21 January 2014

2014 ENERGY MARKET OUTLOOK AND INDUSTRY TRENDS ENERGY MARKET PERSPECTIVE

NATIONAL WEBCAST – ROB PATRYLAK & ANN DONNELLY

Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

BLACK & VEATCH STATEMENT This report was prepared for Client by Black & Veatch Corporation (“B&V”) and is largely based on information not within the control of B&V. As such, B&V has not made an analysis, verified, or rendered an independent judgment of the validity of the information provided by others, and, therefore, B&V does not guarantee the accuracy thereof. In conducting our analysis and in forming an opinion of the projection of future operations summarized in this report, B&V has made certain assumptions with respect to conditions, events, and circumstances that may occur in the future. The methodologies we utilize in performing the analysis and making these projections follow generally accepted industry practices. While we believe that such assumptions and methodologies as summarized in this report are reasonable and appropriate for the purpose for which they are used; depending upon conditions, events, and circumstances that actually occur but are unknown at this time, actual results may materially differ from those projected. Use of this report, or any information contained therein, shall constitute the user’s waiver and release of B&V and Client from and against all claims and liability, including, but not limited to, any liability for special, incidental, indirect or consequential damages, in connection with such use. In addition, use of this report or any information contained therein shall constitute an agreement by the user to defend and indemnify B&V and Client from and against any claims and liability, including, but not limited to, liability for special, incidental, indirect or consequential damages, in connection with such use. To the fullest extent permitted by law, such waiver and release, and indemnification shall apply notwithstanding the negligence, strict liability, fault, or breach of warranty or contract of B&V or Client. The benefit of such releases, waivers or limitations of liability shall extend to B&V and Client’s related companies, and subcontractors, and the directors, officers, partners, employees, and agents of all released or indemnified parties. USE OF THIS REPORT SHALL CONSTITUTE AGREEMENT BY THE USER THAT ITS RIGHTS, IF ANY, IN RELATION TO THIS REPORT SHALL NOT EXCEED, OR BE IN ADDITION TO, THE RIGHTS OF THE CLIENT. Readers of this report are advised that any projected or forecasted financial, operating, growth, performance, or strategy merely reflects the reasonable judgment of B&V at the time of the preparation of such information and is based on a number of factors and circumstances beyond our control. Accordingly, B&V makes no assurances that the projections or forecasts will be consistent with actual results or performance. To better reflect more current trends and reduce to chance of forecast error, we recommend that periodic updates of the forecasts contained in this report be conducted so more recent historical trends can be recognized and taken into account. Any use of this report, and the information therein, constitutes agreement that: (i) B&V makes no warranty, express or implied, relating to this report, (ii) the user accepts the sole risk of any such use, and (iii) the user waives any claim for damages of any kind against B&V.

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ABOUT THE ENERGY MARKET PERSPECTIVE

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

OVERVIEW OF THE ENERGY MARKET PERSPECTIVE (EMP) • Biannual subscription based service (Released January 2014) • Provides 25 year projections • Results are reported for various North American regions Key Report Deliverables • Insights on industry trends and market opportunities • Fundamental capacity, energy, emission and power fuel price forecasts for North American Energy Markets • Easily assessable data

Clients use the EMP to plan for and manage risks of North American shift to natural gas generation

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

INTEGRATED MARKET MODELING World Oil & LNG Prices

Energy and Environmental Policies World

U.S.

Black & Veatch Energy Market View

Commodity Market Models Fuel, Power and Allowances

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

KEY ISSUES AND ASSUMPTIONS THAT INFLUENCE THE BASELINE PERSPECTIVE • Regulation

• Generation expansion plans

• RPS requirements and response

• Transmission infrastructure

• Power demand and conservation

• Unit retirements

• Fuel demand and pricing

• Supply and pipeline expansion plan

• LNG imports / exports

• Finding and development costs

• Future construction costs

Integrates primary research, leading data sources and client consulting experience

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

EMP NORTH AMERICAN MARKET COVERAGE Available as a national or regional service Regions covered: • Western • Texas (ERCOT) • Northeast • Midwest • Southeast

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

INCORPORATES FINDINGS FROM OUR STRATEGIC DIRECTIONS SURVEYS

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ENERGY MARKET PERSPECTIVE BASELINE VIEW

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

TOP 7 ELECTRIC INDUSTRY ISSUES

Reliability, environmental regulation and economic regulation are the industry’s top issues

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

NATIONAL PROJECTIONS During the next 25 years: • Overall electric generation capacity will increase by 30% • Natural gas generation ↑ 100+% • Renewable generation ↑ 150% • Nuclear capacity ↓ 35% • Conventional coal ↓ 40% • Overall market share will also shift • Natural gas = more than half of all electricity consumed • Coal market share ↓ 20% • Nuclear market share ↓ 10%

Nuclear and coal retirements will vary by region

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

BLACK & VEATCH OUTLOOK ON U.S. POWER DEMAND Peak Demand - United States Annual Growth Rate (%)

1,000

6.0%

900

5.0%

800

4.0% 3.0%

700

2.0%

600

1.0% 500

0.0% 400

-1.0%

300

Annual Growth rate (%)

Coincident Peak Demand (GW)

Coincident Peak Demand (GW)

-2.0%

200

-3.0%

100

-4.0%

-

-5.0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Source: EIA, Black & Veatch Energy Market Perspective Analysis

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

RULEMAKINGS COMPLIANCE PLANNING & DEADLINES REGULATORY DRIVER

1-Hour NAAQS Cross State Air Pollution Rule Mercury and Air Toxics Standards

Clean Water Act 316B Effluent Guidelines Coal Combustion Residuals

2010

2011

2012

Designate NAs Develop Rule

2013

2016

Develop Rule

2017

2018

2019

2020

Compliance CAIR

CAIR Replacement

Compliance Prep Period

Develop Rule

Develop Rule

2015

Develop SIPs

Legal Challenge

Develop Rule

2014

Compliance Prep Period Compliance Prep Period Compliance Prep Period

Compliance Compliance Compliance Compliance

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

IMPLICATIONS OF BASELINE GHG ASSUMPTIONS Projected Greenhouse Gas Emission Allowance Prices

GHG Emission Allowance Price (2013 $/short ton)

$40 $35 $30 $25 $20 $15 $10 $5 $0 2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

STATE RENEWABLE PORTFOLIO STANDARDS 30% by 2000; 7% new by 2017 23.8% (16% new Gen) By 2025 15% by 2020 15% by 2015

10% by 2015

25% by 2025 10% by 2015

VT Goal: All New Gen, 10% cap

25% by 2025 (Xcel 30%) 10% by 2015 10% by 2016

25% by 2025, 6% solar by 2016 20% by 2025

10% goal

105 MW

30% by 2020 20% by 2020

33% by 2020

10% by 12.5% 25% 2025 by 2025 by 2025

15% by 2021

29% by 2015 8/10% Tier I/II by 2020 25% by 2025

15% by 2025

15% by 2020, +1%/yr after RI: 16% by 2020 CT: 27% by 2020 NJ: 22.5% by 2021 DE: 25% by 2025 MD: 20% by 2022 DC: 20% by 2020

12.5% by 2020 15% by 2025 20% by 2020

15% by 2015

10,000 MW by 2025

States with RPS Requirements 40% by 2030

States with RPS Goals

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NATURAL GAS AND POWER FUELS OUTLOOK

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

NATURAL GAS PRICE FORECAST Projected Henry Hub Natural Gas Spot Price Historical (Nominal)

$10

B&V Projection (End of Year 2013)

2017-2022 Price growth is driven by LNG exports, coal capacity retirements and GHG legislation

$8

2013$/MMBtu

B&V Projection (Mid-Year 2013)

$6 2030-2038 Price trajectory tracks continued growth in power generation demand

2022-2030 Prices stabilize as production rises to meet demand growth

$4 2013-2017 Growth in lowcost supplies dampens price growth

$2

$2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

NORTH AMERICAN NATURAL GAS PRODUCTION

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

RISING OIL AND NGL PRICES WILL CONTINUE TO SUPPORT ROBUST GAS PRODUCTION

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

ELECTRIC SECTOR DRIVES FUTURE NATURAL GAS DEMAND GROWTH Projected 2013-2038 Compound Annual Growth Rate Electric Residential Commercial Industrial 3.10% 0.83% 1.29% 0.39%

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

U.S. NATURAL GAS DEMAND FOR POWER GENERATION IS EXPECTED TO GROW BY MORE THAN 20 BCF/D BY 2035 • Overall growth is driven by regional demand in the Midwest, Southeast and Texas • Demand growth prior to 2020 is driven by coal-fired capacity retirements • Post-2020 demand growth is driven by a Federal CO2 emissions program

Incremental Lower 48 Gas Demand for Power Generation from 2013

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

MULTITUDE OF LNG EXPORT PROJECTS AWAIT DOE LICENSE APPROVAL Applications for 30+ Bcf/d in export capacity have been filed in the U.S. This capacity would comprise nearly all of current and more than half of future global demand

Export Import

H I

22 Source: FERC; Black & Veatch Analysis

Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

OUTLOOK FOR NORTH AMERICAN LNG EXPORTS

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

SHALE GAS REDEFINES PIPELINE FLOWS & ASSET VALUES

2012-2022 Flows Increase 2012-2022 Flows Decrease

2012-2022 Flows Stable Natural Gas Pipelines

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

NEAR-TERM CONVERGENCE WILL BE FOLLOWED BY A RETURN OF REGIONAL BASIS DIFFERENTIALS Projected Basis to Henry Hub Major Natural Gas Pricing Points Chicago, City-gates Algonquin, City-Gates Carthage

Dominion, South PG&E, City-Gates

Transco Zone 6, New York Houston Ship Channel

$2.00

2013$/MMBtu

$1.50 $1.00 $0.50 $0.00 -$0.50 -$1.00 -$1.50 -$2.00 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

ELECTRIC SECTOR DEMAND FOR COAL WILL TREND DOWNWARD Thermal Coal Demand By Basin 900 800 700

MM Tons

600

500 400 300

200 100 0 2013

2014

2015

Powder River Basin jtboyd.com

2016

2017

Central App

2018

2019

Illinois Basin

2020

2021

2022

Northern App

2023

2024

Lignite

2025 Rockies

2030

2035 Other

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

COAL PRICE TRENDS BOYD projects U.S. coal prices will remain relatively flat BOYD Coal Price Forecast Constant (2013 $/Ton FOB Mine) 100 80 60 40 20 2012

2013

2014

2015

2016

Pitt 8 Rail Medium Sulfur

2017

2018

2019

CAPP Low Sulfur

2020

2021

2022

ILB 5 lb Rail

2023

2024

2025

2030

Gillette High Btu

However, prices will rise to levels necessary to sustain an ongoing industry in the face of deteriorating reserves, rising costs and required new mine replacement

jtboyd.com

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POWER MARKET IMPLICATIONS

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

COAL RETIREMENTS OF 60 GW PROJECTED BY 2020

Near-term retirements are driven by MATS compliance

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

NATURAL GAS-FUELED GENERATION WILL CONTINUE TO GROW • Power sector demand for gas expected to grow 3.1% annually • More than 348,000 MW of new capacity expected before 2038 • Technology advances in combined cycle with advances in combustion turbine technology

Emporia Energy Center - Kansas

Coal retirements and decline in regional reserve margins will drive continued capacity growth

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

ECONOMY, GAS PRICES SLOW NUCLEAR DEVELOPMENT • Deferrals and cancellations of new units to continue • Utilities will work to get the most of existing units with up-rates • Increasing regulatory compliance, and Fukushima related safety costs • Continued economic challenges for smaller nuclear plants • Black & Veatch forecasts a decline in nuclear resources over the next 25 years Refueling Nuclear Reactor

In the near-term, budget deficit and waste disposal concerns limit federal loan guarantee programs

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

NEARLY 100 GW OF RENEWABLE CAPACITY ADDITIONS EXPECTED BY 2038

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

THE CHANGING U.S. GENERATION CAPACITY MIX

2014

Capacity Mix (MW)

2038

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

THE CHANGING U.S. ENERGY GENERATION MIX

2014

Generation Mix (GWh)

2038

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Energy Market Perspective: 2014 Energy Market Outlook

21 January 2014

INDUSTRY TRENDS • Reliability, environmental regulation and economic regulation are the top issues • Electric power pricing will increasingly be tied to natural gas prices as natural gas evolves into the predominant fuel for generation • Coal will continue its significant role in resource mix, even with the anticipated 60 GW retirement of smaller, older plants • Continued economic challenges for smaller nuclear plants West County Energy Center – Florida

• Increased focus on electric grid and natural gas infrastructure network reliability

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QUESTIONS?

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CONTACT ROB PATRYLAK

ANN DONNELLY

Managing Director Planning and Energy Markets Office: 678-932-9131 [email protected]

Director Natural Gas & Power Fuels Office: 360-433-2570 [email protected]

[email protected]

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