,000 pole-attached solar units and 31 centralized solar facilities in service throughout New Jersey. These centralized solar projects are built on rooftops, parking lots, landfills and brownfields. In fact, of the 31 centralized solar projects currently in service, nine are built on reclaimed landfills or brownfields, giving new

PSE&G’s Kearny Solar Farm is built at the crest of a closed landfill almost 100 feet above the marshes and waterways of the New Jersey Meadowlands. It provides enough solar generation to power about 500 average-size homes annually.

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life to more than 190 acres of space that would otherwise have very limited development opportunities. In addition to being New Jersey’s largest electricity provider, PSEG is among the nation’s leading solar developers. On the unregulated side of the company’s business, PSEG Solar Source develops, constructs, owns and operates large- scale solar facilities outside of PSE&G’s service territory. The company focuses on developing large-scale solar facilities and has 19 solar facilities in operation in 13 states that have a total capacity of 350 megawatts. PSEG Solar Source facilities range in size from 2.2 megawatt to the massive 62.7 megawatt PSEG Pavant II Solar Center in Utah.

PSE&G’s 10.14 megawatt-dc Parklands Solar Farm is one of nine PSE&G solar projects built on a closed landfill or brownfield.

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The PSEG Lawrence Livermore Solar Center was among the six PSEG Solar Source facilities that went in operation during 2016, as PSEG Solar Source doubled the size of its portfolio to 350 megawatts in service.

F i n a n c i a l s a n d N o t e s t o t h e f i n a n c i a l s T h e f i n a n c i a l s t a t e m e n t s t o t h i s A n n u a l R e p o r t h a v e b e e n a p p r o v e d b y t h e B o a r d o f D i r e c t o r s o f E n e r g y I n s u r a n c e M u t u a l L i m i t e d .

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Energy Insurance Mutual Limited at December 31, 2016 and 2015 , and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Marian M. Durkin | Chairman of the Board March 1, 2017 Report of Independent Auditors To the Audit Committee of the Board of Directors Energy Insurance Mutual Limited Report on the Financial Statements

We have audited the accompanying financial statements of Energy Insurance Mutual Limited (“the Company”) which comprise the balance sheets as of December 31, 2016 and 2015 and the related statements of income and comprehensive income, changes in policyholders’ surplus and cash flows for the years then ended and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement.

Jacksonville, Florida March 1, 2017

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Energy Insurance Mutual Limited Balance Sheets (Expressed in Thousands of U.S. Dollars)

As of December 31, 2016 2015

As of December 31, 2016 2015

Liabilities and policyholders’ surplus Liabilities: Reserve for losses and loss adjustment expenses Unearned and advance premiums Reinsurance premiums payable and funds held for reinsurers

Assets Investments, available‑for‑sale Alternative investments Investment in subsidiaries

$ 1,355,647 $ 1,361,051

164,040

150,141

673,877 $

839,222 120,975 20,131 67,697 20,000 12,210

$

3,295

3,159

121,825

1,514,351

1,522,982

Total investments

8,574

39,696 338,780 15,707 39,444

76,025 402,203

Cash and cash equivalents

72,365 25,000 12,588 16,500 10,470

Net deferred tax liability

Reinsurance recoverables on unpaid losses Reinsurance recoverables on paid losses

Policyholder distributions payable Accounts payable and accrued expenses

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43,634

Prepaid reinsurance premiums Accrued investment income Receivables for securities sold

Line of credit

7,236 2,685 8,186 1,105

7,953 3,543 7,446 1,051 1,837

Payables for securities purchased

5,891

7,790

129

Due to subsidiaries Total liabilities

Premiums receivable

948,989

1,086,255

Deferred policy acquisition costs

726 809

Income taxes recoverable

Policyholders’ surplus: Accumulated other comprehensive income

621

Other assets

167,068 861,299

164,930 807,516 972,446

Members’ account balance

$ 1,977,356 $ 2,058,701

Total assets

1,028,367

Total policyholders’ surplus

1,977,356 $ 2,058,701

Total liabilities and policyholders’ surplus

$

See accompanying notes to the financial statements.

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Energy Insurance Mutual Limited Statements of Income and Comprehensive Income (Expressed in Thousands of U.S. Dollars)

Years ended December 31, 2016 2015

Years ended December 31, 2016 2015

Underwriting revenue

Investment income Net realized gain on investments sold Other-than-temporary impairments Net investment income Total investment income

6,767 –

12,426 (126 49,295 61,595

Net premiums earned

$

$

$ 209,306 (72,680 136,626 2,121 138,747

$ 222,951 (83,124 139,827 2,421 142,248

)

Direct and assumed premiums earned Ceded premiums earned Net premiums earned

)

)

41,572 48,339

Ceding commission income

Income before policyholders’ distribution and income taxes

Total underwriting revenue

43,437

96,054

Underwriting expenses Net losses and loss adjustment expenses Gross and assumed losses and loss adjustment expenses

Distributions to policyholders’ Income before income taxes

)

(25,000 71,054

(20,000 23,437

)

238,871 (107,726 131,145 1,823 10,681 143,649

123,118 (28,161 94,957 2,273 10,559 107,789

Income tax (expense) benefit Current income tax (expense) benefit Deferred income tax (expense) benefit Total income tax (expense) benefit

)

)

Ceded losses and loss adjustment expenses Net losses and loss adjustment expenses

696 2,486 3,182

)

(13,691 (3,580 (17,271

) )

Policy acquisition costs Administrative expenses

26,619

53,783

Total underwriting expenses

Net income

$

$

)

34,459

(4,902

$

$

Income (loss) from underwriting

Comprehensive income Net income Net unrealized gains (losses) on available‑for- sale securities, net of income taxes of $ 5,456 and $ (4,348) , respectively Less: reclassification adjustment for net gains realized in net income, net of income taxes of $ 4,305 and $ 2,368 , respectively Other comprehensive income (loss), net of tax

26,619

53,783

$

$

(8,074

10,133

)

(4,399 (12,473 ) )

(7,995 2,138

)

Comprehensive income

14,146

55,921

$

$

18

See accompanying notes to the financial statements.

Energy Insurance Mutual Limited Statements of Changes in Policyholders’ Surplus (Expressed in Thousands of U.S. Dollars)

Accumulated Other

Members’

Total

Comprehensive Income Account Balance

Policyholders’ Surplus

Balance at January 1, 2015

177,403 (12,473

780,897

958,300 (12,473 26,619

$

$

$

)

)

Other comprehensive loss, net of tax

26,619

Net income

Balance at December 31, 2015

164,930

807,516

972,446

2,138

2,138

Other comprehensive income, net of tax

53,783

53,783

Net income

Balance at December 31, 2016

167,068

861,299

1,028,367

$

$

$

See accompanying notes to the financial statements.

19

Energy Insurance Mutual Limited Statements of Cash Flows (Expressed in Thousands of U.S. Dollars)

Years ended December 31, 2016 2015

Years ended December 31, 2016 2015

Cash flows from investing activities: Cost of investments purchased

Net income Cash flows from operating activities: Depreciation Amortization of bond premium or discount Net realized investment gain Deferred income taxes Changes in operating assets and liabilities: Reinsurance recoverables on unpaid and paid losses Prepaid reinsurance premiums Premiums receivable Reserve for losses and loss adjustment expenses

53,783

26,619

$

$

(548,234 542,854 18,152

)

)

$ (500,504 409,136 28,255

$

Proceeds from sales of investments Proceeds from maturities of investments Change in amount due from purchase/sale of securities Income from alternative investments Equity in earnings of subsidiaries Purchases of fixed assets Net cash from investing

150 4,141 (12,300 3,580

179 6,179 (6,767 (2,486

)

) )

3,095 (4,341 (852 (94 (65,305 ) ) ) )

5,437 (9,882 (136 (276 7,915

) ) )

(70,627 (3,412 (1,437 ) ) )

47,753 4,190 (740

)

Cash flows from financing activities: Draws on line of credit Repayments on line of credit Net cash from financing Net change in cash and cash equivalents Cash and cash equivalents, beginning of year

13,800 (13,800 –

46,500 (30,000 16,500

)

(165,345 850

126,906 6,759

)

)

Unearned and advance premiums Reinsurance premiums payable and funds held for reinsurers Accounts payable and accrued expenses Due to subsidiaries Policyholder distribution payable

)

(11,557

)

(11,360

)

)

(12,832

(36,329

979 7,661 5,000 1,111

84 (3,071 – (15,093 52,473

88,857

76,025

)

76,025

39,696

)

Cash and cash equivalents, end of year

$

$

Income taxes recoverable Net cash from operations

)

(60,744

$

$

Supplemental disclosure of cash flow information:

27,050

2,877

$

$

Income taxes paid, net of refunds

See accompanying notes to the financial statements.

20

Energy Insurance Mutual Limited Notes to Financial Statements Years ended December 31, 2016 and 2015

Organization Energy Insurance Mutual Limited (the “Company” or “EIM”) was incorporated under the Companies Act of Barbados on June 13, 1986 . EIM obtained a license to engage in exempt insurance business in accordance with the provisions of the Exempt Insurance Act of Barbados, 1983 . On August 12 , 2003 , the Company applied for, and was granted a license to operate as a Qualifying Insurance Company under the Insurance Act 1992‑2 of Barbados. The Company is a mutual insurance company with membership available to any utility or member of the energy services industry that meets EIM’s underwriting standards. The Company provides excess general liability, excess fiduciary liability and excess directors and officers liability policies written on a claims first made basis. In addition, to a lesser extent the Company writes property insurance for its members. All members have casualty policies in place, approximately one‑third of those members have property policies as well. During 2015 , the Company started providing cyber liability coverage to its members. Basis of Reporting The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) promulgated by the Financial Accounting Standards Board Accounting Standards Codification (“ASC” or “the guidance”). Preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Investment in Subsidiaries The Company is the sponsor and 100% common stockholder of Energy Insurance Services, Inc. (“EIS”), a sponsored cell captive insurance company domiciled in South Carolina. As a sponsored captive, EIS allows EIM members, known as Mutual Business Programs (“MBP”), to insure or reinsure the risks of their sponsoring organizations, including property, general and environmental liability, asbestos, workers’ compensation and retiree medical stop loss. Through Participation Agreements with the MBPs, the insurance risks underwritten by the MBPs are contractually limited to the funds available in the individual cell’s account and neither EIS nor EIM has any obligation to absorb losses of the MBP’s. Likewise, EIS has no right to the capital and accumulated profits of the MBP cells. EIM does not have the power to direct the activities of the MBP’s which most significantly impact economic performance. Note A - Organization and Significant Accounting Policies

As of December 31, 2016 , EIS has assets (exclusive of assets held in MBPs) of approximately $ 10.6 million, shareholder’s equity of $ 2.5 million and net income of approximately $ 277,000 . As of December 31, 2015 , EIS had assets (exclusive of assets held in MBPs) of approximately $ 3.4 million, shareholder’s equity of $ 2.3 million and a net loss of approximately $( 36,000) . The Company considers EIS a variable interest entity, which is not consolidated due to the lack of obligations, rights and powers described above. EIM accounts for its investment in EIS using the equity method of accounting because EIM is not the primary beneficiary of EIS’ operations. During 2015 , EIM formed Energy Captive Management, LLC (“ECM”) in the State of South Carolina to provide captive management services to EIS. As of December 31, 2016 , ECM has assets of approximately $ 915,000 , member’s equity of $ 747,000 and net income of $ 25,000 . As of December 31, 2015 , ECM had assets of approximately $ 1,010,000 , member’s equity of $ 722,000 and net loss of approximately $( 166,000 ). Investments Management determines the appropriate classification of marketable fixed‑maturity and equity securities at the time of purchase. The Company’s policy is to hold securities for investment purposes and, as such, has reported all securities as available‑for‑sale. Available‑for‑sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in a separate component of policyholders’ surplus. Interest and dividends on securities classified as available‑for‑sale are included in net investment income. Declines in value judged to be other‑than‑temporary are included as realized losses in the statement of income. The cost of securities sold is based on the specific identification method. Alternative investments include interests in shares of investment funds, limited partnership funds, and real estate funds (“the Funds”), which are considered non‑marketable. Alternative investments are structured such that the Company holds interest in the Funds and not the underlying holdings of such Funds. The Company’s ownership does not provide for control over the related investees, and financial risk is limited to the funded and unfunded commitment for each investment. These Funds are stated at fair value, which is from the most recently reported net asset value as reported by their investment managers or administrators. The Company has elected the fair value option with respect to the Funds, with all gains and losses associated with the Funds recorded directly to the statement of income and comprehensive income, as a component of net investment income. The use

21

Energy Insurance Mutual Limited Notes to Financial Statements (Continued)

of net asset value as an estimate of the fair value for investments in certain entities that calculate the net asset value is a permitted practical expedient. These alternative investment funds give investors the right, subject to predetermined redemption procedures, to redeem their investments at net asset value. Since the funds are not actively traded on an exchange, the estimated fair values are subject to judgment and uncertainty. The financial statements of the Funds are audited annually by independent auditors, although the timing for reporting the results of such audits may not coincide with the Company’s financial reporting. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains certain cash and cash equivalent balances that are not subject to FDIC insurance. Management does not believe these balances represent a significant credit risk to the Company. Losses And Loss Adjustment Expense Reserves The reserve for losses and loss adjustment expenses represents the estimated ultimate gross cost of all reported and unreported losses unpaid through December 31. Since the Company provides principally high level excess of loss coverage to its members, it is exposed to severe but infrequent claims. Therefore, standard actuarial methods, such as paid loss development, are inappropriate to use. Losses are determined based on an evaluation of coverage provisions, review of underlying exposures and an analysis of EIM member loss experience. Case reserves represent the estimated future payments on reported losses. Case reserves are continually reviewed and updated; however, given the uncertainty regarding the extent of the Company’s ultimate liability, a significant additional liability could develop. Supplemental reserves (e.g., IBNR) are recorded based on actuarial projections. Although considerable variability is inherent in these estimates, particularly due to the limited number of claims to date, management believes that the aggregate reserve for losses and loss adjustment expenses is adequate. These estimates are periodically reviewed and adjusted as experience develops or new information becomes known. Such adjustments are included in current operations. Premiums Direct and assumed premiums are recognized as revenue on a pro‑rata basis over the policy term. The portion of premiums that will be earned in the Note A - Organization and Significant Accounting Policies (Continued)

future is deferred and reported as unearned premiums. The Company pays commissions on assumed business, which is initially capitalized and expensed over the life of the policy. Reinsurance In the normal course of business, the Company seeks to reduce the loss that may arise from large claims, catastrophes or other events by reinsuring certain levels of risk in various areas of exposure with other insurance companies. Reinsurance premiums, ceding commissions, loss reimbursement and reserves related to reinsured claims are accounted for on a basis consistent with that used in accounting for the original policies or claims. Deferred Policy Acquisition Costs Commissions and other costs of acquiring insurance that are directly related to the successful acquisition of new and renewal business are deferred and amortized over the life of the policy to which they relate. These costs are deferred, net of related ceding commissions, to the extent recoverable, and are amortized over the period during which the related premiums are earned. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company and its subsidiaries file a consolidated federal income tax return. Income taxes are allocated based on separate return calculations. Policyholder Distributions As a mutual insurer, EIM is owned by its policyholders. Policyholder distributions are released from excess surplus and are charged to income when declared by the Board of Directors. During 2016 and 2015 , the Board of Directors approved the declaration of policyholder distributions in the amount of $ 25 million and $ 20 million, respectively. Subsequent Events The Company has evaluated subsequent events for disclosure and recognition through March 1, 2017 , the date on which these financial statements were available to be issued.

22

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