TRANSFORMERS: INDUSTRY OVERVIEW

Q1 2023
 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

Glossary

Term Definition

▪ Transformers facilitate energy transfer over networks that operate at varying voltage levels and are designed and manufactured in a variety
Transformer
of shapes and voltages to serve a diverse set of customers across end markets.

▪ Although product classifications and power ratings vary across the industry, the figures used throughout this document will refer to the
Voltage Rating
primary (incoming) voltage.

▪ Low-voltage electrical equipment is typically found in smaller end markets, such as residential and small-scale commercial and industrial
Low-Voltage
(C&I) markets; typical voltage range is less than 600 volts (V).
Voltages

▪ Medium-voltage electrical equipment is common among C&I, renewables, data centers, and smaller utility markets; typical voltage range is
Medium-Voltage
600V – 69kV.

▪ High-voltage electrical equipment is most common among heavy utilities, manufacturing, and oil & gas markets; typical voltage range is
High-Voltage
69kV – 765kV.

▪ Ultra-high voltage electrical equipment is seen much less frequently, generally in very large facilities; typical voltage range is greater than
Transformer Classifications

Ultra-High Voltage
765kV.

▪ Dry-type transformers do not use any insulating liquid; rather, the windings and core are enclosed in sheet-metal housing; common
Dry-Type
applications include distribution and substation transformers.

Cast Coil ▪ Cast coil transformers contain windings that have been solidly cast in epoxy resin under a vacuum in a mold.
Dry-Type

▪ These transformers are vacuum-pressure impregnated in a polyester resin varnish, which enhances durability and makes these units virtually
Vacuum Pressure
impermeable to moisture, debris, and other industrial contaminants.

▪ Liquid-immersed transformers use a variety of cooling fluids, including oil that is typically mineral-based to act as an insulator and cooling
Liquid-Immersed
agent; large, high-voltage transformers are most typically liquid-immersed.

▪ Polemount transformers are found on overhead transmission and distribution poles and are used to step down voltages prior to
Polemount
Liquid-Immersed

consumption.

▪ Padmount transformers are often tamperproof and are essential for stepping down primary voltage from transmission lines to secondary
Padmount
voltages for end customers and are typically installed on a concrete “pad” in open, outdoor areas

▪ Power transformers are available in medium- and high-voltage configurations and are critical to electrical substations, where they are used to
Power
regulate voltage levels between generation and distribution.

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 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

Glossary (Cont’d)

Term Definition

CHIPS Act ▪ Creating Helpful Incentives to Produce Semiconductors Act of 2022 authorizes semiconductor and domestic manufacturing spending

DOE ▪ U.S. Department of Energy

EPCA ▪ U.S. Energy Policy and Conservation Act of 1975

IEC ▪ International Electrotechnical Commission sets standards for electrical equipment and is the leading organization in the European market

▪ Institute of Electrical and Electronics Engineers is a professional association for electronic and electrical engineering and has ownership of
IEEE
the public U.S. transformer standards
Industry Acronyms

IIJA ▪ Infrastructure Investment and Jobs Act of 2021 allocates significant spending to critical infrastructure and electric grid modernization

IRA ▪ Inflation Reduction Act, passed in 2022, provides landmark legislation into domestic and clean energy production

kVA ▪ Kilo-volt-ampere is 1K volt-amperes, a common measurement of transformer power ratings

MVA ▪ Mega-volt-ampere is 1M volt-amperes, a common power measurement of large power transformers

NAHB ▪ National Association of Homebuilders

NEMA ▪ National Electrical Manufacturers Association is the largest trade association of electrical equipment manufacturers in the U.S.

NEVI ▪ National Electric Vehicle Infrastructure Program provides federal funding to deploy a nationwide EV charging network

UL ▪ Underwriters Laboratories is a third-party certifications and standards organization

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 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

TABLE OF CONTENTS

I Sector and Subsector Overview

II Transformer Market Dynamics

III Key Drivers of Growth

IV Market Landscape and Investment Considerations

V About Harris Williams

 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

Opportunities in the Transformer Industry

The Transformer Market Opportunity

▪ The North American transformer market is poised for significant growth, particularly as federal investments in the development and implementation of renewable sources of energy
increase, underpinning the ongoing support to create better and more efficient electricity infrastructure.
▪ Several key market trends are expected to continue driving growth, including aging electrical infrastructure, grid hardening and modernization initiatives, expanding renewable
distributed energy, and increasing demand from high-growth sectors, among many others.

Key Industry Themes

Transformers are a fundamental part of the grid, guaranteeing the safe and efficient transmission of electricity from generators to end users, and will
remain a critical link within the electrical power system to ensure continuous operation of the electrical power grid; as a result, the market remains
highly stable.

Market forces accelerated by the energy transition are fundamentally altering the electrical equipment industry, creating secular trends that are
driving significant demand growth.

Demand and supply imbalances have emerged and will intensify as energy-intensive sectors, such as data centers, electric vehicles, and renewable
energy, place further demand on increased infrastructure capability and resilience driving heightened demand for distribution transformers.

New clean energy policies set at both the federal and state level require new investments in infrastructure to accommodate the shift in source mix,
and ongoing political changes, including public and private sector reshoring initiatives, are expected to continue driving regulatory and investment
support for electrical grid development.

The outlook for current market participants remains highly favorable and offers attractive growth opportunities, which is further supported by growing
investor interest.

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 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

Transmission & Distribution Infrastructure

T&D Infrastructure and Electric Grid Overview Electric Grid by the Numbers
The North American electric infrastructure grid has an estimated asset value of over 4.6B+ 70+ Thousand
$1 trillion1 and is widely thought to be one of the most advanced and increasingly Total Kilowatt-Hours Total
clean systems in the world. The grid consists of millions of miles of transmission and 2021 Energy Output3 Wind Turbines6
distribution lines connected to a growing, interconnected network of power
generation facilities and substations. It is also currently undergoing a material 6.3M+ 50+ Thousand
transformation as it evolves from fossil fuels to renewable and clean energy Miles of EV Charging
sources, a goal most aim to have complete by 2050. However, despite the Distribution Lines2 Stations1
sophistication of the U.S. grid, the progress made to date could be jeopardized
without significant investment in grid infrastructure, which is aging and obsolete due
642+ Thousand 2+ Thousand
to decades of underinvestment. Revitalization and modernization of critical grid
Miles of High-Voltage Photovoltaic
infrastructure is needed in order to provide clean, efficient, and reliable energy for
Transmission Lines4 Generating Facilities5
future generations.

The grid consists of a vast network of critical infrastructure supported by millions of

7+ Thousand 1+ Thousand
transformers, which regulate voltage levels between each segment of transmission,
Total Wind Power
from generation to consumption. Given the complexity of the grid, many different
Power Plants5 Projects6
types of transformers are required for operability; however, for the purpose of this
document, the focus will center around transmission and distribution transformers, ~50M+ Transformers are critical
the two main types, and exclude all other transformer types, including Distribution Transformers infrastructure and connect every
instrumentation units. Currently in Use7 power source throughout the grid.

Continued Spend in the Sector Is Driving Growth

Total investment by IOUs at the parent or holding company level 8
($ in billions)
Grid infrastructure spending has remained resilient through economic cycles.
4.4% CAGR

$154.7 $159.2 $155.2

$132.7 $134.1
$119.2 $123.8
$112.5 $113.1
$104.0
$90.3 $90.3 $96.1
$82.8 $77.6 $78.6
$74.1 $74.2

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023P 2024P

1. U.S. Department of Energy; 2. Platts; 3. NERC; 4. U.S. Geological Survey; 5. U.S. Energy Information Administration; 6. U.S. Geological Survey; 7. GRID20/20; 8. Edison Electric Institute PAGE | 5
 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

Transformers Serve as a Critical Link Across the Electric Grid

The Vital Role Transformers Play

▪ Transformers perform a critical role and are needed at every stage of the grid, from generation to delivery to the end user, including multiple phases in between.
– Because power generation typically occurs at a distance from demand centers, transformers are necessary to transmit electricity over long distances while minimizing resistance
and power loss.
– Minimizing power loss requires transmitting electricity at as high a voltage as possible for long-distance transmission, creating a need for transformers at both ends of the
transmission network (i.e., transformers to step up to high-voltage at the start of the network and transformers to step down to low-voltage at the end of the network).
▪ Many different transformer types exist to serve the specific power and environmental requirements of commercial, industrial, and residential users and are characterized by the
voltage they help transmit throughout the grid.
▪ The transformer industry is a multibillion-dollar market and is expected to grow rapidly due to the transformation to sustainable energy, replacement of aging infrastructure, and
strong demand for electricity.

Electrical Power Supply Overview2

Power Generation and Transmission Distribution

Transformers play an integral role across the entire grid and are required at
1 multiple interconnects to deliver electricity and meet daily demands

1 1
1 2
2

2
2
1

2
2

1 Power Generation and Transmission 2 Distribution

Generation facilities produce hydroelectric, nuclear, thermal, solar, The distribution phase steps down voltage prior to electricity
and wind power, while transmission delivers high-voltage electricity consumption to service commercial and residential power markets
over long distances to the distribution grid. across a variety of end markets.

1. Refer to glossary for different types within these two main categories; 2. Note, throughout the document, power generation and transmission is used interchangeably with power transformers as well as high-
PAGE | 6
voltage transformers; distribution is used interchangeably with low- and medium-voltage transformers
 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

The Role of Transformers

Transformers Are Essential to the Grid

▪ Electrical transformers transfer electric power from one circuit to another through changing voltage levels with no change in frequency and serve to improve the safety and
efficiency of power systems by raising and lowering voltage levels to facilitate the movement of electricity across the grid.

Electrical Power Supply Overview

1 Power Transformers 2 Distribution Transformers

Overview: Power transformers are used to step up and step down power output from Overview: Distribution consists of further stepping down power outputs to the final
generation through transmission. electrical power usage by customers across a variety of end markets.
Voltage Range: ~69kV – 1,000kV Voltage Range: ~120V – ~69kV
Primary Suppliers: Multinationals Primary Suppliers: Domestic players

Representative Power Transformers Distribution Transformers

End Markets

Representative End Markets

Utility Commercial Industrial

Power plants and Transmission lines carry Distribution lines carry electricity to end users and
renewable generation electricity across long distances transformers facilitate consumption across end markets

1 2 Representative Transformers

Power transformers continue to be dominated by multinationals, whereas distribution relies heavily on domestic providers.2

1. Refer to glossary for different types within these two main categories; 2. Refer to page 11 for additional detail related to competitive dynamics between power transformers and distribution transformers PAGE | 7
 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

Highly Engineered Products…

Transformer Overview Key Components of Transformers1

▪ Transformers are highly engineered products, requiring sophisticated technical *Denotes components that are not typically included in dry-type transformers
and industry knowledge as well as tailored procurement, design, and testing
capabilities.
▪ The main components of transformers include a laminated magnetic core, as
well as primary and secondary windings.
– The primary winding is connected to the power source and is where the
magnetic flux (a magnetic field-inducing electrical current) is produced in the A Bushings
core by the current and the windings and is constant in all windings.
▪ If the number of secondary turns is greater than the number of primary turns,
then the secondary voltage is greater than the primary voltage (step up). B Core

▪ Conversely, if the number of secondary turns is less than the number of primary
turns, then the secondary voltage is less than the primary voltage (step down).

Core Clamp

F Oil Conservator

Transformer Applications Gasket System

▪ Transformers form the foundation of the electric grid and are critical
components from power generation to distribution and end use. Transposed Cables E Tank

▪ Primary uses of an electrical transformer include: C Winding

Surface Protection
– Raising or lowering the voltage level in the circuit of an alternating current D Radiator & Fan
(AC) system;
– Preventing the passage of direct current (DC) from one circuit to another; A Bushings serve as an insulation device and allow safe connection of
transmission wires into the tank enclosure.
– Isolating two electric circuits;
B The core houses the windings and provides the path for magnetic flux.
– Stepping up the voltage level at power generation and stepping down the
voltage level at the distribution phase; and C Windings receive electricity from the AC source and deliver it to the load.
– In rare instances, mainly for power factor correction, increasing or The radiator and fan provide air flow and cooling to regulate internal
D
decreasing the value of an inductor or capacitor in an AC circuit. equipment temperature levels.
▪ A range of specialty transformers serves unique end markets such as E
The tank protects internal components from dirt, moisture, and mechanical
technology and data centers, electric vehicle charging, light rail networks, and damage.
solar and wind turbine generating facilities.
F The oil conservator provides storage for insulation liquids, which can increase
in volume at high temperatures.

1. The transformer pictured is a large, liquid-immersed power transformer and does not represent every type of transformer PAGE | 8
 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

…Across a Variety of Categories

Multiple Categories of Transformers Serve a Range of Applications and End Markets

▪ Because transformers and related equipment facilitate energy transfer over networks that operate at varying power output levels, they are designed and manufactured in variety of
shapes, sizes, and voltages and serve a diverse set of customers across a range of end markets.
▪ The diversity of transformers across the grid landscape ensures that electrical power is delivered safely, reliably, and in the most efficient manner possible.

Transformer Classifications High-Voltage Transformers

The various sizes of transformers are determined

High-voltage transformers provide the generation step up 10 – 100+MVA
by the primary (input) voltage, the secondary
to enable bulk power to be transmitted over long Power Rating
(output) voltage, and the load capacity,
distances and are used at power generation stations and
measured by MVA or kVA, which quantifies the
in substations to facilitate power flow between systems of Greater than 69kV
amount of power that can be transferred. These
varying high-voltage levels. Voltage Range
voltage and power ratings are used to
distinguish different classes of transformers.
Medium-Voltage Transformers

Medium-voltage transformers are utilized across a variety 500kVA – 30MVA

of applications and end markets and perform a critical Power Rating

function in electrical transmission by stepping down high-

In addition to their voltage power ratings, voltage transmission to levels used to distribute electricity 600V –69kV
to customers across a variety of end markets. Voltage Range
transformers are further classified into dry-type
and liquid-immersed categories. Dry-type
transformers do not use insulating liquids; rather,
Low-Voltage Transformers
the windings and core are cooled by air. Dry-
type units are commonly used in the distribution Low-voltage transformers further step down electrical 10VA – 2.5MVA
phase. Liquid-immersed transformers use various voltage for end-use consumption by customers. These Power Rating
fluids as an insulator and cooling agent. Large, transformers are available in many different types and are
high-voltage transformers are typically liquid- used to regulate electrical voltage for use in many Less than 600V
immersed and used in the transmission phase. common household and commercial applications. Voltage Range

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 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

TABLE OF CONTENTS

I Sector and Subsector Overview

II Transformer Market Dynamics

III Key Drivers of Growth

IV Market Landscape and Investment Considerations

V About Harris Williams

 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

The Transformer Market Remains Highly Competitive

A Highly Competitive Market…

▪ The transformer market consists of large multinational electrical equipment manufacturers, small and medium suppliers specializing in custom units, and aftermarket providers
focused on reconditioning and repair services.
▪ Although many multinational manufacturers experience fierce import competition leading to the outsourcing of manufacturing, most distribution transformers (i.e., low- and
medium-voltage units) continue to be specifically designed and domestically manufactured for the North American market.
– Distribution units will continue to be manufactured in local markets as a result of shipping costs (i.e., higher percentage of overall costs given total unit cost), lead times, and
differing global standards (i.e., there has never been a world standard; the U.S. sets standards through IEEE).
▪ Over the last several years, manufacturers have been adversely impacted by supply chain disruptions, which have contributed to a lack of raw materials, rising input costs, and
longer lead times for most products.
▪ A lack of skilled labor has also contributed to declining capacity: as a generation of highly skilled and experienced engineers retire, fewer skilled workers are available to train the
workforce of the next generation.
▪ Although the industry has experienced secular challenges, a few domestic manufacturers have continued to gain market share from multinationals that have chosen to reduce
their portfolio and focus on a limited product offering.

…Where Suppliers Are Heavily Influenced by Production & Import Dynamics

The Power Transformer Market Remains Highly Competitive Globally… …Whereas the Distribution Market Is Reliant on Local, High-Quality Producers

The U.S. is heavily reliant on overseas power transformer production, and the loss of Unlike power transformer manufacturers, low- and medium-voltage distribution
this critical infrastructure could severely disrupt electricity services.1 transformer manufacturers are much better insulated from import competition.
Key reasons why multinationals are competitive: Key reasons why domestic providers win in the U.S. market:

▪ High capital spend: the significant size and complexity of power transformers ▪ Shipping costs: higher shipping costs as a percentage of sales for distribution
requires significant capital expenditure and labor investment. transformers makes it difficult for multinational players to enter the distribution
market.
▪ Commodity exposure: rising material prices and fluctuating exchange rates
significantly reduce the ability to pass through the high costs of manufacturing power ▪ Labor access: access to both high-skilled and low-cost North American labor (i.e.,
transformers. U.S. and Mexico) allow domestic providers to differentiate on price.

▪ Specification risk: differing input quality and testing expectations demand robust ▪ Strict specifications: the U.S. and European markets have significantly different
regulatory knowledge and a deep employee base to meet U.S. or other international transformer specifications, coupled with certification challenges from varying local
market quality or specifications. building and electrical codes, has resulted in fewer overseas imports of distribution
transformers.

Long lead times in every phase of power transformer production, The distribution market is well insulated from new market entrants
various specification standards, and scarce domestic production and will continue to comprise players able to differentiate on product
significantly increase import risk. customization and delivery.

1. U.S. Office of Electricity PAGE | 11

 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

Sophisticated Manufacturing Process

Supply Chain Overview Transformer Manufacturing Overview

▪ Certain raw materials, such as grain-oriented or The typical manufacturing process for transformers consists of the following steps:
amorphous steel, critical components in transformer
cores, have a limited number of domestic suppliers, Engineering and Design Order
leaving U.S.-based manufacturers dependent on foreign Complex transformer designs must balance cost and performance parameters Placement
imports.
− Many of the countries producing these grades of
electrical steel are currently in the process of large
power grid buildouts, resulting in internal consumption Core Building
and an increasingly limited supply of exports. High-skill process utilizing cold-rolled, grain-oriented electrical steel core
components
▪ Due to ongoing raw material shortages, transit times, and
an intensive manufacturing process, power and
distribution transformers have average lead times of 12 – Winding Production
38 months, nearly double those since the onset of the
pandemic. Transformer winding is a very intensive and high-skill process; windings are
assembled from copper and other specialty materials
▪ Historically strong demand, supply chain disruptions, and
rising material costs have contributed to elevated
manufacturing costs, and manufacturers have responded Liquid-Immersed Dry-Type
with significant price increases on most products.
Drying Stage Dip & Bake Stage
Moisture is removed from the core to Conductor coils are dipped in varnish
protect the insulation and baked (may include casting for
Aftermarket Solutions Overview
cast-resin units)
▪ Units that reach the end of their useful life can be
disposed of or reconditioned to extend the operating life Tank Production Enclosure Production
of an asset by select aftermarket providers. Tank completed prior to assembly to Transformer enclosures are
eliminate moisture manufactured and assembled
▪ Units acquired from utility and industrial customers are
refurbished for resale by either:
− Recondition & Repair: returns equipment to fit-for-
service status by changing the fluids, regasketing the Final Assembly
units, replacing any broken components, and
performing electrical tests Transformers are assembled in a clean environment to ensure optimal performance
and reliability
− Rewind: overhauling a unit by disassembling its
components, designing and winding new coils, and
performing reconditioning services Product Testing
Testing is performed to ensure accuracy of voltage ratios, verify power ratings, and Product
determine electrical impedances
Shipment

1. U.S. Department of Commerce; 2. U.S. Congressional Research Service PAGE | 12

 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

Key Barriers to Entry Prevents New Entrants

Key Barriers to Entry for New Market Entrants

Entrants in the transformer market require a large initial capital investment to establish a manufacturing facility, specialty equipment, and the
technology to design, manufacture, and test transformers.
Capital Intensity

New entrants must also recruit, hire, and train a highly skilled and technical workforce capable of operating the latest technology while meeting
demanding product specifications.
Labor Requirements

Manufacturers must have the ability to develop and maintain a global supply chain to source copper, electrical steel, cooling fluids, and other
specialty materials that are essential in transformer production.
Material Sourcing

Manufacturers need to develop and grow multiple sales channels, including direct sales and national distributor networks, as well as private label
sales to other electrical manufacturers.
Sales Channels

Manufacturers are required to comply with a variety of evolving federal, state, and environmental regulations and ensure their products complete a
range of testing procedures and evolving energy efficiency standards.
Regulatory Environment

New entrants need to develop a product suite that meets the specific needs of a diverse customer base in order to win new business and drive
long-term customer retention, areas where established market participants usually excel.
Product Suite

Established manufacturers compete on transformer lead times, with specialized providers typically offering significantly shorter lead times than
OEMs, making it very difficult for a new market entrant to compete.
Speed and Efficiency

It is also important to build and maintain a reputation as an employer of choice with highly skilled technicians in order to deliver the highest quality
and most reliable products to customers.
Reputation in Market

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 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

Evolving Regulatory Environment

Evolving DOE Efficiency Standards

▪ The Department of Energy (DOE) has regulated the energy efficiency characteristics of distribution transformers since 2007 (the DOE last increased these standards in 2016), and
through the Energy Policy and Conservation Act (EPCA), the DOE is required to evaluate test procedures to determine a product’s efficiency over its useful life.
– The implementation of new standards requires the reengineering of transformers from the ground up, redrawing of supply chains to source new core and conductor materials,
and upgrading of aging factories and processes.
▪ In December 2022, the DOE proposed new energy efficiency standards for distribution transformers sold in the U.S. The new standards aim to improve grid resiliency, lower
energy costs for consumers, and reduce carbon-dioxide emissions.
– Under the proposed rule change, which would go into effect in 2027 if adopted, nearly all new transformers would be required to be manufactured using new materials to
make transformer cores more efficient than the grain-oriented electrical steel cores that are used in most distribution transformers today.
– The evolving standards are unique to the U.S. transformer market and serve as an additional barrier to protect domestic manufacturers from import competition; however, the
limited availability and higher cost of new materials along with reengineering of existing products will pose considerable challenges for most small manufacturers and will likely
lead to higher prices for consumers.

Institute of Electrical and National Electrical Manufacturers

Underwriters Laboratories
Electronics Engineers Association

▪ IEEE is a global association of professionals that ▪ NEMA oversees a variety of responsibilities in the ▪ UL, a third-party certification company, sets industry-
develop and maintain consensus standards for electrical manufacturing industry and is most closely wide standards on new products; UL Certifications
electrical and electronic equipment including associated with “NEMA ratings” and the type of can be found on machinery, industrial equipment,
transformers, Wi-Fi, Ethernet, and other products. enclosure and construction of electrical and appliances.
components.
▪ The Transformers Committee is one of the largest ▪ Testing and inspection procedures are routinely run
and most active of the 17 technical committees ▪ NEMA ratings are published every fifth year to rate on these products to ensure they meet industry
within the IEEE Power and Energy Society (PES). enclosures and protect electrical equipment from standards and are constructed for utmost safety.
damage due to liquids, dust, and corrosive
▪ The most significant IEEE standards include the ▪ UL Recognition focuses on component product
chemicals.
C57.12.00 standard for liquid-immersed transformers parts; certifications ensure machine safety and
and the C57.12.01 standard for dry-type ▪ The ratings provide a range of standards that are efficiency, generating sustainable practices within
transformers; additional IEEE standards govern useful in defining the types of environments in which companies and OEM preference for UL Recognized
transformer components and specialty uses such as an electrical component enclosure can be used. products.
power rectifier and solar transformers.

Adapting to regulatory developments, maintaining industry ratings, conforming to standards, and holding
certifications are all requirements for being “spec’d in” and achieving preferred status among manufacturers.
These strict and costly requisites create high barriers to entry and provide a competitive edge relative to peers.

PAGE | 14
 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

TABLE OF CONTENTS

I Sector and Subsector Overview

II Transformer Market Dynamics

III Key Drivers of Growth

IV Market Landscape and Investment Considerations

V About Harris Williams

PAGE | 15
 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

Transformer Demand Drivers…

Transformer Demand Overview

▪ Clean energy and renewables have experienced rapid growth due to a surge in electric vehicles and sweeping initiatives to combat rising CO2 levels and climate change.
▪ In order to facilitate the transformation to a clean energy economy, new grid infrastructure will be needed to transmit the growing and interconnected network of wind, solar, and
distributed energy resources.
▪ The transition will require significant investment in transformers, T&D infrastructure, and storage solutions to transport renewable electric power, which is often generated in rural,
sparsely populated areas, to distant population centers.

Drivers of Transformer Spending

1
Aging Aging transformers and related transmission and distribution infrastructure are anticipated to receive meaningful equipment upgrades while
Infrastructure undergoing significant revitalization and modernization to minimize outages and prevent high-cost grid failures.

2
Grid Extreme weather, natural disasters, and growing national security concerns after recent attacks on substation transformers have resulted in an
Resiliency increasing emphasis on grid resiliency and durability, all while customers express decreasing tolerance for outages.

3
Landmark Increasing focus on the nation’s aging infrastructure, grid resiliency, and climate impact have inspired sweeping legislation and significant
Legislation investment that are expected to drive both near- and long-term spending.

4
Renewables Continued expansion and integration of renewable energy sources into the electric grid will require investment in new transformers with each
Growth project that is brought online; the IIJA and IRA have allocated billions in targeted spending to facilitate the Energy Transition.

5
High-Growth Strong demand from high-growth end markets, such as technology and data centers, EV charging networks, and renewable energy will place
End Markets additional stress on grid capacity and resiliency, and require new, modern transformers.

6
Reshoring Both the public and private sectors are focused on reshoring domestic manufacturing as a result of the pandemic, supply chain disruptions, and
Initiatives geopolitical tensions; the reshoring of manufacturing is expected to generate greater electricity demand and increase transformer spending.

PAGE | 16
 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

…Are Testing Current Inventory Levels and Availability…

Industry Impacts

Supply Chains

Global supply chains have experienced significant disruptions in recent years driven by the compounding effects of increasing demand and
decreasing materials supply, which was exacerbated following Russia’s invasion of Ukraine.

Limited Inventories

Although electric utilities maintain reserve inventories of transformers to replace damaged or destroyed transformers following natural disasters,
much of that supply has been drawn down without replenishment or any indication when replacement inventory will be available.

Labor Constraints
Labor and workforce availability are often cited as the most critical threat to transformer production capacity due to difficulty in attracting and
retaining skilled labor, while highly trained and experienced engineers continue to age out of the workforce; manufacturers have also noted that
high-skill requirements and low relative wages have created a labor shortage, along with high turnover, which is around 10% in many cases.1

Production Capacity
Despite increasingly limited supplies, the demand for distribution transformers continues to outpace current production capacity, which is
extremely difficult to scale, prompting the DOE to contemplate a range of actions, including engagements with manufacturers, elevating best
practices to address the underlying problems, and potentially using the Defense Production Act (DPA), pending congressional approval.

Government Action
Due to strong demand and persistent supply shortages across the electrical power market, the DOE is taking action to address the limited
supply of critical grid components, including distribution transformers, which the department has described as the most urgent near-term supply
issue.

1. DOE PAGE | 17
 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

…Resulting in an Emerging Transformer Shortage

Strong Demand Driving Shortages Bringing National Attention to Transformer Shortages

▪ Many electric utilities have recently expressed concern over the growing
shortage of electrical transformers, particularly distribution transformers. 429% 1 of 5
Lead Time Increase for Public Utility Projects
▪ Due to the scarcity of these critical components, utilities and electrical Distribution Transformers Canceled or Deferred
equipment suppliers have begun sharing their already limited inventories while From ’20 – ‘221 Due to Shortages1
curbing the supply of transformers to the construction industry to ensure
adequate inventories during the storm season.
▪ In November 2022, six construction and utility trade groups, including the
▪ Public utility companies have also begun to reuse, repair, and delay the National Association of Homebuilders (NAHB) and Edison Electric Institute, sent
deployment of new transformers in response to growing shortages and a joint letter to the House and Senate appropriations committees urging leaders
increasing lead times, and several states have asked the Federal Emergency in Congress to allocate $1B to address transformer supply chain challenges.
Management Agency for assistance in securing additional transformers.
▪ Due to the unprecedented supply chain disruptions and declining inventories of
critical transformers, the electrical, residential, and commercial construction
industries have experienced significant challenges in procuring the necessary
equipment to maintain the power grid and build new housing stock.
Factors Contributing to Reduced Availability
▪ Electric utilities have also experienced difficulties sourcing equipment,
especially distribution transformers, which are required for grid maintenance and
restoring power following storms, wildfires, and other natural disasters.
With only one domestic manufacturer, grain-oriented
electrical steel has been cited as a critical barrier to ▪ Rising shortages prompted the Electricity Subsector Coordinating Council
increased transformer production capacity. (ESCC) to further examine the causes through a specialized working group,
Raw Materials
which reported that current demand is far outpacing supply.

– The ESSC team reported that average lead times for all classes of
distribution transformers have risen from a few months to well over a year.
The electrification of new and rapidly expanding
industries, such as electric vehicles and data centers, – It also noted that construction and electrification projects are being delayed
continues to generate strong demand for transformers. or canceled due to limited supplies of transformers.
Electricity Demand
– The ESSC group recommended that the government utilize DPA authorities
to address labor shortages and material availability, which it found to be the
Resilient demand due to the repair and replacement of most immediate obstacles to increasing transformer production capacity.
aging infrastructure as well as modernization initiatives
Aging Infrastructure continue to consume available supplies.

Seasonal storms result in damaged and impaired

transformers that require replacement, while utilities
increase inventories in advance of peak storm season.
Seasonal Demand

1. American Public Power Association PAGE | 18

 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

1, 2 Aging Grid Infrastructure…

Grid Infrastructure Requires a Transformative Renovation Energy Infrastructure Report Card1

▪ The existing network of transformers is aging and obsolete due to decades of ▪ In its most recent 2021 review, the ASCE (American Society of Civil Engineers),
underinvestment, changing patterns in the use of electrical power, and a greater awarded the nation’s energy infrastructure a C‒ rating.1
reliance on renewable energy sources.
▪ The ASCE noted that although spending had accelerated for both
▪ Aging infrastructure and severe weather pose risks to grid reliability, requiring transmission and distribution infrastructure, severe weather remains an
T&D infrastructure investment to reduce the frequency and duration of outages increasing threat.
and improve grid resiliency.
– Distribution infrastructure, the “last mile” of the electric grid, struggles with
▪ The nation’s power infrastructure system has become one of the greatest reliability, with nearly 92% of all outages occurring along this segment.2
barriers to the Energy Transition and carbon-reduction goals.
▪ The ASCE also reported that all electric grid components (generation,
▪ These challenges arise at a time of historic underinvestment in the nation’s transmission, and distribution) have a significant investment gap, which is
critical T&D infrastructure. projected to grow to $197B by 2029.1
– The average age of large power transformers, which handle 90% of U.S.
electricity, is now more than 40 years.
▪ Further, according to the DOE, power outages are now costing the U.S.
economy $28B - $169B annually.2
▪ In the near term, supplementary T&D infrastructure, smart planning systems,
“To maintain the strongest economy in the world, we also need the best and improved reliability are needed to enable the grid transformation, as
infrastructure in the world. We used to be #1 in the world in infrastructure, then distributed resources and renewable energy continue to grow.
we fell to #13th” – President Biden, State of the Union Address, February 2023.

Age of Existing Transformers U.S. Power Outages Are Becoming More Frequent

Industrial Transformer Equipment Commercial Transformer Equipment Temporary and Sustained Transmission Outages4

Increasing outages have prompted billions in federal spending to

12% modernize the grid, leading to strong demand for transformers.
25%
33% 32%
Avg. Age: 10,362 10,249 10,490
Avg. Age:
8,963 9,188
20+ Years3 20+ Years3 8,684 8,745

55%
43% 4,688 4,588 4,204

< 10 Years 11-29 Years >30 Years

Transformers, especially units used in data centers, are burdened with higher 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
loads relative to their rating, resulting in a shorter useful life of ~10 years Total Outages Moving Average

1. ASCE, 2021 Report Card; 2. U.S. DOE; 3. Independent Third-Party Market Study; 4. NERC PAGE | 19
 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

3 …Supported by Landmark Legislation…

Evolution of Legislation Supporting Energy Infrastructure and the Shift to Clean and Renewable Energy Sources

The transformer market is set to experience explosive growth driven by billions in federal spending targeting key initiatives in which transformers are critical
components, including clean energy, EV charging, and grid resiliency; moreover, American transformer manufacturers are poised to benefit from expanded Buy
America rules and material tax credits for domestic production.

▪ The IIJA, passed in 2021, represents a historic investment in the nation’s core infrastructure systems.
– The IIJA authorizes $1.2T in spending with approximately $550B allocated to new programs and investments and $73B earmarked for Power and Grid spending,
including the bipartisan Energy Infrastructure Act.
IIJA

– Power and Grid spending will be allocated to grid reliability and resiliency; critical minerals and supply chains for clean energy technology; critical energy
technologies including carbon capture, direct air capture, hydrogen, and energy efficiency; and various energy projects from the bipartisan Energy Act of 2020.
– The U.S. Department of Transportation’s Federal Highway Administration (FHWA) announced it will release ~$60B to support critical infrastructure.

▪ The IRA, passed in 2022, was designed to serve as a major catalyst to the electrification of the U.S. economy while achieving meaningful carbon reductions; the IRA
represents the largest investment to address climate change in U.S. history.
– In total, the IRA will raise $738B, allocating roughly $391B in spending to address a variety of clean energy and climate change initiatives.
IRA

– The IRA legislation targets renewable and clean energy sources – both existing and developing – and provides additional incentives for electric vehicles, as well as
the electrification of heating and cooling systems.

▪ The CHIPS Act of 2022 was designed to boost U.S. competitiveness, innovation, and national security, and aims to catalyze investments in domestic semiconductor
manufacturing capacity.
CHIPS Act

− The CHIPS Act directs $280B in the next ten years to position supply chains and scientific progress in the U.S. more competitively.
− The legislation aims to incentivize the production capacity of high-tech manufacturing companies, increase production capacity of US semiconductors, spark
domestic R&D, create regional high-tech hubs, and develop a more robust STEM workforce.

▪ The NEVI Formula Program, established as part of the IIJA, provides funding to states to strategically deploy electric vehicle charging infrastructure and to establish an
interconnected network to facilitate data collection, access, and reliability, amounting to a down payment that is the largest-ever U.S. investment in EV charging.
NEVI Program

− Under the NEVI Formula Program, ~$5B will be made available to states over the next five years to build out a national EV charging network.
− The law also provides $2.5 billion for communities and corridors through a competitive grant program that will support innovative approaches and ensure that
charger deployment meets administration priorities such as supporting rural charging, improving local air quality, and increasing EV charging access in
disadvantaged communities.
− Altogether, the NEVI establishes the blueprint to construct an equitable network of 500,000 chargers covering 75,000 miles of highways by 2030.

PAGE | 20
 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

4 …Is Driving Electricity and Renewables Growth…

Existing T&D Infrastructure Requires Modernization U.S. Electricity Use by End-Use Sector1,2

▪ The transition to clean and renewable energy is well underway but remains in (Billion kW Hours)
the early innings of a decades-long transformation of the entire electric grid.
2,500
▪ Landmark legislation, including the IRA and IIJA, will serve as catalysts, bringing
billions of dollars of investment to a range of renewable and clean energy
2,000
projects.
▪ As a result of the ongoing grid transformation, the transformer market is poised 1,500
for significant growth, driven by increasing demand for electricity and the
growing contribution of electrical power derived from renewable sources.
1,000
− Further, the existing transmission and distribution infrastructure is aging and
requires replacement of older transformer units to ensure the grid remains 500
reliable and efficient.
▪ The transition to a clean energy economy is accelerating, requiring new, high- 0
efficiency transformers and modernized grid infrastructure to deliver electricity 1990 2021 2050 1990 2021 2050 1990 2021 2050
throughout a more regionally focused grid powered by intermittent and variable Residential Commercial Industrial
energy sources, such as wind and sunlight.
Electric Sales Direct Use

U.S. Electricity Generation by Source1 U.S. Renewable Electricity Generation by Source1

(Billion kW Hours) (Billion kW Hours)

Increased projected U.S. electricity generation capacity and diversified With the rapid acceleration and adaptation of the Energy Transition comes
generation sources, coupled with ~70% of today’s transformers at or above the requirement of high-efficiency transformers to distribute renewable
6,000 their useful life3, present significant new and specialty transformer demand. energy produced from all sources.
2,500
5,000 Historical 2021 Projected Historical 2021 Projected
2,000
44%
4,000 51%
21%
1,500
3,000
37%
34% 1,000
2,000 19% 31%

19% 43% 2%
1,000 500 2%
12%
23% 30% 7% 12%
10% 4%
0 0
2010 2015 2020 2025 2030 2035 2040 2045 2050 2010 2015 2020 2025 2030 2035 2040 2045 2050

Coal Nuclear Natural Gas Renewables Other Hydroelectric Geothermal Wind Solar

1. U.S. EIA; 2. In the transportation sector, electric sales in 1990, 2021, and 2050 were and are projected to be 4.8, 12.9, and 145.7 billion kW Hours, respectively, with direct use being 0 kW Hours in each period
PAGE | 21
3. T&D World
 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

5 …Along With High Growth Across a Variety of End Markets

Several High-Growth End Markets Will Accelerate Transformer Demand

Data Center EV Charging Solar Power

▪ Explosive demand for data and streaming content is ▪ Under the NEVI Program, nearly $7.5B has been ▪ The U.S. currently operates more than 2,500 utility-
driving an expansion of data centers worldwide. allocated to states over the next five years to build out scale solar generating facilities and contains thousands
a national electric vehicle charging network under the of major commercial solar projects that are active or
▪ Several new technologies, including 5G connectivity,
Bipartisan Infrastructure Law. under development.3
autonomous driving, and a range of IoT edge devices,
such as smart home, security, and access control ▪ NEVI will support efforts to target a 50% EV share of ▪ In August 2022, the IRA was enacted, significantly
systems will generate even greater demand for data. new vehicle sales and build a network of 500k EV increasing the amount of federal incentives and
chargers covering approximately 75k miles of highway lengthening the duration of tax credits to manufacture
▪ As demand for data continues to grow, the demand for across the country.1 and deploy domestic solar equipment.
data centers will increase, along with the industry’s
enormous levels of energy consumption. ▪ “Buy America” initiatives give preference to domestic ▪ Solar power is now the fastest-growing energy source,
manufacturers of EV charging stations and will and massive growth in solar transformers will be
▪ Transformers are critical to the data center industry, generate significant demand for new transformers, required to support the expansion of both commercial
particularly as it transitions to small edge data centers which distribute power to EV charging networks. and industrial generation facilities as the grid transitions
located closer to end users and connected devices.
▪ U.S. EV growth requires a $28B cumulative investment to a greater contribution of solar energy.
in charging infrastructure over 2021 to 2030.2

Data center transformers operate in demanding “As EVs proliferate, charging infrastructure must follow Solar and wind power systems require voltage
environments with a high density of electronic – if not lead” … EV charging transformers support adjustments between the system, end user, and utility
equipment and must be engineered to avoid multiple charging configurations for small and rapid provider, requiring specialized bidirectional
overheating and costly outages. charge commercial systems. transformers.
Key Recent and Ongoing Link: Harris Williams EV Charging (U.S. cumulative solar additions in gigawatts) 4
Data Center Investments and Fueling Infrastructure Report
Utility Solar Distributed Solar

$35B investment in data centers in

Virginia from 2023-2040 32.5
26.0
$9B investment in data centers 20.0
across the U.S. in 2022
13.0 102.0
82.0
6.0 63.0
Billions in spending and plans to 41.0
build 50 to 100 data centers 20.0
annually for the foreseeable future 2022 2023 2024 2025 2026

Growth in specialty transformers will be critical to several rapidly expanding end markets, including data centers, EV charging
networks, and solar and wind power projects, and transformers serving these markets possess unique characteristics and
often require highly engineered, customized solutions to meet end-market and project specifications.

1. U.S. Department of Transportation; 2. International Council on Clean Transportation; 3. Solar Energy Industries Association; 4. International Energy Agency PAGE | 22
 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

6 Reshoring Initiatives
Significant Reshoring Tailwinds… …Validate Continued Reshoring Momentum1

▪ Global catalysts, including climate forces and geopolitical destabilization, have (Job Announcements per Year, Reshoring)
highlighted U.S. supply chain vulnerabilities and an overreliance on international
manufacturing. ~350,000 jobs returned to the U.S. in 2022, with ~220,000 from
reshoring and ~130,000 from foreign direct investment
▪ Private and public sectors are highly focused on creating greater self-sufficiency
as declining levels of emergency electrical equipment reserves, domestic 250,000
manufacturing capacity, and availability of critical raw materials drive continued
200,000
manufacturing reshoring.
– The Facilitating the Reshoring of Energy Grid Component Manufacturing Act 150,000
was recently introduced and aims to establish an electric grid product loan 100,000
program within the Department of Energy.
50,000
▪ Reshoring momentum is expected to continue following ~350,000 jobs returning
to the U.S. in 2022, driving continued U.S. manufacturing and jobs growth, as 0
well as deficit reduction. 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
– These initiatives, coupled with the fact that no new entrants have entered the
Reshoring FDI
U.S. market in years, will create sustained growth for established domestic
manufacturers, helping make the U.S. more self-reliant and resilient.

Strong Reshoring Support from American Executives2 Reshoring Initiatives in the News

92% of executives expressed positive sentiments towards ‘The Reshoring Craze Is Real’ – These
reshoring in Kearney’s Operations and Performance research
Companies Should Benefit, Experts Say
report.
Positive Sentiment

“The reshoring craze is real, especially as you continue to hear more and
79% of executives with manufacturing operations in China more about this general theme of deglobalization. It is a trend that is going
have moved part of their operations to the U.S. or plan to so to accelerate, especially in the first part of the year. The U.S. has learned its
in the next three years. lesson during COVID and the lockdown and supply chains breaking.
Operation Relocation
Companies will continue to focus on improving operating efficiencies,
reducing costs, preserving cash, and sustaining earnings growth – and North
China’s share of U.S. manufacturing imports decreased from America will provide a safe haven. Supply chains will not only move closer
66% to 55% in 2021 based on Kearney’s China Diversification to home but evolve, as there is no longer a ‘one size fits all’ solution in the
index, which tracks shifting U.S. imports. face of sever disruptions, but rather, a ‘best way forward’ as opposed to the
Declining Imports
accustomed ‘cheapest way forward’.”

American companies began to diversify away from China - December 2022

before COVID-19 and continued this trend even as other low-
cost Asian countries started to recover from the pandemic.
Self-Reliance

1. Reshoring Initiative IH 2022 Data Report; 2. Kearney’s Reshoring Index PAGE | 23

 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

TABLE OF CONTENTS

I Sector and Subsector Overview

II Transformer Market Dynamics

III Key Drivers of Growth

IV Market Landscape and Investment Considerations

V About Harris Williams

PAGE | 24
 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

Transformer Landscape Today

Primary Product
Manufacturer HQ Ownership Business Description
Offering

Private Power transformers Provider of mobile and power transformers and substations power solutions

Private (Graycliff
Distribution transformers Manufacturer of transformer and switchgear products
Partners)

Private Distribution transformers Designer and manufacturer of commercial and specialty application transformers

Private Power transformers Producer of large power transformers with repair and maintenance services

For the full market taxonomy, please

Actionable Targets

Private reach out to [email protected]

Distribution transformers Manufacturer of a range of dry-type transformer solutions

Private Distribution transformers Designer and manufacturer of transformers and other magnetic devices

Private Power transformers Manufactures power and specialty transformers and provides parts and services

Private (One Equity Power and distribution

Manufacturer of large power and specialty transformer products and substations
Partners) transformers

Private Distribution transformers Designer and manufacturer of transformers and other electrical products

Private Power transformers Manufacturer and supplier of specialized power transformers

PAGE | 25
 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

Transformer Landscape Today (Cont’d)

Primary Product
Manufacturer HQ Ownership Business Description
Offering

Power and distribution

Public (NYSE: ETN) Operates a global electrical component and equipment company
transformers

Power and distribution

Hitachi (OTC: HTHIY) Power grid and transformer products (formerly Hitachi ABB Power Grids)
transformers

Public (NYSE: HUBB) Power transformers Designer and manufacturer of transformers and other electrical power equipment

Public (TSE: 6503) Power transformers Developer, manufacturer, and distributor of electronic equipment worldwide
Multinationals

General Electric (NYSE: Power and distribution

Manufactures a range of transformers and provides various services
GE) transformers
For the full market taxonomy, please
reach out to
Public (TSE: 6502)
[email protected]
Power transformers Designer and manufacturer of consumer, energy, and electronic products

Public (EXNTPA: PU) Power transformers Provider of energy and automation digital solutions worldwide

Public (XTRA: ENR) Power transformers Global provider of a range of gas and power and renewable energy products

Public (BOVESPA:
Power transformers Provides global transformer, motor, control, and generator solutions
WEGE3)

Private (Arkansas
Distribution transformers Manufacturer of transformers and component parts
Electric Cooperative)
Other

Public (TSX: HPS.A) Distribution transformers Designer and manufacturer of transformers and related products

Private (Delaney Capital) Distribution transformers Manufactures and supplies electrical transmission and distribution equipment

PAGE | 26
 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

Transformer Landscape Today

Primary Product
Manufacturer HQ Ownership Business Description
Offering

Aftermarket products and

Private Provides testing, commissioning, and maintenance services
services

Aftermarket products and

Private Provides replacement parts, testing, and retrofitting services
services

Aftermarket products and

Private (Sunbelt Rentals) Provides load bank and power distribution rental services
services

Aftermarket products and

Private (Insight Equity) Offers electrical equipment repairs, parts, disposal, and recycling services
services

Aftermarket products and

Private
For the full market taxonomy,Provides
services pleasetransformer removal, recycling, and disposal services
reach out to [email protected]
Aftermarket

Aftermarket products and

Private Manufacturer of power, distribution, and specialty transformers
services

Aftermarket products and

Private Provider of a range of commercial and industrial transformer products
services

Aftermarket products and

Private Provides electrical, power line, and communications services in the Northeast U.S.
services

Aftermarket products and Provider of comprehensive transformer, switchgear, substation, and testing
Private
services services

Aftermarket products and

Private Offers power transformer maintenance services and testing
services

Private (Trilantic North Aftermarket products and

Global provider of commercial and industrial electrical distribution equipment
America) services

PAGE | 27
 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

Key Macro Considerations for Investors

Investment Considerations Key Characteristics

▪ Transformer demand is expected to remain strong, driven by increasing demand for electricity, grid durability and resiliency initiatives, and
Resilient Demand
the need for secure, reliable electrical power.

▪ The Energy Transition is well underway, requiring a substantial shift to clean and renewable energy sources and heightened electric vehicle
charging demand to meet ambitious climate and decarbonization goals.
Energy Transition
▪ A transformer is required with every new connection to the grid and at every new EV charging station, increasing grid complexity and driving
long-term demand for transformer solutions.

▪ Recent legislation, such as the IIJA and IRA, is driving massive investment into transformers and the T&D landscape, supported by tax credit
program expansions and extensions and the buildout of nationwide EV charging infrastructure through the NEVI Formula Program.
Regulatory
▪ Evolving DOE standards scrutinize transformer inputs to ensure maximum energy efficiency and environmental responsibility, benefiting
scaled providers with established supplier relationships and vertically integrated platforms.

▪ Limited access to materials, personnel, and key relationships for distribution transformer manufacturers has resulted in a limited number of
domestic transformer manufacturers of scale.
Limited Platforms of Scale
▪ Given the limited number of transformer manufacturers, continued consolidation, and significant capital requirements, only a limited number
of both power transformer and distribution transformer manufacturers have emerged.

▪ Manufacturers are required to comply with numerous state and federal regulations, rigorous testing and inspection standards, and a variety
of environmental regulations.
High Barriers to Entry
▪ Greenfield operations in transformer manufacturing are especially challenging due to high capital requirements, material sourcing, and
engineering expertise.

▪ High initial capital investment is required to open a manufacturing facility, acquire the necessary equipment, access the latest design and
High Capital Intensity engineering technology, and recruit a highly skilled and technical workforce.
for New Entrants ▪ As manufacturers of scale, companies must also have the necessary capital to establish and grow their distribution networks and material
sourcing capabilities in order to remain competitive with other manufacturers and larger multinationals.

▪ Approximately 75% of the cost to manufacture a transformer is directly tied to commodities, which are subject to constraints and significant
cost fluctuations.1
Commodity Exposure
▪ Steel, copper, and oil are all assets that regularly experience price fluctuations, and each have experienced an increase in price, though
have recently begun to normalize; products with longer lead times and producers with higher levels of inventory have increased exposure.

1. T&D World PAGE | 28

 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

Key Business Considerations for Investors

Investment Considerations Key Characteristics

▪ Workforces in the increasingly technical T&D environment must be highly skilled, capable of utilizing the latest technology, and able to adapt
Highly Skilled and to the rapidly evolving product and regulatory environment.
Technical Workforce ▪ There are a limited number of qualified transformer technicians; access to skilled labor, long and costly training programs, and high
employee turnover have all contributed to an industry-wide labor shortage.

▪ Supply chain dynamics, delivery coordination, material scarcity, tariffs, and transit costs are all key aspects factoring into each transformer
manufacturer’s lead times.
Lead Times
▪ Shorter lead times is a crucial consideration in maintaining a competitive advantage relative to market peers, especially given the non-
discretionary nature of transformers.

▪ Transformer sales have multiple potential routes to market, including sales to electrical equipment conglomerates and their respective
Established Sales Channels business units, direct sales to companies across a wide range of end markets, sales to distributors, and sales to the public sector.
▪ Market leaders operate across multiple sales channels with distinct strategies and fortified partnerships for each route to market.

▪ Transformer manufacturers are highly reliant on metals, including electrical steel, copper, aluminum, and standard steel.
Access to Raw Materials ▪ Grain-oriented electrical steel and non-oriented electrical steel, inputs that provide the most economically and energy-efficient transformers
through reducing core loss and boosting permeability, are essential yet scarce, providing an advantage to those with supplier relationships.

▪ Transformers can either be produced in standardized categories, or they can be highly customized to fit specific requests of the customer.
Standard vs. Customized
Product Mix ▪ While custom transformer offerings can boost margins, these products increase lead times for those that are not vertically integrated and
require a highly specialized engineering team to deliver upon all customer specifications while conforming to industry regulations.

▪ To effectively scale their operations, transformer manufacturers must develop strong vendor and customer relationships in order to deliver
products across geographies and through various sales channels.
Ability to Scale
▪ Key aspects factoring into scalability include the establishment of operational best practices and manufacturing capacity, which requires
adequate facility space, specialized equipment, and a highly trained workforce.

▪ Although not legally enforced, several standards and certification organizations, including NEMA, IEEE, and UL, have a strong influence on
Ratings, Standards, & the success of transformer providers.
Specification Compliance ▪ While costly and time-consuming, maintaining industry ratings, conforming with standards, and holding certifications are all requirements for
achieving a preferred status among manufacturers.

PAGE | 29
 TRANSFORMERS : INDUSTRY OVERVIEW | Q1 2023

TABLE OF CONTENTS

I Sector and Subsector Overview

II Transformer Market Dynamics

III Key Drivers of Growth

IV Market Landscape and Investment Considerations

V About Harris Williams

PAGE | 30
 E N E R G Y, P O W E R &
INFRASTRUCTURE GROUP

Innovative energy, power, and infrastructure services companies benefit from some of the world’s most powerful trends, including ESG, grid
upgrades and maintenance, 5G expansion, energy transition, and infrastructure investment. Senior professionals in our Energy, Power &
Infrastructure Group work with investors and company leaders to make the most of these opportunities. Clients worldwide turn to us to keep a
pulse on the energy, power, and infrastructure market and to help unlock value in their businesses through M&A.

We have a robust track record across industry sectors such as environmental services; utility and telecom; engineering and construction; energy
management; energy technology; renewables and distributed energy; and testing, inspection, certification, and compliance.

Luke Semple Drew Spitzer Matt White

Managing Director Managing Director Managing Director
[email protected] [email protected] [email protected]
(804) 915-0158 (804) 915-0174 (804) 915-0131

Thomas Saunders Neha Shah Greg Waller

Director Director Director
[email protected] [email protected] [email protected]
(804) 915-0143 (804) 887-6036 (804) 887-6138

PAGE | 31
 GLOBAL M&A ADVISOR

Harris Williams is a global investment bank specializing in M&A advisory services. Clients worldwide rely on us to
help unlock value in their business and turn ambitious goals into reality. We approach every engagement with
boundless collaboration, pooling expertise and relationships across industries and geographies to uncover
the unique story of each company.

Deep Industry Experience

70% Revenue from

repeat clients

83%
Managing directors
Aerospace, Defense Business Services Consumer Energy, Power & promoted from
& Government Services Infrastructure within the firm

30+ Year
history

Healthcare & Industrials Technology Transportation

Life Sciences & Logistics

Offices: Boston | Cleveland | Frankfurt | London | Minneapolis | Richmond | San Francisco | Washington, DC
Disclosures and Disclaimers

Investment banking services are provided by Harris Williams LLC (“Harris Williams”). Harris Williams is a registered broker‐dealer and member of FINRA and SIPC. Harris
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