Identify and Communicate Energy Price Volatility to Manage RiskEnergy Prices and Market Intelligence Q3 Update September 18, 2014

Presenters: Jonathan Lee, Senior Energy Market Intelligence Managerand Sheila Johnston, Manager, Energy and Sustainability Analytics

Electric and natural gas prices have retreated from highs during the polar vortex, but more volatility could be on the way.

− As the nation increases its reliance on natural gas-fired electric generation, wholesale gas prices will play an even bigger role in the direction of electric prices.

Fundamental Drivers – Bulls and Bears

• Fall/Winter Weather: A potentially chilly winter could boost natural gas demand and severely deplete already below-average storage levels.

Natural Gas Production, Demand, Storage: Production continues to grow at a record pace, but demand for the fuel is also steadily on the rise. Forward electric and natural gas prices remain somewhat elevated as market participants worry over gas storage heading into the winter of 2014/2015.

• Longer-term drivers: Northeast pipeline constraints, new EPA regulations, coal-plant retirements, and LNG exports will all have a role to play in price volatility.

Budgetary Risks to Consider: With the winter months quickly approaching, what regions are most at risk and what steps can you take to mitigate impacts to your budget.

ENERGY MARKET INTELLIGENCE

MARKET FUNDAMENTALS 17 September 2014

  Near Term Next 60 Days

Short Term 2 to 6 Months

Medium Term 6 to 12 Months

Long Term 1 to 5 Years

Storage     

Production     

Demand     

Electric Power Sector

 

     

Weather       

Tropical Storms

LNG       

Economy       

Storage

Production

Demand

Electric Power Sector

Weather

Tropical Storms

LNG

Economy

The summer of 2014 was mostly in line with projections. The West was hot and dry, while the Central U.S. and Northeast experienced milder temperatures.

Below-Average Cooling Degree Days Weighed on Summer

Power Sector Demand

SUMMER 2014 RECAPNOAA, AccuWeather; EIA: September 2014

FALL TEMPERATURE OUTLOOK

A cooler central region is likely to persist until mid-Fall, while the is East projected to be above-normal for much of the time.

NOAA, AccuWeather: September 2014

Fall Outlook

EARLY WINTER WEATHER OUTLOOKNOAA, Farmers’ Almanac: September 2014

Another Bitter Cold Winter Ahead??

Potential El Niño patterns forming for late 2014 could help CA hydro next year, and keep the East drier and warmer this winter.

El Niño patterns, as shown below, primarily reach maximums during Dec-Feb and typically persist for 9-12 months.

EL NIÑO WINTER IMPACTNHC/NOAA; AccuWeather: September 2014

Drought conditions are projected to improve for much of Texas and the South through the remainder of the year.

However, much of California is expected to maintain equal chances for normal precipitation, so the drought conditions there are likely to persist into next year.

DROUGHT OUTLOOK – DRY WESTNOAA/CPC: 26 August 2014

HURRICANE OUTLOOK ~ AVG YR, LOWER IMPACT FROM GULF

Atlantic Hurricane Outlook

June 01 - Nov 30

Average Values

(1981-2010)

Record Values

2014 Projected Values

2014 Actual Values To-Date

Mild (Named Tropical Storms)

12 27 (2005)9 (CSU); 8-13 (NOAA 70%

confidence)1

Moderate (Hurricane Categories 1-2)

6 15 (2005) 3 (CSU); 3-6 (NOAA) 3

Intense (Hurricane Categories 3-5)

38 (1950); 7 in (2005)

1 (CSU); 1-2 (NOAA) 1

NHC/NOAA; Colorado State University: September 2014

Short-Term Trend: Market remains focused on the ability to replenishing record-low storage levels by November

NATURAL GAS STORAGE

STORAGE REPLENISHMENT

8 weeks left for injection season

Current 86 Bcf refill rate is exceeding previous rates, but...

Market more comfortable with getting to 3.6 Tcf, requiring 99 Bcf/week

EIA projects working gas stocks to reach 3,477 Bcf at end of October, equates to injections of:

676 Bcf from Sep 12th to October 31st

85 Bcf/week

Supported by 6.76% Yr/Yr increase of dry gas production

SUPPLY AND DEMAND BALANCEEIA: September 2014

Post-winter gas production is outpacing

demand, which has led to a strong injection season.

Consumption expected to decline in 2015, especially in the Residential/Commercial sector.

RECORD: Gas production exceeded 15 bcf/day through July 2014

Accounts for almost 40% of U.S. shale gas production

On track to be enough production to equal the demand in Pennsylvania, West Virginia, New York, New Jersey, Delaware, Maryland, and Virginia

MARCELLUS GAS PRODUCTION REGION– Exceeded 15 bcf/d in July

Drilling productivity has increased from 0.3 mcf/d in January 2012 to an estimated 5.0 mcf/d in August 2014.

UTICA PRODUCTION SOARINGEIA: 12 August 2014

Increased from 155 mcf/d in January 2012 to an estimated 1.3 bcf/d in September 2014.

North Dakota seeks to cut gas flaring to 10% of production by 2020.

Over the last 4 years, about a third of natural gas from oil wells has been flared (364 mcf/day).

Difficulties include construction of large-volume gas gathering capacity and economics of rapidly declining oil and gas production after first year of operation.

NORTH DAKOTA NATURAL GASEIA: 28 August 2014

NATURAL GAS FORWARD CURVE(NYMEX) – 16 September 2014

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb

-16

Mar

-16

Apr

-16

May

-16

Jun-

16

Jul-1

6

Aug

-16

Sep

-16

Oct

-16

Nov

-16

Dec

-16

Jan-

17

Feb

-17

Mar

-17

Apr

-17

$3.00

$3.50

$4.00

$4.50

$5.00

$5.50

$6.00

4-Aug

18-Aug

2-Sep

16-Sep

$/M

MB

tu

NATURAL GAS$MMBtu (12-Month Strip) – 16 September 2014 – Short Term Trading Channel

NEW YORK/NEW ENGLAND – ANOTHER VOLATILE WINTER AHEAD?− Market-based electric rates are susceptible to spikes in the winter period as power sector

demand competes with residential/commercial heating demand for natural gas supply.

PJM ISO – VOLATILTY ISN’T ISOLATED TO NEW YORK/NEW ENGLAND

− During the Polar Vortex in early 2014, market-based electric rates also saw significant upward pressure in Maryland, New Jersey, and Pennsylvania.

TEXAS – OPERATING RESERVE DEMAND CURVE (ORDC)− On June 1, 2014, ERCOT introduced a new charge that aims to achieve more efficient pricing

by tying a price adder to the reserves available in the system. The adder is called the On-Line Reserve Price Adder and is included in 15-minute Real Time Settlement Point Prices.

CALIFORNIA – ELECTRIC PRICES ON THE RISE− Persistent drought conditions, increased reliance on natural gas and renewable energy

sources, and the permanent retirement of the San Onofre nuclear power plant continue to place upward pressure on electric prices in the state.

REGIONAL ELECTRIC HOT SPOTS:Fall/Winter 2014 Outlook

ELECTRIC WHOLESALE PRICESEcova: 12 September 2014

NEW YORK/NEW ENGLAND

Natural Gas Pipeline Constraints During High Demand Periods

Result in Market Volatility. Real Threat Heading into Winter

2014/2015.

NEW YORK$/MWh (ATC 12-Month Strip Zone Average)

NEW ENGLAND$/MWh (ATC 12-Month Strip Zone Average)

PJM ISO$/MWh (ATC 12-Month Strip Zone Average)

RECENT SIGNIFICANT BASED/BUNDLED CHANGES

Southern Company cost overruns for nuclear and coal fired plants

East Coast storm related damage and increased “hardening” of system– Replacement costs for existing and additional costs for “hardening” of system

Retirement of coal generation/replacement with new generation

SCE and SDG&E– Protracted rate case pushed several B/B rate changes and fuel rate changes in 2014

– Shut down of San Onofre Nuclear Generation Station (SONGS) – rate payer cost still to be determined

Prolonged Drought– New Natural Gas generation stations under construction to offset hydro supply

EIA PROJECTIONS – 2014 vs. 2013Region Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec AverageAlaska and Hawaii 3% -1% 5% 1% 5% 7% 4% 5% 6% 2% 0% 0% 3%Pacific Contiguous 11% 5% 7% 3% 4% 0% -1% -1% 4% 1% -5% 1% 3%Mountain 5% 5% 4% 3% 4% 3% 2% 3% 2% 3% 2% 1% 3%West North Central 3% 7% 4% 4% 1% 2% 3% 3% 3% 3% 3% 3% 3%West South Central -1% -3% 2% 3% 1% 3% 2% 3% 3% 1% 2% 0% 1%East North Central 3% -1% 4% 4% 1% 2% 3% 2% 4% 2% 3% 3% 2%East South Central 2% -1% 7% 6% 5% 6% 8% 9% 8% 7% 7% 7% 6%New England 5% 6% 7% 3% 1% 5% 6% 6% 7% 7% 5% -2% 5%Middle Atlantic 11% 3% 13% 6% 3% 4% 4% 4% 3% 4% 7% 5% 6%South Atlantic 6% -1% 5% 5% 3% 3% 3% 3% 3% 3% 3% 3% 3%National Average 5% 2% 6% 4% 3% 4% 3% 4% 4% 4% 3% 2% 4%

Region Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec AverageAlaska and Hawaii 12% 15% 15% 7% 4% 6% 9% 5% 17% 16% 13% 7% 10%Pacific Contiguous 12% 15% 15% 7% 5% 7% 8% 2% 14% 13% 10% 3% 9%Mountain 9% 12% 17% 17% 13% 13% 10% 11% 12% 11% 12% 8% 12%West North Central 8% 16% 36% 22% 7% -1% -2% 3% 4% 0% 12% 8% 9%West South Central 7% 5% 18% 18% 18% 6% 1% 1% 1% 0% 8% 10% 8%East North Central 2% 13% 35% 23% 17% 16% 17% 14% 15% 21% 19% 12% 17%East South Central 7% 9% 13% 14% 14% 7% 6% 7% 7% 8% 8% 7% 9%New England -2% 5% 10% 26% 6% 11% 13% 10% 10% 8% 15% 6% 10%Middle Atlantic 0% 9% 12% 8% 3% 10% 17% 18% 16% 17% 22% 18% 13%South Atlantic -2% 8% 12% 7% 5% 5% 7% 8% 8% 7% 13% 8% 7%National Average 5% 11% 18% 15% 9% 8% 9% 8% 10% 10% 13% 9% 10%

Electric EIA 2014 vs. 2013

Natural Gas EIA 2014 vs. 2013

Ratepayer responsibility for:

“20% by 2020” – higher costs associated with alternative fuel choices

Cleaning up or replacing coal generation

SONGS

Transmission line construction from Canada

Nuclear plant cost overruns

FUTURE BASE/BUNDLED CHANGES

EIA PROJECTIONS – 2015 vs. 2014Region Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec AverageAlaska and Hawaii 0% 0% -2% 0% -1% -1% -2% -3% -2% -3% -3% -3% -2%Pacific Contiguous 1% 3% 2% 3% 1% 4% 4% 3% 3% 2% 2% 2% 2%Mountain 1% 3% 2% 1% 2% 2% 2% 2% 2% 2% 2% 2% 2%West North Central 2% 3% 1% 2% 2% 1% 1% 1% 1% 2% 2% 2% 2%West South Central 0% 1% -3% -3% -3% -3% -3% -2% -2% -1% -1% -1% -2%East North Central 2% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1%East South Central 5% 4% 0% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2%New England 2% -5% -5% 0% 1% -2% -1% 0% 0% 1% 0% 1% -1%Middle Atlantic 3% -2% 0% 0% 0% 0% 0% 0% 0% 2% 2% 2% 0%South Atlantic 0% 0% 1% 2% 2% 1% 1% 1% 1% 2% 1% 2% 1%National Average 2% 1% 0% 1% 1% 0% 0% 0% 0% 1% 1% 1% 1%

Region Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec AverageAlaska and Hawaii 7% 4% -4% -2% -4% -4% -1% 0% 1% 2% 2% 1% 0%Pacific Contiguous 4% 1% -8% -5% -8% -8% -3% 0% 1% 2% 2% 1% -2%Mountain 7% 3% -4% -11% -10% -11% -7% -3% -2% 0% 2% 3% -3%West North Central 6% -1% -15% -9% -8% -7% -4% -2% -1% 2% 3% 3% -3%West South Central 7% 6% -2% -9% -14% -11% -4% 1% 3% 4% 2% 1% -1%East North Central 13% 8% -5% -4% -9% -7% -5% -3% -2% 1% 2% 3% -1%East South Central 8% 8% 9% 1% -8% -7% -4% -2% -2% 1% 2% 2% 1%New England 7% 3% -4% -13% -8% -6% -3% -1% 1% 2% 2% 3% -2%Middle Atlantic 15% 5% 7% 6% 5% -1% 0% -1% 0% 1% 2% 2% 3%South Atlantic 15% 8% 9% 2% -1% -3% -2% -2% 0% 0% 1% 2% 2%National Average 9% 4% -2% -4% -7% -6% -3% -1% 0% 2% 2% 2% 0%

Electric EIA 2015 vs. 2014

Natural Gas EIA 2015 vs. 2014

E: +4%NG: -21%

E: -1%NG: -15%

E: -3%NG: +17%

E: -1%NG: +17%

E: +1%NG: +11%

E: +2%NG: +10%

E: -1%NG: +20%

Regional Energy Changes Attributed to Weather

POLAR VORTEX

NATURAL GAS AND WHOLESALE ELECTRICITY COULD EXPERIENCE ANOTHER VOLATILE WINTER

Market volatility will continue for the foreseeable future as the nation relies more on gas-fired power plants to generate electricity.

ENOUGH GAS IN STORAGE TO MEET WINTER DEMAND? With end of injection season supplies expected to be at an eight-year low, market participants

are concerned heading into the winter of 2014/2015.

REGIONAL HOT SPOTS: WHAT CAN YOU DO NOW? NEW YORK/NEW ENGLAND: Extreme winter volatility will likely continue until new pipeline

capacity comes online. Prepare well in advance by monitoring the market for buying opportunities.

PJM: Another frigid winter could result in another volatile winter, which could place significant upward pressure on electric and gas prices. Look to limit potential risk to budget.

TEXAS: New charge (ORDC) will potentially be seen on customer bills after June 1, 2014 for customers on market-based rate. Consider a fixed rate supply option to reduce upside risk.

CALIFORNIA: Increased reliance on natural gas and renewable energy sources for electric generation will continue to place upward pressure on prices. Traditional shoulder seasons may offer decent buying opportunities.

MAJOR TAKEAWAYS

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