Q3 2015 Energy Market Outlook Energy Prices and Market Intelligence Q3 Update September 10, 2015

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Q3 2015 Energy Market Outlook Energy Prices and Market Intelligence Q3 Update September 10, 2015 Presenter: Jonathan Lee, Sr Energy Market Intelligence Manager, Ecova

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Prices are near a three-year low, how did we get here? Natural Gas Production, Storage: Near-record pace. Power Sector Demand: Helped keep the downside limited. Summer Recap: Near the 10-year norm. What’s on the horizon? Natural Gas Pipeline Projects: Impact to volatility and basis prices. LNG Exports: First LNG export facility coming online late 2015. PJM Capacity Performance: FERC approved PJM’s new capacity structure. 2016 Budget Influencers Downside Pressure: Gas production, healthy natural gas storage, weak winter demand, pipeline capacity additions. Upside Potential: Gas-fired generation growth, LNG exports, EPA regulations, unexpected weather, reliability enhancements. ENERGY MARKET INTELLIGENCE

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Natural gas production running 7% higher in first six months of 2015 than 2014 Dry gas production expected to average around 74 bcf/day in 2015 Continued growth seen through 2016 STRONG NATURAL GAS PRODUCTION EIA - September 2015 Boom largely due to shale production in PA, OH, and WV, which accounted for 2.4% of U.S. production in 2008 and now accounts for nearly 25%.

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SHALE PRODUCTION GROWTH EIA - September 2015 Marcellus leading the way, producing over 15 bcf per day in 2015.

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Power sector demand growth Pipeline infrastructure expansions Liquefied natural gas exports Exports to Mexico Increases in industrial demand due to chemical plant additions FACTORS FOR INCREASED PRODUCTION EIA - September 2015

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Cost of production vs. the price of natural gas Decline in oil prices Potential reduction in associated gas output LNG market less attractive Interest rate hikes Environmental regulations RISKS FOR SLOWING PRODUCTION EIA - September 2015

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2015 STORAGE REPLENISHMENT 2015 Refill Rate: Could push total supplies to record high.

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SUPPLY OUTPACING DEMAND Gas production continues to outpace demand, which has put downward pressure on natural gas prices. Power Sector experiencing large increases in 2015, but expected to decline in 2016 Industrial demand anticipated to see continued annual growth EIA – September 2015

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RECORD GAS-FIRED GENERATION EIA - September 2015 The proportion of electricity generated from natural gas outpaced the previous five-year average by 5.1%. During 2012, low gas prices led to record annual gas-fired generation at 24.9 bcf/day EIA predicts 2015 annual power sector demand will average 25.2 bcf/day

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The summer of 2015 was mostly in line with projections. The West was hot and dry, while the rest of the country was near normal. Increased power sector demand limited the decline in natural gas prices. SUMMER 2015 RECAP NOAA, AccuWeather; EIA - September 2015

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FALL TEMPERATURE OUTLOOK A cooler South Central is likely to persist through Fall, while the is West, North, and East Coast are projected to be above-normal for much of the time. NOAA, AccuWeather: September 2015 Fall Outlook

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EARLY WINTER WEATHER OUTLOOK NOAA, Farmers’ Almanac, AccuWeather - September 2015

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El Nino currently has greater than a 90% chance of strengthening through the winter, which could help CA drought, and keep the North drier and warmer this winter. El Nino patterns, as shown below, primarily reach maximums during Dec-Feb and typically persist for 9-12 months. EL NINO WINTER IMPACT NHC/NOAA; AccuWeather: September 2015

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NATURAL GAS PIPELINE PROJECTS An estimated 33 Bcf/day of takeaway capacity expansions by 2018 3.1 Bcf/day of expansions in 2014 to benefit Northeast 4.9 Bcf/day of expansions planned for 2015 to benefit Northeast New England to see additional pipeline capacity in 2016

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REX ZONE 3 EAST TO WEST 1.2 bcf/day into Chicago and Michigan. EIA - September 2015 One of the longest pipelines in the U.S., measuring 1,700 miles long. Zone 3 fully bi-directional. Only U.S. pipeline directly linking Rocky Mountain and Appalachian supply basins to consumers in the Midwest.

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PIPELINE CAPACITY AND GAS BASIS Expected Changes 2015 - 2018

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NATURAL GAS FORWARD CURVE (NYMEX) – 4 September 2015 YOY Decline: 26.6% Six-Month Decline: 9.6%

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NATURAL GAS $MMBtu (12-Month Strip) – 4 September 2015 – Short Term Trading Channel

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WHOLESALE ELECTRICITY $MWh (12-Month Strip) – 4 September 2015

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WHOLESALE ELECTRICITY YOY DECLINE Rolling 12-Month Strip: 4 September 2015

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OUTLOOK: COMMERCIAL ELECTRIC PRICING EIA Average Retail Rates ($/MWh) - September 2015

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PJM CAPACITY PERFORMANCE PJM - September 2015 PJM’s goal is to strengthen grid performance, but that will likely lead to increased costs for consumers. Restructuring of PJM’s capacity market due to deteriorating resource performance and ongoing change in generation mix Stems from the poor generator performance during the price spikes in January 2014 Phased In, but initially effective June 2016, with transitional auctions for planning years 2016/2017 and 2017/2018. Base auction for 2018/2019 to include 2016/2017 transitional auction results showed increases between 23%-63% from base auction (still below 2015/2016)

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CLEAN POWER PLAN EIA – 3 August 2015 Implementation of the Clean Power Plan will cause natural gas and renewables to become a much bigger part of the U.S. generation mix. Clean Power Plan goal to reduce carbon dioxide emissions from power plants Carbon pollution from power sector set to be 32% below 2005 levels by 2030. (An increase of 2% from last year’s proposal) States must submit initial plans to EPA on how they will meet the standards by Sept 2016 and final complete plan by Sept 2018 Must meet progressive goals starting 2022 through 2029. (Two year delay to start of program, originally 2020) Coal expected to fall to 27% of generation mix by 2030, while renewables expected to double to 28%

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2016 ENERGY BUDGET PLANNING TIPS #1: START WITH SITE SPECIFIC BASELINES Energy market influencers can vary quite a bit by region. Know the potential risks in each market and tailor your energy procurement buying strategy to meet your budget needs. #2: ENGAGE STAKEHOLDERS EARLY AND OFTEN Communicating the fundamental factors affecting regional energy markets can help reduce surprises when they occur (i.e. extreme winter of 2013/2014). It also develops further communication around energy procurement strategy, potential building enhancements, and cost-cutting initiatives. #3: TRACK VARIANCES FOR COST AND USAGE By tracking variances in cost and usage, you can better understand what’s driving the variance. Also analyze multiple levels (portfolio, regional/division, site) to identify trends or isolate poor performers. #4: ADJUST AND COMMUNICATE AS NEEDED The energy markets are in a constant state of change. Identify fundamental shifts in the market to evaluate whether the current strategy needs to be adjusted.

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NATURAL GAS AND WHOLESALE ELECTRICITY ARE NEAR THEIR LOWEST LEVEL SINCE 2012. Strong natural gas production weighing heavily on wholesale natural gas and electricity prices POWER SECTOR DEMAND FOR NATURAL GAS TO INCREASE With around 14,000 MW of coal-plant retirements scheduled for 2015, gas-fired generation will continue to grow and potentially introduce more volatility. EL NINO STRENGTHENING INTO WINTER El Nino typically brings warmer/drier conditions to the major gas consuming North during winter, which could reduce pipeline constraint related volatility in New York and New England NATURAL GAS PRICE FORECAST Wholesale natural gas prices are expected to slowly rise into 2016. At this point, upside risk is more likely than further downside moves MAJOR TAKEAWAYS

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NEW! Energy Market Watch Newsletter Subscribe today: http://www.ecova.com/news-media/energy-price-hub.aspx Weekly energy price outlooks and market trends delivered to your inbox

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UPCOMING WEBINARS INSIDE ENERGY & SUSTAINABILITY How to Reduce Food Waste– October 8th, 2015 at 11a PST

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Q&A Questions, comments, suggestions? webinars@ecova.com

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Thank you!