McKinsey & Co. Report: Ohio Energy Competitiveness

Ohio Energy Competitiveness

Technical fact baseSeptember 2016

www.OhioBRT.com

This document is prepared for the use of members of the Ohio Business Roundtable. It does not constitute legal, accounting, tax, or similar professional advice normally provided by licensed or certified practitioners. The information provided is preliminary and shall not be fully relied upon as the complete and final product. No part of this document may be circulated, quoted, or reproduced for distribution without prior written approval from the Ohio Business Roundtable. No part of this document may be circulated, quoted, or reproduced externally to the members of the Ohio Business Roundtable, and any requests for additional use or release must be pre-approved by Ohio Business Roundtable

1

This document can be used to support and provide depth to the findings of the Ohio Energy Competitiveness overview document

Purpose

conclusions in an extensive fact base Link facts, data, and assertions from the overview directly to their sourceProvide additional depth on the topics covered in the overview documentCommunicate insights about important

competitiveness not covered in the overview

How to use this document

The overview contains links to the appendices with supporting factsLinks to the appendices reference specific facts cited on the page and additional insights on a given topicThe future outlook sections of the appendices explain the methodology for projections made in the overviewThe future outlook sections also provide deep dives on specific tax and regulatory concerns (e.g., severance tax)

2

This technical backup document covers a fact base for two broad topics

Oil and gas

Power

Defining energy competitiveness Approach to fact base

Ability to extract reserves (oil, gas)Ability to deliver resource to high-demand regionsAbility to attract and maintain industrial investments that benefit from reserves

Analyze four resource types: natural gas, natural gas liquids (NGLs), crude, and condensateDevelop historical and future perspective across entire value chain: extraction, transportation and utilization

Low-cost: Power prices in range of benchmark statesReliable: Able to effectively meet load at all times, including peak demand periodsStable and predictable: Ability to predict power prices within an acceptable range of uncertainty for investments, with acceptable volatility (compared to competitive states)

Develop historical and future perspective according to three aspects of power generation: pricing, supply and demandUtilize specific benchmark and competitor states to understand relative performance

3

Contents

Energy Competitiveness Report

Appendix B: Electric power

Appendix A: Oil and gas

Ohio Energy CompetitivenessCONFIDENTIALThis document is solely for the use of members of the Ohio Business Roundtable. It does not constitute legal, accounting, tax, or similar professional advice normally provided by licensed or certified practitioners. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from the Ohio Business Roundtable. The information provided is preliminary and shall not be fully relied upon as the complete and final product. No part of this document may be circulated, quoted, or reproduced externally to the members of the Ohio Business Roundtable, and any requests for additional use or release must be pre-approved by Ohio Business Roundtable.

Pre-read document for BRT Annual Meeting of December 15, 2015

5

The OBRT energy competitiveness initiative has been a collaborative year-long effort that has focused on three key objectives

CEO Steering Committee Gary Heminger, Chair; Nick Akins, Chuck Jones, Bob Schottenstein, Mike Thaman and Tim Timken

through the present day

changing energy landscape

Align on themes and recommendations to move Ohio forward

OBRT energy project objectives

Working Team Marathon PetroleumAEPFirstEnergyDuke EnergyTimkenSteel

Owens CorningM/I HomesNiSourceMcKinsey & Company

6

Guiding principles for the work

Drive economic benefit for Ohio

Encourage competition

Ensure smarter regulation

Invest in infrastructure

competitiveness, rather than being solely reliant on federal policies to set the agenda

by fully capturing the fair share of value from energy sources, driving job growth in the state, and supporting an innovative workforce with the necessary skills across the value chain

by avoiding measures that discourage energy source investments and ensuring that policies and regulations do not discourage any specific technology or fuel-source

by streamlining the permitting process and establishing

investments in energy assets

by removing impediments to the alignment of infrastructure investments with future energy production and demand

7

Unpacking our three

Key questionsObjective

the years? What impact is the development of the Utica Shale having on the State?

prices evolved compared to competitor states?

How will the production of gas, oil, and liquids in the Utica Shale advance over the next 15 years?What infrastructure and regulatory structures will facilitate the strong production, transportation, and use of hydrocarbons in the years ahead?

between now and 2030?

What are the key hurdles that Ohio must overcome to remain energy competitive?

and other key stakeholders to move the State forward?

Understand the evolution

sector through the present day

Use potential future scenarios to


Offer themes and recommendations to make Ohio energy competitive

8

has featured prominently in public and policy discourse over the past year

Clean Power Plan (CPP) aims to reduce power market emissions 32% below 2005 levels by 2030

Ohio lawmakers sent

severance taxproposal to a study committee to analyze potential impacts

The SB 310 study committee

renewable energy freeze should continue indefinitely

The Ohio Clean Energy Initiative has been certified by the ballot board for the November 2016 election

Cleveland State University shale study maps the opportunities for shale gasdevelopment in Ohio

The Kasich Energy Plan aims to update

fit with the evolving shale gas and electric power landscape

9

Purpose of this document

Written for a CEO-level audience, with varying levels of exposure to and experience with the energy space

Overview of the major energy trends impacting Ohio and proposal for a path forward, reflecting only the highlights of the analysis

Companion document to detailed fact pack

Objectives

Understand the evolution

through the present day

Use potential future scenarios


Offer themes and recommendations to make Ohio energy competitive

10

Executive Summary (1/2)Ohio sits on an immense opportunity to benefit from abundant and low-cost shale gas

A huge volume (~24 trillion cubic feet) of inexpensive and accessible wet and dry gas exists in the Utica basin, where ~98% of gas is still to be extractedExtraction costs in the Utica basin are lower than many other basins and projected to drop

Increased production and emerging downstream industries are already beginning to capture this value, and new investments in infrastructure and adjustments in regulation are needed to maximize potential

annual GDP and sustain nearly 138,000 jobsThe electric power landscape is fundamentally shifting in Ohio, driven by trends that are shaping the national power landscape

Power demand has declined over the last 5 years, and is expected to remain relatively flat for next 10-15 years, driven by increased energy efficiency and adoption of distributed resourcesOhio is now part of a larger regional power system, PJM, and continues to be a net importer of power as Ohio-based assets retireMix of power supply for Ohio has been and will continue to shift toward natural gas, renewables and distributed energy resources that could displace coal generationPolicy and regulatory landscape continues to be in flux with major outcomes (e.g., SB310, Clean Power Plan) that will eventually have a tangible impact on pace of transition in Ohio

This document is solely for the use of members of the Ohio Business Roundtable. It does not constitute legal, accounting, tax, or similar professional advice normally provided by licensed or certified practitioners. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from the Ohio Business Roundtable. The information provided is preliminary and shall not be fully relied upon as the complete and final product. No part of this document may be circulated, quoted, or reproduced externally to the members of the Ohio Business Roundtable, and any requests for additional use or release must be pre-approved by Ohio Business Roundtable.

11

Executive Summary (2/2)

In order to respond these power and gas dynamics and position the state as an energy leader, Ohio will need to mobilize across 6 priority themes:

Meet the evolving needs of the power market for customers and developers

Build out energy infrastructure

Improve the ease of doing business in energy in Ohio

Ensure adoption of renewables and advanced energy technologies are market based

Drive economic impact from energy competitiveness

This document is solely for the use of members of the Ohio Business Roundtable. It does not constitute legal, accounting, tax, or similar professional advice normally provided by licensed or certified practitioners. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from the Ohio Business Roundtable. The information provided is preliminary and shall not be fully relied upon as the complete and final product. No part of this document may be circulated, quoted, or reproduced externally to the members of the Ohio Business Roundtable, and any requests for additional use or release must be pre-approved by Ohio Business Roundtable.

12

Path forward

Changing power landscape

12

13

!"#$%&'()*%'+%#,,)+*)%+'-./'0%1'*%$22$/-.+#-3

Ohio is sitting on large natural gas reserves in the Utica and Marcellus Basins

~98% 24 trillion cubic feet of accessible gas remains untapped

The Utica and Marcellus Basins are among the lowest-cost natural gas extraction zones in the US, and leveraging this resource presents an enormous economic opportunity for the state of Ohio

2015 extraction costs in the Utica are 16% lowerthan the average of other US basins

Natural gas production could sustain up to 138,000 jobs in Ohio and contribute $8B to the GDP

New investment in infrastructure and attention to regulation will allow Ohio to capture the full value of the these basins and the related economic benefits

Production will outpace pipeline capacity by 2030

14

Ohio sits on one of the largest natural gas basins in the country

Source: Energy Information Administration (EIA), April 2015

From 2008-2014, Marcellus and Utica contributed ~50% of the total US dry gas production growthMost of the growth is due to Marcellus; Utica production did not start in earnest until 2013

NATURAL GAS OPPORTUNITY: ECONOMIC VALUE

Most productive dry gas plays1 in the contiguous United States

1 Plays are regions where dry gas is actively extracted

Bakken

Woodford

Eagle Ford

Haynesville-Bossier

Fayetteville

Antrim

Marcellus & Utica

Barnett

Low growth High growth

Basins

15

sustain over 130,000 jobs in 2025

0

2

4

6

8

10

$8.3billion

Othersectors3

Manufac-turing1

Total GDP gain

Services2Gas and oil production

$ Billion

Source: IMPLAN model results

1 Includes chemicals, metals, paper and pulp, and rubber and plastics manufacturing.2 Includes professional services, management, real estate, health care, education, leisure, and hospitality.3 Includes wholesale and retail trade, construction, transport and warehousing, agriculture, mining, and government.

Sector jobs sustained 55 19 42 22 138


16

Ohio natural gas resources have hardly been tapped to date

Tcf

Utica Basin present an enormous economic opportunity

23.3.36

Untapped

98%

.08

Reserves

24 .08 .18

natural gas resources are equivalent to an entire year of US gas consumption


Ohio production of both dry gas and NGLs is projected to double over the next decade

0

1

2

3

4

5

6

ProductionBcfd

3025 262320 2717 1916 22 292824211815

Dry Gas

NGLs

Dry gas Natural Gas Liquids (NGLs)This production growth includes 3 products

Light tight oil (LTO)

Source: Drillinginfo, RigData, Energy Information Administration (EIA), OBRT working team model

17

This economic value is driven by production growth of 3 products,with a special emphasis on dry gas and NGLs

End uses

Source: SRI; TECNON; EIA1 Includes fractionators and crackers additional details to follow

Largest opportunities, details to follow


Dry natural gas

Dry gas

Dry gas well

Value chain

Wet gas well

Mid-stream processing1

EthylenePropylene etc.

Natural Gas Liquids (NGLs)

Oil reservoir

LTO

Light tight oil (LTO)

Refineries

Low-cost supply of gas forDirect burn Power generation potential

Low-cost feedstock fuel (e.g., steel, methanol) for industries

Plastics

Rubbers

Insulation

Pipes

Housewares

Carpets

Clothing

Antifreeze

Paper

Etc.

Substitute for other crude oil, which could increase

Net exports of petroleum productsRefinery utilization rates

Could be used for direct burn

18

Break-even price levels across US basins, $/MMBtu

5.04.84.74.7

4.54.54.4

4.03.8

3.63.4

3.43.3

3.23.2

3.4Utica OH

6.25.9

5.75.5

5.05.0

4.74.64.64.54.44.24.14.03.9

5.4Utica OH

competitive position in dry gas is expected to strengthen, as gas extraction costs in the Utica basin decline further

2014 20151

1 Assumes a 5% severance tax based on recent proposals by Governor Kasich; break-even Utica cost is ~$3.3 at current tax levels

NATURAL GAS OPPORTUNITY: DRY GASA

Source: Drillinginfo; RigData; working team analysis

19

Shale gas wells, which use horizontal drilling and hydraulic fracturing, have dramatically increasedPermits for drilling in the shale plays were issued starting in 2011

The number of wells in Ohio has quadrupled in the last two years

Source: Rystad UCube

447445

294

7912

20151413122011

1 Horizontal wells drilled since 2011

Drilled horizontal wells1

Horizontal gas wells, Well count

NATURAL GAS OPPORTUNITY: DRY GAS

20

Current pipeline capacity is not sufficient to keep up with projected production levels

Source: Energy Information Administration (EIA)

Appalachia natural gas production and pipeline capacity (2015 2030)

26

30

4

Projected production growth

Projected 2030 production

2015 production

17

13

Current and planned regional pipeline capacity

Regional pipeline capacity

Additional capacity needed

30Bcfd

Pipeline capacity is currently constrained at periods of peak demandThese capacity constraints during periods of peak demand are associated with the greatest commercial loss, as prices are highest during these periods


21

Needs met with local supply

-12% -24%1%Tennessee Gas Pipeline OH/PA Border (Gulf supplies to Mid-Atlantic)

1

-77%-38%23%2 TETCO Ohio

(Gulf supplies to Mid-Atlantic)

34% 16%56%3 Columbia Gulf Leach KY

(Gulf supplies to Mid-Atlantic)

21% -8%38%4 REX Ohio

(Rockies supplies to Mid-Atlantic)

Initial flow reversal Consistently reversed flow

Example pipeline flows Tennessee Gas Pipeline

Flow reversals across major Ohio pipelines

Pipeline flow reversals have begun to address the capacity issue, but will not be sufficient to cover the future volume of gas

Source: Ventyx, Energy Velocity

-2024

Jan-13

Jul-12

Jul-14

Jan-12

Jan-11

Jan-14

Jul-13

Jul-11

Capacity utilization

Flow reversal

As Utica and Marcellus production increased, pipelines which once brought gas into the region were reversed to allow for exportsThese reversals have begun to address the local supply-demand imbalance, but capacity is constrained even at current production levels

Bcfd


22

Bb

US NGL proved & probable reserves from gas extraction, 2014

Additionally, the Utica Basin is a prime location for wet gas extraction

Bak

ken

Oth

er s

hale

0.7 28.4

Oth

er

1.0

Oth

er ti

ght

Mar

cellu

s

Tota

l

3.6

3.7

Con

vent

iona

l

11.0

Nio

brar

a

0.50.6

Bar

nett

0.9

Utic

a

1.31.4E

agle

3.2

Woo

dfor

d

Per

mia

n0.5

NATURAL GAS OPPORTUNITY: WET GAS

Source: Rystad Ucube (May 2015), Energy Information Administration (EIA)

23

NGLs can be processed into several end-products, presenting Ohio with the opportunity to support new industries

Select end-products

Value chain

Natural Gas Liquids (NGLs)

Wet gas well

Dry natural gas

FractionatorNGLs

Cracker1

Source: SRI; TECNON; AFPM; JobsOhio1 Crackers use natural gas liquids to produce petrochemical products (e.g., plastics)

Plastics Rubber Other

PackagingFilmHousewaresToysLiners / film

TiresFootwearSealants

CarpetsInsulationClothingPaperAntifreeze

Ethylene

What is a cracker?

Approvals and design of a PTT Global Chemical ethane cracker are already in motion in Belmont County in Eastern Ohio

A significant investment has already been made to test the design of the plant


Picture of an ethane crackerSource: PTT Global Chemical

Recent developments

A cracker converts natural gas to liquids

These liquids can then be converted into a number of end-products, listed below

24

0

100

200

300

400

500

600

700

Ethane Productionkb/d

2030202520202015

Ethane production in Appalachia is estimated to be sufficient to supply one or two ethane crackers now and several more by 2030

Ohio could benefit from construction of ethane crackers

Attracting ethane crackers could provide new jobs in the state and increase demand for Ohio NGLsOhio must compete with other states for ethane cracker projectsWithout increased pipeline capacity and/or new crackers, NGL prices may be suppressed and possibly bottleneck wet gas production

Encouraging the entrance of crackers into Ohio would create local demand for NGLs, unlocking the full value of these liquids

Source: Drillinginfo; RigData; OBRT working team modeling and analysis


Large crackers consume ~100-175 kilobarrels per day (kb/d) of feedstock

could supply 3-5 large crackers by 2030

25

Path forward


25

26

Over the past 15 years, Ohio has shifted from a regulated state to a restructured state, allowing customer choice

declined by 1.2% from 2008 and is likely to remain flat for next 10-15 years

and will continue to tilt toward natural gas, renewables and distributed energy that could displace coal and nuclear

Major policy and regulatory outcomes remain in flux and will eventually have a major impact on the transition in Ohio

Critical to manage a stable transitionnext 10-15 years as we see flat power demand, power importing, shifting supply mix, and a uncertain regulatory/policy landscape

Ohio is now part of a larger regional energy system, PJM, that operates across multiple states and is evolving

Ohio now imports ~10% of its power supply and will continue to be a net importer as assets retire faster than demand declines

27

Regulated rates Regulated rates to capped rates to market-based rates Market-based

rates

<1% gas Changing generation mix: moving from traditional base load (coal, nuclear) to more gas, renewables ~15% gas

No legislativemandates Increasing mandated energy efficiency requirements

2025 mandates on

hold

Utility state plans

Move from meeting reliability needs through utility state plans to PJM driven model

PJM regional model

Low contribution

Increasing role of demand response, energy efficiency and energy imports from other states to meet our reserve margins High contribution

2001 2006 2009 20151999 2000 2008 2012 Beyond

WHATNEXT?

Total RegulatorOversight

Deregulation journey: Wholesale Competition, Retail Competition, PJM established, energy efficiency, Renewables Standards for Ohio

2014

CHANGING POWER LANDSCAPE

28

retail power rates across continue to be competitive over last 6 years relative to the national average

6-ye

ar a

vera

ge (2

010-

2015

) in

$/M

Wh


CHANGING POWER LANDSCAPE: PRICING

70

75

77

79

84

88

89

91

91

93

95

NC

WA

IN

IL

LA

KY

WV

US

PA

MI

CT

OH

GA

166

101

103

TX

107

SC

42

54

56

60

60

61

62

63

63

64

64

68

70

74

74MI

MA 132

PA

GA

TX

NC

NY

SC

LA

WV

IL

OH

IN

WA

US

KY

72

82

83

85

85

86

87

92

97

97

97

98

NY

106

KY

142

US

PA

IN

MI

CA

156

LA

OH

GA

SC

104

IL

NC

TX

ID

WV

85

91

95

95

WA

LA

IN

NC 108

GA 111

106

TX 114

WV

KY

OH

188

US

139

CT

121

MI

119

134

115

SC

IL

116

PA

Overall ResidentialCommercialIndustrial

Ohio US averageCompetition

29

Total retail sales for Ohio

Power demand in Ohio has fallen over the past 6 years, and is expected to remain relatively flat over next 15 years

TWh

1 Multiple scenarios were considered for power demand; even more optimistic scenarios did not lift demand expectations above 2008 levels

CHANGING POWER LANDSCAPE: DEMAND

Industrial losses contributed to falling power demand from 2008-2014

Residential demand is projected to fall over next 15 years, in part, due to adoption of energy efficient technologies and distributed resource

Industrial and commercial demand are projected to increase slightly over next 15 years


53

2014

47

-1.2% p.a.

53

2030est.

44

-1.1% p.a.

49

0 3

4947

53

2008

0

59

52

48

47

2015

0

0.1% p.a.

TransportationIndustrialResidential Commercial

30

with many of its peer states

What has happened to power demand from 2008-2014?

Flat to negative load growth in the US overall

Commercial and residential loads have remained relatively stable

Industrial load growth has been challenged across the US

Power demand (2008-2015, cumulative growth rate)

Commercial ResidentialOverallStates Industrial

Ohio

Texas

Illinois

Indiana

Kentucky

Pennsylvania

West Virginia

Georgia

South Carolina

US

North Carolina

Michigan

Louisiana

SOURCE: Energy Information Administration (EIA)

CHANGING POWER LANDSCAPE: DEMAND

-0.1% -0.5%-1.2% -2.7%

3.1 % 1.7%1.6% -0.4%

-0.4% -0.6%-0.7% -1.2%

-0.3% -0.8%-0.8% -1.1%

-0.7%-3.1% -6.1%

-1.1% 0.1%-0.4% -0.3%

0.1% -0.4%-0.8% -1,7%

0.0% 0.2%0.0% -0.3%

0.0% 0.1%0.1% 0.0%

0.2% 0.2%0.0% -0.7%

0.4% 0.4%0.3% -0.1%

-0.1% -0.4%-0.5% -1.2%

1.2% 1.2%1.7% 2.7%

-0.6%

31

Ohio is now part of a larger regional energy system PJM that operates across multiple states, but is still maturing as a power market

CHANGING POWER LANDSCAPE: MARKET CONTEXT

Multi-Optimizes for region not Ohio

getting its rules rightStates of many flavors participate

PJM What is it?

Restructured

States that allow customer choice

Partially restructured

States that have (very) limited retail choice

Regulated

States have traditional regulated rates

32

Power Demand and Generation in Ohio

Over last 5 years, Ohio has become a bigger importer of power as Ohio-

Ohio power generationDemand


TWHXX Imports as a share of total demand (%)

Ohio has become a net importer of power over last 5 years, for several reasons including coal retirement and gas price reduction

With significant coal retirements scheduled, net importer status will continue over next 10-15 years

Critical for PJM to function as an efficient market

increasing reliance on it

CHANGING POWER LANDSCAPE: SUPPLY

06

147

10

136

05

153

136

2015

144146

159

153155

162

155

2004 09

148

154

08

157

07

160

122

154

149

135

13

137

14

149

12

152

130

11

155

TWH

4 2 -1 4 4 7 7 12 15 8 10 17

33

imports from neighboring PJM states with excess capacity this trend is expected to continue

CHANGING POWER LANDSCAPE: SUPPLY

Indiana

Kentucky

Michigan

Ohio

Pennsylvania

West Virginia

145 146 146 146

2013 20152012 2014

32333131

2015201420132012

7583

2014

77

2012 20152013

89

223 228 216

73 76 72

90 9083


2014

147149

2012 2013 2015

149152

130 137 135

Demand State Generation

Ohio Pennsylvania

West Virginia

Kentucky

122

222

81

91

34

Consistent with rest of the country, changing energy economics may shift mix away from coal toward gas and renewables

%

Power generation mix in Ohio

Low gas prices and coal plant retirements led to a 29% decrease in coal generation and 12-fold increase in gas generation since 2004Market-based adoption of renewables (i.e., without subsidies) will accelerate as technology costs come down over the coming years

CHANGING POWER LANDSCAPE: GENERATION MIX

1 Working team analysis Source: Energy Information Administration (EIA)

2008

86

01

2004

1 1011

87

1

24

14

2 1

60

2015

2

68

2030est.

11

2912

18

46

13

2014

110 2

Other Gas CoalRenewables Nuclear

35

Ohio has several natural gas power generation projects in different phases of development, with some uncertainty surrounding completion timelines

Average gas plant takes 3-4 years to come online following its initial announcement1,2

existing pipelines and transmission infrastructure could enable development of new gas plants without significant grid expansion Retired coal assets may provide opportunities for brownfield development and gas conversions

Gas power-generation facilities in project pipeline

33

6

Permitting Under constructionPre-permitting

1,860 2,042 1,992

MW capacity#

Source: Ventyx, Energy Velocity2 Development timeline is based on a sample of 12 new plants announced and developed between 1998 and 2012, excluding two plants with timelines of 12+ years

Number of plants, 2015


36

Renewables are projected to be a growing portion of the changing generation mix over the next 15 years, with heavy growth in wind

1.2

5.3

1.3

0.7

0.50.1

20302015

1.8

7.3

Hydro WindSolarTWh

Projected renewables generation mix

capacity and production for renewable power is projected to nearly double More renewable plants are under construction than any other type, though with an overall capacity growth below that in gasWind likely to remain the dominant renewable technology through 2030Changes in technology and regulation could accelerate the extent of this growth

Source: Energy Information Administration (EIA), BRT Working Team Analysis


37

Six scenarios were modeled to test the impact of various factors on future power prices in Ohio

Probability

Scenario

Description

Extremely unlikely

Low gas, high mandates

Unrealistic, low-probability, state of the world which envisions low gas prices coupled with high mandates. This scenario gave us our left bookend

Bearish on market

Reasonably low gas, low mandates

A more realistic state of the world where we have low gas prices coupled with low mandates. This is the case where we exploit Utica resources efficiently and have economic adoption of disruptive energy technologies

Market expected

Business as Usual

Our base case where we run the current gas prices and mandates over the next 15 years

Market expected

Business as Usual with no mandates

A slight variation of the base case with 0 Renewable Portfolio Standards (RPS). This allows us to understand the impact of RPS over the next 15 years

Bullish on market

Reasonably high gas, high mandates

A scenario where gas prices go up, due to issues with fracking, which leads to higher mandates for energy technologies

Extremely unlikely

High gas, low mandates

A low-probability state of the world in which high gas prices are coupled with low mandates. This scenario gave us our right bookend

Gas prices

Mandates

Low High

High LowHighNoneBusiness as usual Low

CHANGING POWER LANDSCAPE: FUTURE OUTLOOK

38

The scenario planning exercise yielded a few key takeaways

Power demand will be relatively flat, regardless of gas price and renewables adoption

Power supply generation mix will shift away from coal toward more gas and more renewables

Reliability during this transition will not face major challenges if PJM adds new capacity and in-state and interstate transmission infrastructure is effectively built

Retail prices on a $/kilowatt hour will likely increase this is largely driven by flat

Mandates on energy efficiency and renewable portfolio standards (RPS) consistently lead to higher energy prices

Wind is predicted to be the most economic technology of choice among renewables; solar adoption will accelerate via RPS mandates

Key uncertainties remain on the horizon: regulatory (e.g., Senate Bill 310, Clean Power Plan), markets (e.g., gas prices, PJM rules) and technology evolution


39

Retail unit prices increase with high mandates due to energy efficiency impacts, while wholesale prices increase only in the high gas scenario

Wholesale energy prices1

$/MWh2

1 AEP zone only 2 2015 Real $

Retail power prices$/MWh1

Wholesale price outlook is directly coupled to natural gas price (given that new combined-cycle technology will become the price-setter) wholesale prices increase the most in the high gas scenario with no mandates

Retail prices are set on a volumetric basis ($/MWh), and escalation is largely a function of energy efficiency mandatescausing demand destruction


Source: Energy Information Administration (EIA), OBRT Working Team Modeling and Analysis

2014 20302022 2014 2030

Price band with no mandates

Price band with high mandates

High gas price scenario pricing

Low gas price scenario pricingMedian price band

40

Major regulatory, political and market uncertainties relevant to the Ohio power market

Source: NCSL, Press search

State-by-state emission reduction targets (32% by 2030)When will Ohio reach a resolution on CPP?How will this impact the in-state generation mix? Over what time frame?

Clean Power Plan (CPP)

-term?How will Ohio manage the interaction of CPP and SB 310?

SB 310

Specific regulatory issues will emerge in Ohio (e.g., power purchase agreements hearings)What will be the impact of resolution on in-state generation mix over time?

Ohio Regulatory Outcomes

PJM market rules will evolve in response to observed market issuesHow will PJM capacity payment structure incentivize new generation?How will rules for new inter-state transmission facilitate new construction?

PJM Market Rules Evolution

Current subsidies in place for solar and wind at the federal levelWhat is the future for federal renewable subsidies (i.e., timing for investment tax credit, production tax credit phase-out over time)?

Federal renewables subsidies


41

Path forward


42

42

4")/)%5$%6)%1$%&/$,%")/)7

with overall demand for power decreasing and the mix of energy sources shifting away from coal

Natural gas production in Ohio has increased 4x since 2011, and the resources of Utica Basin are in the early stages of being accessed

As growth continues, it will be important to proactively address potential obstacles and

competitive position

Coordinated efforts from the private and public sectors will allow Ohio to maximize the opportunity of natural gas and manage the transitioning power industry and capture this value for Ohio

There are several key action themes to pursue in order to position Ohio has an energy leader and support the energy transition

PATH FORWARD

43

To address these challenges and make the state sustainably energy-competitive, our Steering Committee recommends six key themes

natural gasadvantage

Meet the evolvingneeds of the power

market

Ensure adoption of renewables and

advanced energy technologies are

market based

Improve the ease of doing

business

Build the required support

infrastructure

Drive economicimpact from energy

competitiveness

PATH FORWARD: SIX THEMES

44

5.45.9

2020

4.0

20302010 2025

0.2

2.4

2015

By 2025, production growth could1:

Contribute $8B annually to GDP Sustain 130,000 jobs

With 98% of Utica gas reserves still untapped and exponential production growth in the Utica and

gas production is expected to grow at 6% annually

Natural gas production in OhioBillions of cubic feet per day, projected2

1 IMPLAN model results 2 Drillinginfo; RigData; OBRT working team modeling and analysis


45

Nurture production growth in the Utica from 2bcfd to 10+, by resolving emerging transportation bottlenecks from key production areas to key demand areas

Build state and regional demand for valuable Utica by-product liquids (e.g., ethane, condensate)

Put in place mitigating measures to avoid health and

oil and gas industry

Give confidence to investors/producers by establishing certainty in production, regulation, and future tax structure

Maximize

shale gas production potential


46

Meet the evolving needs of the power market: Defining the opportunity

Ohio has been a net importer of

power

generation mix may shift to

greater gas and

renewables

Recent spikes in pricing

volatility are real

As an importer, critical for Ohio to strengthen our voice in PJM and ensure it functions well as a market, and incents build-out of new capacity and infrastructure through appropriate incentives

This is a major shift especially to more intermittent, weather-dependent generation sources Ohio must proactively and effectively manage this transition smoothly, ensuring a long-term picture is developed for all market participants and stakeholders so they can align around an integrated agenda

During the transition, Ohio must pay attention to reliability and volatility trends, reinforcing the importance to strengthen its voice in PJM and to an extent control its reliability destiny through more in-state generation and resources where possible

Imported power1

Ohio, %

Share of gas & renewable power2

Ohio, %

2014 2030

20152004

Price spikes3

Retail power

2004 2015

1 Energy Information Administration (EIA) 2 BRT Working Team Analysis 3 Ventyx, Energy Velocity


47

Meet the evolving needs of the power market: Goals

overall function of the capacity market and resolve wholesale market uncertainty

generation assets, the capacity market, and the transmission and distribution network

Encourage the development of cost effective

Promote an environment that balances the needs of both customers (cost-effective, predictable and reliable power) and developers (enable continued investment in new and existing assets)


48

Build the required support infrastructure: Defining the opportunity

051015202530

2015 2020 20302025

Natural gas production in Appalachia1

bcfd, projected

Current and planned pipeline capacityNatural gas

opportunity

Power landscape

Without additional gas pipelines, we project regional gas production will be constrained by pipeline capacity in 2020 with over 32 trillion cubic feet of potential production unable to reach the market

As Ohio continues to rely on imports and a changing generation mix, it must ensure the right T&D infrastructure in place to take power to consumers and reduce the probability of a reliability/volatility events

US transmission and distribution investmentsUSD billions2

1 Ventyx, Energy Velocity 2 EIA; EEI; Energy Velocity; SNL; analyst reports; expert interviews


10

20

0

25

15

5

191920

2017

17

2010

20

2014

1510 12

ForecastedActuals

49

Build the required support infrastructure: Goals

Define the solution which accommodates the changing supply/demand profile of the electric grid in a reliable and cost-effective manner

Identify and resolve any constraints to enhancing the inter and intra state gas and liquids pipeline network, including capital asset tax

Maximize the use of the Ohio river as a critical element of the transportation infrastructure, recognizing the potential future value of commodities produced in-state

Develop a state-wide strategy to anticipate energy infrastructure needs and manage the transition


50

Improve the ease of doing business: Defining the opportunity

Increasing the severance tax would not change the competitive position, but wellhead break-even price variability could impact well owner profitability4


Severance tax increase would render Ohio uncompetitive for gas extraction

Developing power plants is more difficult in Ohio than other states

PUCO rule allows for regulated generation to be built in specific cases

What we found

The rule is applicable only after Jan 1, 2009Has not been enforced yetThis rule can only be enforced when there are issues with reliability

625574

60Region

Ohio

Pre-permitting Permitting

Gas generation turbine construction success rates%

Success of gas generation turbines are slightly below the regional average, with no probability difference on a per megawatt level

It appears PUCO could be more transparentwith the enforcement criteria for rules and regulations

Conditions for doing business in Ohio are more favorable than perception

Tax structure

New generation

construction

Ability to regulate

generation

1 Drillinginfo; RigData; OBRT working team model 2 Ventyx, Energy Velocity 3 PUCO

tax today is lower than other statesUtica will remain on low end of the cost curve

4 More detailed study needed to fully explore implications

1%

10%

Comparative tax rates

51

Improve the ease of doing business: Goals

Streamline review and approval process for energy investments (e.g. new gen, pipelines) to closely match siting and permitting times with construction times

Increase transparency and clarity of electric power price-setting

Minimize the cost and disruptiveness of implementing the Clean Power Plan

Promote favorable conditions in Ohio with public effort to counter myths concerning barriers to doing business

Implement a regulatory environment that maximizes value and encourages investment

ease of doing


52

Renewables are a growing share power generation

Forced acceleration

in the pace of renewable

growth increases

prices

Ensuring Ohio is

competitive on price requires

waiting for parity

Retail power prices increased under all scenarios, but this increase is even more dramatic when mandates or measures force the use of renewables before the business case justifies their inclusion

The growth of renewables and energy efficiency will continue over the next several years, which presents an opportunity to seize a greater market share of renewable development and manufacturing, but there are open questions on the correct timing and pace of growth

Ensure adoption of renewables and advanced energy technologies are market based: Defining the opportunity

1 BRT Working Team Modeling and Analysis 2 Projected rates at national level 3 Cumulative installed wind onshore, GW


2020

+73%

2014

Wind power growthCapacity growth3

2014 2030

Modeled retail power prices1

Projected price bands by year

With mandates

Without mandates

20302014

Solar power costsResidential rates2

Parity between cost and rate

As renewable technologies advance, these sources can be included in a cost-effective way in future years as they reach economic parity with other energy sources

53

Support adoption of renewables and advanced energy technologies when the business case (and self-calculated economics) warrant

Phase out mandates for renewable technologies and riders for energy efficiency in a gradual and efficient fashion

Maximize the production base for energy efficiency and renewable technology in the state by attracting manufacturers to Ohio

Ensure adoption of renewables and advanced energy technologies are market based

PATH FORWARD: SIX THEMESEnsure adoption of renewables and advanced energy technologies are market based: Goals

54

Drive economic impact from energy competitiveness: Defining the opportunity

1 IMPLAN model 2 UTSA Institute for Economic Development; large quantities of LTO supplemented Texas GDP growth from shale3 2008-2009, Louisiana DNR 4 2013, US Bureau of Economic Analysis


Scale of

economic opportunity

Potential to attract energy

intensive industries

Gas and oil production, along with associated industries, such as the petrochemical industry, and the businesses needed to support both, are projected to add more than $8 billion

(1.4% growth) and sustain ~137,000 jobs

Other states with similar shale booms have been able to capture economic benefit beyond the direct gains from gas and oil production, such as bringing in new industries attracted to competitive energy prices

0246810

Othersectors

Total GDP gain

ServicesManu-facturing

Gas and oil production

$8.3billion

55 19 42 22 137

GDP gain in 2025Annual growth, billions1

Jobs sustained (000s)

GDP growth: 2.6%2

Jobs: ~155,000Economic impact: Resource extraction created jobs including truck drivers, retail salespeople, and lawyers, and LTOsboosted GDP growth

GDP growth: ~1%3

Jobs: ~90,000 Economic impact: Disposable income increased by $5.7 billion in 2009, a direct result of Haynesville Shale production

GDP growth: ~1%4

Jobs: ~89,000 Economic impact: Cheap gas is provided to nearby dense industrial and residential areas, stimulating regional economic activity

Economic growth in shale states

Texas Louisiana Pennsylvania

55

Maximize the economic benefits of being an energy leader by attracting and retaining gas and liquids producers, power generation facilities, and critical energy infrastructure

investment in energy intensive manufacturing and other complementary activities

Leverage energy competitiveness to drive economic development

Drive economic impact from energy competitiveness: GoalsPATH FORWARD: SIX THEMES

56

To address these challenges and make the state sustainably energy-competitive, our Steering Committee recommends six key themes

natural gasadvantage

Meet the evolvingneeds of the power

market

Improve the ease of doing

business

Build the required support

infrastructure

Drive economicimpact from energy

competitiveness


Ensure adoption of renewables and

advanced energy technologies are

market based

57

Contents




58

Table of contents


A1

1. Historical fact base: Oil and gas reservesa. Background and reservesb. Natural gasc. Natural gas liquids (NGLs)d. Crude and condensatee. Tax and regulatory

2. Future outlook: Oil and gas reservesa. Modeling contextb. Outcomes

i. Referenceii. Highiii. Lowiv. Comparison

c. Severance tax analysis

59

Ohio energy competitiveness: Oil and gas challenges and opportunities

Ohio is well situated to benefit from abundant and low cost shale gas produced from the massive Marcellus and the emerging Utica basins; Ohio now has a price advantage compared to the national average and neighboring statesWhile the Utica has potential to be a major supply basin, it has significant competition from other supply basinsExpansion of intra-state pipelines will likely be needed to connect producing fields to demand locationsRising Marcellus production and coast marketsGrowth in wet gas production, which recently started in significant volumes in Ohio, presents new challenges and opportunities for the state;

New liquids pipelines and wet gas processing plants are being built and could drive further investment and job creationIf not built, limited infrastructure could suppress NGL prices and possibly bottleneck wet gas production

Growing NGL production and depressed ethane and propane prices in the region present another opportunity for Ohio to attract new businesses; however, it faces strong competition from neighboring states and the US Gulf region, where most of the petro-chemical industry is located

Ethane is currently kept in the gas stream and thereby valued at low gas prices rather than converted to higher margin chemicals

A1. OIL & GAS: HISTORICAL FACT BASE

A2

60

Table of contents


A3





61

Ohio energy competitiveness: Basin reserves

Recent advances in non-conventional drilling techniques have made the recovery of hydrocarbons resources in the Utica Basin economical

Utica reserves are primarily comprised of dry gas; However, there are also NGLs, condensate, and crude available, including:

~20 Tcfe of dry gas~8 Tcfe of NGLs~4 Tcfe of condensate

falling gas production and increasing gas prices in the mid-2000s that incentivized the development of new, non-conventional technologies

A4

A1a. OIL & GAS: HISTORICAL FACT BASE BACKGROUND & RESERVES

62

US hydrocarbons proved & probable reserves, 2014

Tcfe

Mar

cellu

s

Bak

ken

34

Woo

dfor

d

35

1,164

Tota

l

34

Oth

er s

hale

44

Upp

er

Dev

onia

n

25

Oth

er ti

ght

Bar

nett

Oth

er

23

Upp

er D

evon

ian

6

Utic

a

31

456

202

Con

vent

iona

l

56E

agle

ford

108

Per

mia

n

109

CondensateNGLGas Crude oil

Source: Rystad Ucube, May 2015

Primary Ohio basin

A5


63

US technically recoverable shale gas volumes

resources were fully understood for shale gas

Source: EIA (shown by assessment date), National Petroleum Council (NPC), USGS

58

611542

267

8535

0

100

200

300

400

500

600

700

Production (2007-14)

EIA (2012)

EIA (2009)

EIA (2007)

USGS (2006)

NPC (2003)

Tcf

Shale gas development history

Large shale gas deposits exist in widely dispersed geographic areas, but the gas is locked in semi-impermeable shale rock

Despite the huge potential volume of shale gas in the US, only a fraction was assumed to be technically recoverable

Pioneering efforts, largely led by independent oil and gas companies helped unlock the value of shale gas

Cumulative production already exceeds USGS 2003 estimate of total technically recoverable

A6


64

The US had historically experienced declining gas production and rising prices

Source: EIA

8.868.69

5.47

3.964.31

051015202530354045505560

0123456789

101112

6.97

2006

6.73

2005

-1% p.a.

2008200720042000

5.89

2002 2003

3.38

2001

US Gas ProductionBcfd

Henry Hub Price$/MMBtu

US gas production and prices 2000-2008Market sought incremental supplies

Henry Price US Production

Decades of production and resource depletion of conventional gas supplies led to declining production despite higher expenditures

Decline in production and resulting rising prices, led the US gas industry to seek alternative sources to meet anticipated supply gap to meet demand in mid-2000s

Alternative energy sources pursued included the following:

Shale gasLNG importsAlternative fuels (e.g., synfuels, biogas)

A7


65

In the mid 2000s, expectations of high prices incentivized search for new gas supplies

Source: EIA

0123

456789

10111213

Jan-15Jan-14Jan-13Jan-12Jan-11Jan-10Jan-09Jan-08

Actual

Nymex futures (5/30/2008) In the summer of 2008, market expectations, as reflected by Nymex futures prices, were for prolonged period of high prices to support cost of future production and importsAlthough actual prices fell far below expectations, high expected prices helped incentivize and fund shale gas developmentSeveral US LNG import terminals were constructed to meet the anticipated supply gapCapital decisions on long lead-time projects, such as shale gas development and LNG terminal construction, reflect expectations at the time of decisions, rather than prices when projects come on line

Gas prices Actual Vs. Nymex futuresMarket sought incremental supplies

$/MMBtu

A8


66

Table of contents


A9





67

Ohio energy competitiveness: Gas challenges and opportunities

Ohio is well situated to benefit from abundant and low cost shale gas produced from the massive Marcellus and the emerging Utica basins; Ohio now has a price advantage compared to the national average and neighboring states

While the Utica has potential to be a major supply basin, it has significant competition from other supply basins

Over the past two years, gas production in Ohio has increased by ~150%

Ohio gas production is dominated by independents with majors almostnon-existent

Expansion of intra-state pipelines will likely be needed to connect producing fields to demand locations

Rising Marcellus production and east coast markets

A10

A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS Return to pg. 16

68

The Marcellus and Utica basins have been important drivers of growth in US production since 2009

Source: EIA

2

2014 Total

2014

4

2013

1

2012

3

2011

4

20102009

1

2008

2

2007 Total

53

71

+34%

Marcellus/Utica

Rest of US Gas

US gas production

Production Change from Previous Year

BcfdSince 2007, Marcellus and Utica have provided over 70% of the total US production growthMost of the growth is due to Marcellus because Utica production started in earnest in 2013During past three years, total production from other supply basins actually declined by 3.4 Bcfd, but were more than offset by 8.0 Bcfd of growth from Marcellus and Utica

A11

A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS

69

Bcfd

Ohio quarterly gas productionOhio is a late arriver but rapidly catching up

Source: Ohio Department of Natural Resources

0.1 0.2

0.40.5

0.7

1.0

1.4

1.8

2.0

00.20.40.60.81.0

1.21.41.61.82.02.2

173%

1Q

Development of the Utica shale in Ohio only started in 2013, lagging behind other shale basins such as the Barnett, Haynesville and Marcellus

One primary reason for the late development is because the Utica shale layer mostly lies beneath the Marcellus layer, making it less accessible and more costly to drill

2013 2014 2015

2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q

A12


70

Source: EIA

0

0.1

0.2

0.3

0.4

0.5

0.6

2010200520001995199019851980 2013

Ohio gas production - Historic

well was drilled in 1860 in Ohio

With depletion of conventional gas supplies, production declined steadily from mid-1980s, mirroring similar declines in other North American gas basins

Only recently was the decline reversed due to shale gas production

Bcfd

Start of Utica production

A13


71

Break-even price levels across US basins, 2014

Utica break-even price was middle of the pack in 2014, but is estimated to benefit from a steep learning curve as drilling improves

CBMShaleTight$/MMBtu


6.25.9

5.75.5

5.45.05.0

4.74.64.6

4.54.4

4.34.2

4.14.04.0

3.93.0

2.9

Utica OH

Utica break-even price is projected to drop by 30% or more (to approximately ~$3.80) in 2015 as drillers gain experience in the basinThis will improve

position relative to other plays

A14


72

For example, Chesapeake has succeeded in driving down cost over time across basins

Source: Chesapeake Energy investor presentation (May 19, 2015)

1.51.7

3.2 -32% p.a.

1.11.4

1.8-22% p.a.

2.73.4

4.3-21% p.a.

201420132012

1.02.1

3.1 -42% p.a.

201420132012

Utica Marcellus North

HaynesvilleEagle Ford

Chesapeake annual drilling costs in representative regional basins Cost/EUR ($/Mcf equivalent)

A15


73

Details of shale gas producers - Ohio

Ohio gas production is dominated by independents with majors almostnon-existent

8

40

33

27

11

9

6

5

4

158

1

305Total Ohio (MMcfd)

Large independents

Regional independents

Company

Majors

Enterprise Value ($B)

214.5

19.0

23.6

5.0

NA

15.2

NA

NA

NA

NA

NA

Source: Yahoo Finance (June 2, 2015), company websites, Ohio Department of Natural Resources

Artex Oil

Everflow Eastern

Ohio Valley Energy

Atlas Noble

NCL Resources

Production (MMcfd)

Chesapeake Energy is the largest producer of shale gas in the state

Followed early strategy to quickly buy shale basin acreage around the country

Smaller regional independents are the next largest producers

DNR:1926 wells permitted,1497 wells drilled901 producing

Chesapeake owns about half wells

A16


74

In contrast, overall US gas production is led by majors and large independents

19.8Total US (Bcfd)

CompanyEnterprise Value ($B)

356.0

19.0

58.5

14.8

36.7

98.4

151.1

15.9

143.5

214.5

3.4

3.0

2.6

2.1

1.7

1.5

1.5

1.4

1.3

1.3

Anadarko

Devon Energy

ConocoPhillips

BP

Cabot O&G

BHP Billiton

Chevron

Chesapeake

ExxonMobil1

2

3

Southwestern Energy4

5

6

7

8

9

10

Source: Yahoo Finance (June 2, 2015), company websites, Natural Gas Supply Association (NGSA)

Details of gas producers - US

Production (Bcfd)

Energy majors, such as ExxonMobil and Shell, tended to focus on massive and complex projects to leverage their capital and expertise

Shale gas was thought to be technically risky and uneconomic prior to mid-2000s

Shale gas growth brought Chesapeake and Southwestern Energy to the top 10 for overall gas production

A17


75

Top US gas players do not lead in shale gas production

2014 Production, Bcf/dCompany

BHP Billiton

Chevron 1.3

Anadarko

Chesapeake

ExxonMobil

1.3

Cabot O&G 1.4

BP 1.5

1.5ConocoPhillips

Southwestern Energy 2.3

Devon 1.7

2.6

3.0

3.4

1.3

2.3

Antero Resources

1.3

ExxonMobil

EOG Resources

Chesapeake

0.6

Anadarko 1.1

0.9

1.1

1.3

Cabot Oil and Gas

Devon Energy

1.3

2.2

Southwestern Energy

EQT Corporation

BHP Billiton

2

3

4

5

6

7

8

9

10

1

Source: Natural Gas Supply Association (NGSA)

2014 Production, Bcf/dCompany

Major

Average Enterprise value for top 10 US gas producers is ~$110B compared to $72B for top 10 shale gas producers

Top 10 US Gas Producers Top 10 US Shale Gas Producers

A18


76

Growth in shale gas production has steadily increased; Prices have stabilized following a significant decline from 2009 - 2010

Source: Bloomberg

0123456789

10111213

0

5

10

15

20

25

30

35

40

45

Henry Hub Price$/MMBtu

US Shale Gas ProductionBcfd

US gas production and prices

Even after prices after 2008, shale gas production, benefitting from cost-reducing technologies, continued to climband now comprise over half of all domestic gas production

Price Production

2008 2009 2010 2011 2012 2013 2014 201520072006

Price falls but production continues to climb

A19


77

As Marcellus/Utica production has grown, Ohio prices have fallen below those of neighboring states

Source: EIA

0

5

10

15

20

25

30

35

40

45

50

55

60

65

Jan-13Jan-09 Jan-15Jan-11 Jan-12Jan-08 Jan-14Jan-10

ProductionBcfd

Comparison of citygate pricesGas production Marcellus/Utica & rest of US

7

11

9

8

2

3

4

5

0

6

1

Citygate price$/MMBtu

20102009 20142013201220112008

US Average

Indiana

Pennsylvania

Illinois

Ohio

Marcellus/Utica

Rest of US Gas

Rest of US Gas

Marcellus/Utica

As gas flows reversed, Ohio prices fell below neighboring states

Ohio gas prices used to be significantly higher than neighboring states to the west, reflecting transportation costs and pipeline constraints

A20


78

Comparatively, Ohio production is lagging behind other shale states in the Appalachia region, but is on a similar path since first permit

Source: Pennsylvania Department of Environmental Protection; Ohio Dept Natural Resources

Production volume (Bcfd)

0

1

2

3

4

Year 5Year 2 Year 4Year 1 Year 3

0

500

1,000

1,500

Year 3Year 1 Year 5Year 4Year 2

Number of wells since first permit

Drivers of differences

First permits issued year

Ohio 2011

Pennsylvania 2006

West Virginia 2008

West VirginiaOhio Pennsylvania

Resource economicsUtica lies beneath the Marcellus and therefore was drilled later

deeper depth results in higher drilling costs

Market factorsE&P companies invested in the Marcellus when oil and gas prices were more favorable

A21


79

The number of shale gas wells have increased and are concentrated in eastern part of the state

Source: Rystad UCube

Shale gas wells, which use horizontal drilling and hydraulic fracturing, have dramatically increasedPermits for drilling in the shale plays were issued starting 2011Current intra-state pipeline system is configured to primarily connect to inter-state pipelines and transport to demand centers

Horizontal gas wells, Well count

445294

7912

447

1413122011 2015

1 Horizontal wells drilled since 2011

A22


Drilled horizontal wells1

80

Historically, gas flowed from the Gulf, Midcontinent and Rockies supply regions to the eastern markets through Ohio

Source: American Petroleum Institute

Direction of gas flows before 2005

A23


http://www.api.org/oil-and-natural-gas-overview/exploration-and-production/natural-gas/understanding-natural-gas-markets

http://www.api.org/oil-and-natural-gas-overview/exploration-and-production/natural-gas/understanding-natural-gas-markets

81

Recent changes in North American natural gas flows have occurred as Marcellus and Utica production volumes increased

Source: Wood Mackenzie

Major US shale gas and liquids resources and gas flow in 2014

Cody

Mowry Gammon

Excello-Mulky

Marcellus (256)

Devonian

Chattanooga

ConasaugaFloyd-Neal

Haynesville/Bossier (251)

Woodford/Caney

Barnett(118)

Eagle Ford/Pearsall (>100)

Woodford (42)

BendPierre

Lewis

Hermosa

Mancos

Hilliard-Baxter-Mancos

AntrimUtica

Granite Wash Fayetteville (20)

Horn River Shale (40)

Montney (152)Marcellus gas production is displacing inflows to the Mid-Atlantic and Northeast markets and now flows are reversing

Imports from Canada into the US have been declining

Exploration

Developing

Producing (Tcf resources)Increasing gas volumes

Decreasing gas volumes

A24


82

As Utica and Marcellus production increased, pipeline flows from other supplies into the region were displaced or reversed

Source: Ventyx Energy Velocity

-2

0

2

4

-2

0

2

4

0

2

1

-1

01

2

Jan-12

Jul-14

Jan-14

Jul-13

Jan-13

Jul-12

Jan-11

Jul-11

21% -8%38%

34% 16%56%

-77%-38%23%

-12% -24%1%

Flows at key points, BcfdLocation of points in Ohio

4

32

1

Tennessee Gas Pipeline OH/PA Border (Gulf supplies to Mid-Atlantic) 1

TETCO Ohio (Gulf supplies to Mid-Atlantic) 2

Columbia Gulf Leach KY (Gulf supplies to Mid-Atlantic) 3

REX Ohio (Rockies supplies to Mid-Atlantic)4

Capacity utilization Flow reversal

A25

A1b. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS Return to pg. 20, 21

83

In line with this broader trend, Ohio gas flows have been dramatically altered due to growth in shale gas production (1/2)

Source: EIA

2.5 2.2 2.6 2.8 3.1 3.6 3.1 2.9

2.52.4

2.83.0

3.12.6

2.3

1.3

0.5

0.20.2

0.4

00.51.01.52.02.53.03.54.04.55.05.56.06.57.0

0.2

2013

4.64.2

2012

+4.5 Bcfd

6.7

+1.7 Bcfd

2011

6.1

0.2

2010

0.2

3.9

2009

6.4

0.2

2008

6.0

0.2

2007

5.7

0.2

2006

4.8

0.2

2005

5.2

0.2

Ohio Demand

From Indiana

Ohio Production

From Kentucky

From Pennsylvania

From W Virginia

Gas from Gulf, Midcontinent, and Rockies supplies used to enter Ohio and flow to eastern markets, as well as supply Ohio demand

However, flows to Ohio have fallen sharply as Marcellus gas displaced much of the inbound flows

Flows from Ohio to West Virginia and Pennsylvania started to reverse in 2013

Sources of gas flow into Ohio

Bcfd

A26


84

Destination of gas flow out of Ohio

In line with this broader trend, Ohio gas flows have been dramatically altered due to growth in shale gas production (2/2)

Source: EIA

1.3 1.2 1.3 1.4 1.5 1.71.2

1.3 1.11.5

1.5 1.51.5

1.3

0.3

0.40.3

0.60.8

1.11.2

1.5

1.6

1.7

0.20

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2.7

1.7

-60%

2013

0 0

2012

2.2

2011

3.9

2010

4.4

2009

4.2

2008

3.7

2007

3.3

20062005

2.9

To PennsylvaniaTo Michigan To West Virginia

Since 2010, gas flows through Ohio to other states have fallen 60%With growth in Marcellus production, flows to Pennsylvania and West Virginia stopped and even reversed in 2013Gas flows are increasing headed north to Michigan to meet state demand or continue to Canada

Bcfd

A27


85

As Ohio production increases, it is important to understand location of highest price market destinations


Ohio quarterly gas production

Bcfd

Prices in gas markets

Henry Hub 4.39

Opal 4.42

Chicago 5.45

Transco NY(Mid-Atlantic) 6.62

Algonquin(Northeast) 8.22

Average Gas Prices in 2014 $/MMBTU

0.1 0.2

0.40.5

0.7

1.0

1.4

1.8

2.0

0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

173%

1Q

2013 2014 2015

2Q 3Q 4Q 1Q 2Q 3Q 4Q 1QMost attractive based on price

A28


86

Northeast Demand

Mid-Atlantic Demand

However, current pipeline capacity to eastern markets is constrained during peak demand periods

Source: EIA

02.04.06.08.0

10.012.0

Jan-2015Jul-2014Jan-2014 Mar-2014 May-2014 Sep-2014 Mar-2015Nov-2014

11.0

Bcfd

0

1.0

2.0

3.0

4.0

Jan-2015Jul-2014Jan-2014 May-2014 Sep-2014Mar-2014 Nov-2014 Mar-2015

3.3

Demand

Pipeline capacity

Pipeline capacity

Bcfd

Key implications

Already pipeline capacities constrain flows to premium markets during peak periodsWith growth in Marcellus production and demand growth in the region, more pipeline capacity will be requiredMarcellus gas, which can now satisfy regional demand during most periods, wants to move westward to Midwest markets. Existing pipeline capacities are inadequate so some pipelines, such as REX, are reversing flows

A29


87

Ohio gas prices have fallen more rapidly than those in other states

Source: US EIA

01.02.03.04.05.06.07.08.09.0

10.011.012.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

US Average

Indiana

Illinois

PennsylvaniaOhio$/MMBtu

Citygate prices Ohio & other states

Ohio used to be downstream of gas flows so its prices reflected pipeline transportation cost and occasional pipeline bottlenecks relative to states upstream in gas flow

As flows reversed, Ohio prices fell relative to Illinois and Indiana

Pennsylvania prices are higher than Ohio because its prices are buoyed by connection to high prices Northeast markets during peak demand periods

Ohio gas prices

Ohio price disadvantage

Ohio price advantage

A30


88

Industrial Rate

Electricity Rate

Residential Rate

12.71 8.71 7.40 5.48 6.206.146.77

-7% p.a.

10.795.01 4.28 4.313.954.40

0% p.a.

3.05

14.53 12.68 11.13 10.78 9.91 9.46 10.14

201413

-4% p.a.

121110092008

Price advantage from shale gas extraction is being passed on to all end-users

Source: EIA; two missing years were computed based on citygate prices and average difference by sector

All Ohio gas consumers are enjoying lower prices

Gas retail rates have fallen for all user types, but the rate of decline varies by sector

Residential prices have fallen the least because they include a large distribution charge that is not affected by supply cost

Ohio now has a price advantage to competing Rust Belt states

$/MMBtu

A31


89

Since 2009, gas usage has increased, driven primarily by gas-fired generation

Source: EIA

2005

2.5-2% p.a.

2009 2011

2.3

2.0 Residential

2.6

2.22.1

Industrial

+6% p.a.

2.2

Commercial

Electric powergeneration

Vehicle

2.0

2001 2003

2.2

2007

2.12.2

2013

2.22.4

2.22.3

Gas demand fell by 2% per annum from 2000 to 2009However, gas demand rebounded starting 2010 as gas burned for electric power generation grew sharply with low gas prices and coal plants retirements (3 GW of retirements from 2010 to 2014)

Ohio gas consumption by sector (Bcfd)

Bcfd

A32


90

Table of contents


A33





91


Approximately 4% of US NGL resources are located in basin; Since initial permits were issues in 2011, production has increased by 1000%+

Ohio processing capacity has doubled in the last two years; Ohio fractionation capacity has quadrupled in the last year

Growth in wet gas production, which recently started in significant volumes in Ohio, presents new challenges and opportunities for the state;

New liquids pipelines and wet gas processing plants could drive further investment and job creationIf not built, limited infrastructure could suppress NGL prices and possibly bottleneck wet gas production

Growing NGL production and depressed ethane and propane prices in the region present another opportunity for Ohio to attract new businesses; however, it faces strong competition from neighboring states and the US Gulf region, where most of the petro-chemical industry is located

A34

A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS

92

Natural gas liquids, associated with the production of wet gas, provide feedstock for petrochemical products

Source: SRI; TECNON

Value chain - Natural gas, crude oil and associated liquids

Current focus

Wet gas well

Dry gas well

Gas processor

Oil well

Gas processor

Methane

Methane

Dry natural gas

Fractionator


Cracker

Other products

Liquid Petroleum Gases (LPG) & Naphtha

Mixed Natural GasLiquids (NGLs)

Crude oil

Purity hydrocarbons Ethane, propane

& butanes

Refinery

A35

A1c. OIL & GAS: HISTORICAL FACT BASE NATURAL GAS LIQUIDS Return to pg. 23

93

US NGL proved & probable reserves from gas extraction, 2014

Bb

Approximately 4% of US NGL resources are located in


Primary Ohio basin

Bak

ken

0.9

Woo

dfor

d

1.43.2

Oth

er s

hale

11.0

28.4

Eag

le

0.50.5

Mar

cellu

s

Con

vent

iona

l

Per

mia

n1.0

0.6

Utic

a

Bar

nett

Nio

brar

a

3.6

Oth

er

1.3

Oth

er ti

ght

3.7

Tota

l

0.7

A36


94

Ohio NGL production

MMb

Majority of NGL reserves in Ohio are located in Utica basin with production ramping up since the first permits were issued in 2011

Proved & probable NGL reserves in Ohio

MMb

Source: Rystad Ucube (May 2015), EIA

1,174181,154

Marcellus TotalDevonianUtica Conventional

+1059% p.a.

13

0.1

1.4

2012

A37


95

MMb

US NGL production from natural gas processing (2013)

However, as of 2013, Ohio NGL production volumes accounted only for 0.1% of national output

938

Total US

Others

164

OH

1

KY

5

WV

10

PA

19

CO

52

WY

53

NM

59

OK

99

TX

474

Source: EIA

Could

production share grow beyond 0.1% level?

A38


96

Ohio processing capacity has doubled in the last two years

Source: Bentek NGL Facilities databank

Processing capacity growth - Ohio National processing capacity 2014

Bcfe/d

3.5

WV

2.8

OK

TX

LA

25.6

8.6

Others

PA 0.8

WY

1.9

1.2

1.5

ND

OH 2.0

CO

4.0

50

17

8

7

6

4

3

2

2

4

XX% Proportion of national capacity

~70% of processing capacity is on the Gulf Coast but Appalachia especially Ohio & West Virginia are fast catching up

Within Appalachia, there is a higher concentration of capacity within West Virginia and Ohio compared to Pennsylvania

1.93

2014

0.97

20132012

0.05

2011

0.01

+533% p.a.

Bcfe/d

A39


97

Location of processing plants - Appalachia

Appalachia regional gas processing plants have been developed in recent years to support production from Marcellus & Utica

Source: Bentek NGL facilities databank

1 Only processing plants with capacity > 100Mcf/d included

Details of existing plants1

Appalachia processing has been bottlenecked since 2012, especially more so in the winter, due to increased natural gas demand

Processing plants are pre-manufactured and require a lead time of 24 months for set up

Many of the new big processing plants are in Ohio

Fractionation Location

Pennsylvania

Ohio

West Virginia

1

2

34

6

5 7,8,9

10

11,13,14,1512, 16

17

Ohio

Pennsylvania

West Virginia

Hastings16

StateName

Penn Cryo8

Cadiz I & II3Berne4

Majorsville I-V11Mobley I-IV12Fort Beeler13

Oak Grove15Natrium I & II14

Renfrew9

Houston6

Seneca I-III2

Blueston I & II7

Hickory Bend5

Kensington I,II, III 1

Sherwood I-V10

Kenova17

OwnerCapacity Mcf/d

180

125

125200

470320320

200200

125

355

200

50

200

200

200

160

Year

2013

20132014

201120132011

20142013

2013

2009

2013

2012

2013

2013

2012

A40


98

Ohio fractionation capacity has quadrupled in the last year


Fractionation capacity growth - Ohio National fractionation capacity 2014

BBL/d

0

0.1

PA

Others

WV

0

KS

LA

TX

0.1

0

0

OK

0.5

0.1

OH

55

14

8

5

4

3

3

7

~70% of fractionation capacity is on the Gulf Coast but Appalachia, especially Ohio & West Virginia, are quickly catching up

20142013

+437% p.a.

0.04

0.01

BBL/d XX% Proportion of national capacity

A41


99

As a result, some of the mixed NGLs extracted from Ohio are currently fractionated in Appalachia to satisfy regional demand


1 Excludes fractionators with capacity < 1Mb/d

Fractionation Location

Location of fractionation plants - Appalachia Existing plants1

NameCapacity Mb/dOwner State

1 180Hopedale I, II & III OH2013

Start year

3 40Cadiz OH

135Harrison I, II & III OH20142

4 100Houston PA2014

5 97Keystone PA2013

7 59Natrium WV2014

8 43Moundsville I & II WV

Holden9 15 WV

Hastings10 14 2013 WV

6 40Majorsville WV2013

Pennsylvania

Ohio

West Virginia

1, 2, 3

9

5

6,7,810

A42


100

There has been significant growth in NGL pipeline infrastructure, especially within Appalachia (1/2)

Source: Ohio Department Of Transportation database

New/Expansion

Pipeline growth in Ohio Miles by players, 2013

# miles

+35% p.a.

2013

996

2011

547

CAGR %

39

86

Name Miles CAGR (2011-13)

590 0

200 24

57 100

49 0

5 0

50 100

45 100

Interstate

Intrastate

InterstateIntrastate

A43


101

There has been significant growth in NGL pipeline infrastructure, especially within Appalachia (2/2)

NGL pipeline map Ohio, Pennsylvania & West Virginia

OH

Details of pipelines

UEO NGL PipelineUEO Ethane PipelineUEO Propane PipelineAGS CenterlineSGG Centerline

NGL Pipeline

BRM Purity NGL PipelineBRM NGL in ServiceBRM NGL ProposedBRM Ethane PipelinePennant NGL PipelineWilliams NGL PipelineWilliams Ethane Pipeline

Sunoco Logistics PipelinesMariner EastMariner East Phase IIMariner WestMariner WestSunoco Refined Products PipelineATEX

Mark West NGLMark West Ethane PipelinesTEPPCO

Source: Bentek NGL facilities databank; JobsOhio

1 Y-Grade - Mixed NGLs containing ethane, propane, butane and natural gasolines

Enterprise TEProducts

Ohio Valley Ethane Pipeline

NameCadiz-Harrison

Pennant Midstream

Seneca-Harrison

Mobley-Majorsville

Sherwood-Mobley

Butler-Houston

Majorsville-Hopedale

Majorsville-Houston

Propane

Ethane

ProductY-Grade1

Y-Grade

Y-Grade

Y-grade

Y-Grade

Y-Grade

Y-Grade

Y-Grade/ Ethane

Greensburg, PA

Marshall, WV

OriginHarrison, OH

Mahoning, OH

Noble, OH

Wetzel, WV

Doddridge, WV

Butler, PA

Marshall, WV

Marshall, WV

Start of operations

2014

2013

2015

2015

2012

2013

2013

2013

2012-13

Owner

A44


102

Additionally, long-haul pipeline growth continues, connecting Appalachia to the Gulf Coast, Sarnia and Marcus Hook NGL hubs


Details of pipelines

Owner ProductCapacityMb/d

Start of operat-ions Origin

Destina-tionName

Ethane 125 (265) 2014 Houston, PA

Mt. Belvieu, TX

ATEXexpress

Ethane 50 (65) 2013 Houston, PA

Sarnia, ON

Mariner West

Ethane/propane

70 2014 Houston, PA

Marcus Hook, PA

Mariner East I

Y-grade 150 (400) 2018 Mercer, PA

Mt. Belvieu, TX

Utica MarcellusTexas pipeline

Operational

Propane/Butane

275 2015 Scio, OH Marcus Hook, PA

Mariner East II

Proposed

Long haul NGL pipelines from Marcellus & Utica

Mont Belvieu

ATEX

Sarnia Ontario

Mariner East I Marcus Hook

Mariner West

Mariner East II

UMTP

In-serviceAnnounced

Current (Expandable) capacityXX (XX)

A45


103

Increased flow of liquids from Midwest to Gulf has required water and rail, as well as pipeline, transportation

Source: EIA

Crude oil and petroleum product movement from Midwest to Gulf (PADD 2 to PADD 3) is growing over time

Pipelines are the most common mode, but waterborne and rail transportation increasingly used

Growth in wet gas and oil production in the Marcellus and other eastern supply basins, movement of crude and petroleum products from the Midwest (PADD 2) to the Gulf (PADD3) have increased over time

With pipeline capacity constraints limiting flows from Appalachian supplies to Gulf petro-chemical plants, higher cost, alternative means are used

With the start-up of ATEX pipe-line in 2014, more volumes were sent by pipeline, displacing some volumes sent by rail or water

0

100

200

300

400

500

Movement Million barrels

132007 09 11 121008 2014

Rail PipelineWaterborne

A46


104

Waterborne movement from Midwest has coincided with growth in Appalachian production

Pipelines are the most common mode, but waterborne and rail transportation increasingly used

Waterborne movement on tankers and barges, typically the next most efficient alternative after pipelines, has grown with Appalachian production

Source: EIA, Reuters (Analysis: As Mississippi oil barge arbitrage window shuts, another opens)

Mont Belvieu

Increasingly, tankers and barges flowing down the Mississippi River have allowed more product from the Midwest to reach Gulf facilities

Waterborne transportation is roughly 30% less costly than rail for transporting petroleum products

14

10

6

3

1000

0

5

10

15

0

10

20

30

40

50

60

70

80

90

Waterborne MovementMillion Barrels

20141312111009082007

Appalachian ProductionBcfd

Marcellus/UticaWaterborne

A47


http://www.nps.gov/miss/press_riverfacts.htm

http://www.nps.gov/miss/press_riverfacts.htm

105

Extensive freight railroad system in the US enabled petroleum product movement from the Midwest to Gulf in recent years

Rail, the last major transportation alternative, has grown in past several years to meet surge in Appalachian production

Source: Moving Crude Oil by Rail ( Association of American Railroads)

Rail movement is a high cost alternative, but railroads provide additional capacity and flexibility

Rail was only used after pipeline and waterborne capacities were usedAlthough rail is more costly than pipeline or water movement for petroleum products, rail has some advantages:

Rail facilities can almost always be built or expanded much more quickly than pipelinesRailroads offer market participants enormous flexibility to shift product quickly to different places in response to market needs and price opportunities

Unit trains with sometimes more than 100 cars consisting of a single commodity to carry up to 85,000 barrels of oil which can be loaded or unloaded in 24 hoursOver the past few years, railroads have invested hundreds of millions of dollars on tracks, locomotives, terminals, and more to enhance their ability to transport crude oil.

0

50

100

Rail Movement Million barrels

132007 09 11 121008 2014

A48


106

Export from Ohio is primarily by rail or combination of rail and water

Source: Center for Transportation Analysis in the Oak Ridge National Laboratory

Most of petroleum product movement from Ohio was by rail

Although Ohio has access to rivers, rail is the primary mode for moving petroleum product to the Gulf region

Ohio has good access to the two largest Class I railroads in the eastern U.S. (CSX and NS)Some liquids are transported using multiple modes; product is loaded on rail cars at a processing plant and sent to a barge terminal for shipment to Gulf plants

6

22

15

0

4

8

12

16

20

24

Estimated petroleum product exports (2015)Million Barrels

TotalRail Multiple modes

0

Other

A49


107

US ethane demand has struggled to keep pace with supply leading to

Source: Bentek NGL supply-demand data

US ethane demand supply balance

MMb/d

10

8

6

4

2

0

18

16

14

12

2014

18

13

14

12

12

2011

11

Total supply Steam crackersRejection

Supply-demand difference Exports

3

700

16

100

CAGR %

A50


108

and fallen in step with that of natural gas

US crude, ethane and natural gas prices

$/MMBtu

Source: EIA; Platts; Bloomberg

0

4

8

12

16

20

24

201420132012201120102009 20152008200720062005

WTI crude

Natural gas

EthaneWide spread in 2008 driven by crude oil price spike (supply/ demand imbalance) while ethane: Oil link was still strong

Ethane price begins to delink

linked to natural gas prices

A51


109

In the Midwest, falling ethane prices have negatively impacted supply transfer to the Gulf Coast while increasing rejection in the region


Midwest1 ethane supply-demand balance

MMb/d

0

0.5

1.0

1.5

2.0

2.5

4.0

3.5

3.0

2014

4

13

3

12

4

2011

3

Supply-demand differenceTotal supply Exports to Gulf CoastRejectionPetrochemicals

8

-14

16

36

1 Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, South Dakota, Ohio, Oklahoma, Tennessee, and Wisconsin

Fall in supply driven by fall in imports from other PADDs

Ethane fractionation spread from Midwest to Mt. Belvieu$/MMBtu

-3-2-10123456789

2014201320122011

CAGR %

A52


110

Announced cracker projects in Ohio and surrounding Appalachia could increase regional demand for ethane in the future

Source: ICIS Magazine, American Chemistry Council, JobsOhio discussion

Factors that make Ohio attractive for future projects

Cheap ethane

Site availability

Attractive tax structure

Description/Plant type

Ethylene Capacity, MT

Stage of development

Projected start year of operationPlayer

Ethylene complexMonaca, PA

1.5 MT Permit obtained, FEED

2018

Ethylene complexParkersburg, WV

1.5 MT Feasibility study

>2019

Ethylene complexBelmont County, OH

1.0 MT Feasibility study

2021

A53


111

Increasing exports and petrochemicals have helped balance propanesupply and demand, but prices have fallen sharply in recent times


US propane demand by end-user group

-6

14

4

50

12

8

16

10

4

14

2

0

6

18

2014

16.415.3

12 13

11.812.9

2011

Exports

Steam cracker

Petrochemicals

Residential & commercial Total supply1

supply-demand difference

1 Includes imports

MMb/d

12

US propane price

$/b

0

10

20

30

40

50

60

70

2011 201420132012

CAGR %

A54


112

Propane exports out of US from the Midwest have increased significantly in line with national trends


Midwest1 supply-demand balance MMb/d

5.0

4.0

3.0

2.0

1.0

00.5

1.5

2.5

3.5

4.5

5.5

2014

5

13

5

12

5

2011

5

Exports to Gulf Coast

Exports to North East

Exports (out of US)

Residential & Commercial

Steam crackers2

Supply-demand difference

Total supply

-23

72

5

4

1 Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, South Dakota, Ohio, Oklahoma, Tennessee, and Wisconsin

2 Drop in demand in 2014 due to debottlenecking of Westlake cracker at Calvert City, KY (conversion from propane to ethane)

0

3

CAGR %

A55


113

Several propane dehydrogenation projects have been announced in the Gulf Coast to increase petrochemical demand for propane


Propane Dehydro-genationplants

StateCapacity MMlbs/y

NGL Demand Mb/d Company Start up year

Sunoco Logistics PA TBD

Dow Chemical TX 29 20151,650

C3 Petrochemicals

TX 45 20152,581

Enterprise Products

TX 29 20161,650

Formosa Plastics TX 23 20161,320

Williams AB 19 20161,100

REXtac TX 660 12 2016

A56


114

Announced plans for increase in LPG export terminal capacity will help handle increasing export demand for propane


LPG Export terminals

Company Name of project StateExport Capacity Mb/d Start up year

40 2015PAMarcus Hook Expansion ISunoco Logistics17PAMarcus HookSunoco Logistics

120 2013TXEnterprise Expansion IEnterprise83 2013TXGalena Park Expansion Phase ITarga50 2015TXEnterprise Expansion IIEnterprise

200 2015TXMariner SouthSunoco Logistics130TXEnterpriseEnterprise50TXGalena ParkTarga8 2015VAChesapeakeDCP Midstream

30WAFerndalePetrogas

235 2016PAMarcus Hook Expansion IISunoco Logistics67 2014TXGalena Park Expansion Phase II (a)Targa17 2014TXGalena Park Expansion Phase II (b)Targa

233 2015TXEnterprise Expansion IIIEnterprise

2015LAEnLinkEnLink Midstream37 2018ORPortland Propane TerminalPembina Pipeline

100 2015TXInglesideOccidental Chemical

Current

Expansion

New build

A57


115

Table of contents


A58





116


The US has a significant crude oil resource base across shale and conventional sources; however, Ohio accounts for less than 1% of current crude oil reserves

Utica Shale reserves contain a large proportion of Gas, NGLs and condensates compared to crude oil, greater than a 10:1 ration

Ohio has seen production in crude oil & condensate increase dramatically as dry gas extraction has grown, although absolute volumes remain comparatively low to other states

crude and condensate extraction market is fragmented and is dominated by small to mid-sized independents who have continued to increase acreage positions

A59

A1d. OIL & GAS: HISTORICAL FACT BASE CRUDE & CONDENSATE

117

The US has significant crude oil resource base, both shale and conventional, with Ohio accounting for < 1%

Bb

US crude oil proved & probable reserves, 2014

Source: Rystad Ucube (May 2015)

Primary Ohio basin

Tota

l

60.81.4

Oth

er

Oth

er s

hale

0.52.4

Oth

er ti

ght

Eag

le7.3

Bak

ken

11.1

26.6

7.1

Utic

a

2.30.1

Con

vent

iona

l

Nio

brar

a

Per

mia

n

Woo

dfor

d

Bar

nett

1.60.4

A60


118

Utica reserves composition and size relative to US

MMboe

Utica Shale reserves contain a large proportion of condensates with little oil

5,904376725

1,296

3,507

Condensates TotalOilNGLsGas


8.0 2.90.64.63.4

% of US reserves

Utica Shale is rich in NGLs and condensates

Oil makes up only 6% of the total Utica reserves

Non-gas hydrocarbons make up 41% of the Utica reserves

A61


119

Ohio has seen production in crude oil & condensate increase dramatically, although absolute volumes remain comparatively low to other states

Texas

Pennsylvania

Louisiana

Oklahoma

West Virginia

Ohio

351314255209189

+17% p.a.3,164

2,5321,9841,4491,169

+28% p.a.

2019

765

+42% p.a.181412910

+15% p.a.

5232

141313

2010 2011

+41% p.a.

201420132012

188197194189184

0% p.a.

20142010 2012 20132011

Source: US Energy Information Administration

Oil and condensate production by state 2011-2015

Mb/d

Mb/d

Mb/d Mb/d

Mb/d

Mb/d

A62


120

Extraction market is fragmented and is dominated by small to mid-sized independents who have continued to increase acreage positions

Major Ohio drillers

4

30

46

89

142

161

190

370

720

780

1043 630,000

1,000,000

67,000

NA

346,000

210,167

NA

NA

NA

NA

NABeldon and Blake Corporation

PDC Energy

Annual oil production (Mb)

3575

Company Acreage

Total

Source: Press Search

A63


121

Ohio has seven pipelines capable of carrying 1144 Mb/d of crude to the four refineries in state


Map of existing crude oil pipelines into Ohio, 2014 Details of pipelines

PlayerRefineryconnectedPipeline

Total

Capacity Mbd

Enbridge BP-Husky Toledo

1 Line 17 101

Marathon Husky Lima3 Line 83 249

Enbridge N/A 2 Line 79 80

Marathon Marathon Canton

4 Line 84 84

Sunoco Husky Lima5 Mid Valley 1

240

Sunoco BP-Husky and PBF refineries

6 Mid Valley 2

240

Sunoco BP-Husky and PBF refineries

7 Eastern Pipeline

150

1144

Illinois

Michigan

Ohio

Stockbridge

Guernsey

Freedom Junction

Toledo

Detroit

Canton

21

3

6

7

Lima

Patoka

Longview, TX

5

4

A64


122

Announced pipelines will increase transmission capacity for condensates


Player Pipeline Origin DestinationCapacity kbd Status

Marathon Corner-stone Pipeline

Cadiz, OH Canton, OH 25 2016Marathon Canton

Refineryconnected

EnlinkMidstreamPartners

ORV Condensate Pipeline

Guernsey, OH

Washington county, OH

50 2015N/A

A65


123

Ohio has very little refinery presence compared to states such as Texas & Louisiana in the US Gulf Coast


26TX

3,40019LA

5,500

231WV

6265PA

5445OK

CapacityMb/dPlayer Type of Plant

160BP -Husky

RefineryToledo

170Husky RefineryLima

88Marathon RefineryCanton

175PBF RefineryToledo

Location

5934OH

State# refineries

Capacity,Mb/d

Ohio refineries, 2014US refinery capacity by state, 2014

A66


124

Table of contents

Appendix A: Oil and gas1. Historical fact base: Oil and gas reserves

a. Background and reservesb. Natural gasc. Natural gas liquids (NGLs)d. Crude and condensatee. Tax and regulatory




A67

125

-conventional dry gas production is in line with other major gas producing states

Source: DOE Office of Fossil Energy; American Petroleum Institute, RFF Report

Pennsylvania West Virginia New York Texas WyomingOhio

Site preparation

Well establish-ment

Fracturing regs

Wastewater treatment

Gas dispersion

500 625 100 200 350100Building setback limits (feet from building)

Water setback limits (feet from water source) 1000 1000 2000 None 5050

50 30 75 12050

Cement quality restrictions Specified Specified Specified Specified NoneSpecified

Depth regulations (feet from surface)

Cement surface requirement Yes Yes Yes Yes YesYes

Water withdrawal permission

Frack fluid disclosure required Yes Yes Proposed Yes YesYes

Some fluids Some fluids Some fluids Some fluids Some fluidsAll fluids

Freeboard requirements Yes Yes Yes No NoYes

Frack fluids requiresealed tanks

Wastewater transport permits Recordkeeping Recordkeeping Permit & Recordkeeping

Permit & Recordkeeping PermitNo, but

Authorized

Discretionary Discretionary Restricted Restricted BannedRestrictedVenting banned

Restriction on flaring during production Discretionary Discretionary Restricted Restricted NoneRestricted

Permit & Recordkeeping PermitPermit &

Recordkeeping PermitPermit & RecordkeepingPermit

RegulationsMore stringent

A68

A1e. OIL & GAS: HISTORICAL FACT BASE TAX & REGULATORY

126

Overview of existing regulations for shale gas production

Regulation over the exploration and production of shale gas in the United States is conducted by state authorities

In recent years, states with shale oil and gas have created specific rules and guidelines to maintain safety standards and environmental protection

Each state defines the minimum safe distance between wells and water sources, buildings, urban areas and other features of the stateCasing and cementing is highly variable, in most cases casing and cementing is required near water sources. Rules over the type of cement also applyDespite being controversial, regulation over fracturing fluid disclosure is still heterogeneous. Several states require detailed information on the utilized fluids, while others allow companies to maintain the confidentiality of their operations

Several regulations apply to both conventional and unconventional wellsStates regulate water withdrawal through general state laws, which apply to all industries, and not just oil and gasOpen pits and storage tanks must follow safety guidelines to prevent contamination of nearby water sources. Generally, regulation focuses on freeboards and pit linersWastewater transportation is tracked, but disposal options vary among statesFlaring is allowed in all states, while venting is more regulated. In both cases, states try to minimize the amount and effect on the environment

A69


127

Setback restrictions: Most states, including Ohio, have setback restrictions between wells, buildings and water sources

Source: Office of Fossil Energy; RFF Report

The American Petroleum Institute (API) best practices encourage separating well activity from both buildings and water. However, each state has individual perspectives on the required distance

Building setback regulations may vary based on local conditions. In Ohio and Colorado, high density or urbanized areas tend to have larger setbacks

Many states provide reductions or exemptions from their setback restrictions, often contingent upon signatures from the affected landowners

Most states have setback restrictions for water sources to avoid water pollution

The Environmental Protection Agency has yet to find evidence on water pollution caused by shale production; however, the agency is conducting new studies on the subject

500

Maryland

200

West Virginia

500

Pennsylvania

1,000

308

625

Wyoming

North Dakota

350

Michigan 300

Texas

Tennessee 200

200

100

Ohio

New York

50

1,000

300

100

2,000

100

1,000

1,000

Setback restrictions from buildings, Feet

Setback restrictions from water sources, Feet

States with the largest number of gas wells in the US

No restrictions

No restrictions

US Average

Overview

A70


128

Well testing: Several states, including Ohio, require predrilling water well testing to evaluate the potential impact of an incident

Source: Bloomberg; Factiva; RFF Report

1 Colorado, Nebraska, Illinois, Ohio, West Virginia, Virginia and New York

Use

Predrilling water well testing establishes the baseline water quality for an area prior to drilling activityIn case groundwater is found to be polluted after drilling, the baseline results are important evidence for determining whether contamination is related to drilling activity

Specifications

Although the radius for testing varies greatly from 0.09 miles (Virginia) to 1 mile (North Dakota, Nebraska and Oklahoma), the average radius is 0.44 miles for testingAlthough the majority of states do not require predrilling testing, seven states1 do require testing before drilling activity takes place

Examples

Ohio regulation requires operators to test water wells within 300 feet of a proposed gas well in urbanized areas, while in other areas sampling must occur within 1,500 feet of a proposed horizontal wellIn addition, Ohio has mapped the entire ground-water system, as an additional risk management measure, to ensure ground-water is protectedIn early 2014, the Environmental Protection Agency was unable to find considerable

Duke University conducted a parallel study, and found considerable amounts of the substance. Residents have blamed operators, instead of conducting defining independent studies

A71


129

Cementing: Regulations vary greatly between states, and may differ among fields in each state

Source: RFF Report; Midwest Energy News

``

Overview States with casing type regulations

Not considered in map Regulated cement typeThe American Petroleum Institute best practice is that selected cements, additives and mixing fluid should be laboratory tested in advance to ensure they meet the requirements of the well design

Ohio has adopted both the API and ASTM standards for cementing

The most commonly-used cement in the US is Portland Class A cement

Cement type varies by well and operator. It depends on the geological formation and other conditions

Cement is classified based on the following characteristics

Compression resistanceCement typeCement circulation around the casing

Ohio has seen <1% correction of cementing works -- need fixing or additional work due to deficiencies in the application of cement --compared to a 1-5% median.

A72


130

Cement casing: Circulation is highly regulated in the United States, and applies to both vertical and horizontal wells

Source: US Energy Department of Energy; RFF Report; Propublica 1 Colorado, Oklahoma and Texas

`

`

`

`

Regulation relevant to vertical and horizontal wells

Casing zones and cement programs in shale gas wells

Production

Intermediate

SurfaceMost states require surface casing, the outermost layer of casing, to be cemented all the way to the surface, along with an outer conductor casing (or conductor pipe)All states that do require such cementing do so explicitly in their statutes or regulations

Cementing in this zone is usually not mandatory, but may be required through permitting processSeveral states1, specify a distance above the shoe to which intermediate casing must be cemented. The distance ranges from 200 to 600 feet above the shoe 500 feet for OhioEight states regulate intermediate casing cementing depth via their permitting processesAlabama and Ohio use a performance standard: operators are required to isolate and protect groundwater of hydrocarbon zones

Arkansas and New York require production casing to be cemented to the surface which inserts some risk for cement cracking with a potential for reduced leak controlAPI states that best practice is to cement production casing to at least 500 feet above the highest formation for vertical wells (and 1000 feet for horizontal) above where fracturing performed

A73


131

Water: Consumption regulated through local water withdrawal laws, and not under industry-specific rules

Source: Energy Information Administration; RFF Report; National Petroleum Council; Environmental Protection Agency

Main shale gas production areas and the water resources used for their production

Niobrara

Cody

Gammon

Excello-Mulky

Marcellus(256)

Devonian

ChattanoogaConasauga

Floyd-NealHaynesville/

Bossier (251)

Woodford/Caney

Barnett(118)

Eagle Ford/ Pearsall (> 100)

Woodford (42)

Avalon

Bend

PierreLewis

Mancos

Hilliard-Baxter-Mancos

Antrim

New Albany

Utica

Horn River Shale (40)

Montney (152)

Bakken

Granite Wash

Fayetteville (20)

Hermosa

Mowry

Orange: States with the largest amount of liquids

Under development

Exploration

Production

Permit, registration &reporting over threshold

Not considered

Regristration & reportingover threshold

Permit requiredover threshold1

10%42%

40%8%

Water withdrawal regulations% of states

Overview

1 California, Montana, Wyoming, Utah, Colorado, New Mexico, Texas, Oklahoma, Kansas, Nebraska, South Dakota, North Dakota, Arkansas, Mississippi, Georgia, Virginia, Pennsylvania, New York, Michigan and Maryland

Several states have discussed drafting rules specific to the shale industry about water withdrawal, but few have passed such regulation. Water withdrawal is regulated under general regulations

In Ohio, different withdrawl levels drive different regulations. Additionally, Ohio does have permitting withdrawls

Most states require general permits for surface and/or underwater withdrawals, many of them only require them after a specified threshold

Consistent with best practices, Ohio requires interface with appropriate water management agencies, who work with companies to shift location of water source

A74


132

Water: Fracturing fluid disclosure has become a controversial issue with environmental groups, legislators and operators

Source: Energy Information Administration; RFF Report; US Department of Energy

1 Montana, Wyoming, Utah, Colorado, New Mexico, Texas, Oklahoma, Arkansas, Louisiana, Michigan, Ohio, West Virginia, Pennsylvania, Maryland

Regulation overview States with requiring fracturing fluid disclosure

Not considered in map Disclosure requiredThe Safe Drinking Water Act authorizes state regulation of underground fluid injection under EPA guidance. In 2005, Congress amended the SDWA to exclude fracturing fluids other than diesel fuel, making it a controversial issue

Ohio still regulates these fluids, with Class1 Wells by Ohio EPA and Class2 Wells by ODNR

Fifteen states1, including Ohio, require some form of fracturing fluid disclosure. Although reporting differs greatly among states, Ohio requires good amount of detail while still protecting confidential information

Many states rely on FracFocus, which was developed with the US Department of Energy funding, in which operators can provide fluid disclosure. Over 200 companies in 30,000 wells have shared their information through this tool. Eight states use this tool to receive operator reports on fluid disclosure

In addition to FracFocus, Ohio DNRrequires specific reporting and fluid disclosure

A75


133

Water: Wastewater storage and disposal varies greatly among states and within each state depending on the type and composition of wastewater

Source: RFF Report

2

3

10

16Pits allowed & regulatedfor all fluids (incl. Ohio)

No regulation

Sealed tanks requiredfor some fluids

Permit required forall pits/tanks

Fluid storage optionsStates in RFF Report

General overview

Fluids are most commonly stored in open pits or closed tanks. Some state regulations mention storage of waste water in ponds, sumps, containers, impoundments and ditches, but all these can be considered subtypes of pits or tanksStates vary in how they define and regulate each type of pit. Each type is approved to accept certain types of fluids, and regulation changes widely from state to state and by field in several cases. Ohio regulates pit storage through permitting of each type.

Open pits

Pit liners

Several states have freeboard regulation, requiring from one to three feet of freeboard, the difference between the top of a pit and its maximum fluid levelFreeboard is important for preventing overflow of fluids, particularly during and after intense rainRules may differ depending on the nature of the pit. Temporary pits usually require one feet freeboard, while large capacity pits may require up to three feet

Pit liner regulation requires operators to have a minimum lining in their storage facilities to avoid fluids from seeping into the ground and potentially polluting groundwaterLiner thickness ranges between 10-40 millimeters, averaging at 22.4 millimeters in the USMost states require a minimum thickness. However, some states require thickness specifications case-by-case

A76


134

Wastewater treatment: Underground injections of waste fluids is allowed in several states, however regulation applies to most states

Source: US Office OF Fossil Energy; RFF Report

1 California, Montana, Wyoming, Utah, Colorado, New Mexico, Texas, Oklahoma, Kansas, Nebraska, South Dakota, North Dakota, Arkansas, Mississippi, Georgia, Virginia, Pennsylvania, New York, Michigan, Maryland, Illinois, Louisiana, Alabama, Vermont, New Jersey, West Virginia, Tennessee, Kentucky, Ohio and Indiana

Overview

MontanaRequires underground injections of all fluids more than 15,000 ppm total dissolved solids (TDS)

Fort Worth, TexasBan on deep injection wells

OhioRequires brine to be disposed of by injection into an underground formation unless the board of the community permits surface application

North CarolinaExpressly prohibits underground injection of fluids produced in the extraction of oil and gas

ArkansasMoratorium on deep injection in a 600 mi2 area of the state where a fault may activate

Examples

Underground injections of waste fluids is allowed in 30 states1 with restrictions on fluids and pollutant levelsThree states recently issued limited or local moratoria because of increased seismic activity linked to shale gas fluid disposal

Ohio introduced an injection well fee of 5 cents per barrel of each substance that is delivered to a well to be injected in the well. Colorado charges $50,000 for each facility

A77


135

Pipeline property taxes in Ohio are higher than comparison states

Source: Data received from Columbia Pipeline Group, State Governments of Ohio, Kentucky, West Virginia, and Pennsylvania

1 Includes property taxes on buildings and other facilities in support of pipeline operations and 41-43% depreciation of pipeline assets2 Pennsylvania does not have a pipeline tax, only a real property tax of 1.1-1.5%, depending on county3 Assessed on fair value of real and tangible assets

Actual taxes paid by a pipeline operator as a percentage of net book value1, 2014 Pipeline asset tax rates

Several factors drive the high tax rate assessed on pipeline operators in Ohio

Depreciation is calculated according to a regular schedule that allows ~3% p.a. for 30 years, resulting in less depreciation realized early in the life of the asset

No allowance for obsolescence or negotiation of asset value without a formal Tax Commission hearing

Relatively high assessment and pipeline tax rates

No data 0.102%

PA2 WVKYOH

3.146%

1.140%Ohio

West Virginia

Pipeline asset tax rate5.0-6.0%

1.5-3.0%

Assessment rate88%

Kentucky 0.45%3N/A

60%

Pennsylvania N/AN/A

A78


136

severance/extraction and income taxes rank 5 of 6, respectively

Source: National Conference of State Legislatures; EIA; State Government of Ohio; State Government of Louisiana, State Government of West Virginia, State Government of Pennsylvania; State Government of Oklahoma;

0.210

Texas

Pennsylvania

Oklahoma

0.005

0.025

0.150

Ohio

0.225

West Virginia

Louisiana 0.163

State corporate income tax,(% of income, % of revenue)

Severance /extraction tax1,($/MCF)

.26% of revenue

6.00% of income

~10% of income

8.00% of income

1% of revenue

6.5% of income

1 Assumes wellhead price of $3.00/McF; Texas, Oklahoma, and West Virginia use a flat percentage formula; Louisiana uses a basis of $.07 multiplied by an annual multiplier; Pennsylvania uses a well fee paid over first three years of production; Ohio employs a flat rate per McF

A79


137

Unlike several large energy producing states, Ohio uses oil and gas severance taxes to support the general fund


Source: National Conference of State Legislatures; EIA; State Government of Ohio; State Government of Louisiana, State Government of West Virginia, State Government of Pennsylvania; State Government of Oklahoma; State Government of Texas

100%

10%

100%

43%25%

90%

40%

10%

60%

20%

75%30%

45%

12%

40%

95%

North Dakota

Arkansas OklahomaOhio3Michigan Texas

5%

West Virginia

Penn-sylvania

General Fund

Rainy Day Fund

Counties

State agencies

Education

Infrastructure

514 188224

$M 2014 State SeveranceRevenues

Breakdown of state expenditures of severance revenues (2014)

44 5774

1 Estimated 2013 2 gas 3 Ohio GRF allocated to DNR following GRF allocation, with 10% for orphaned wells

%

77 1493 59

A80

138

Table of contents


A81





139

Production of both dry gas and natural gas liquids are important energy future

Source: SRI; TECNON

Value chain Natural gas, crude oil and associated liquids

Wet gas well

Dry gas well

Oil well

Gas processor

Gas processor

Methane

Methane

Fractionator


Cracker

Other products

Liquid Petroleum Gases (LPG) & Naphtha

Mixed Natural GasLiquids (NGLs)

Crude oil

Purity hydrocarbons Ethane, propane & butanes

Refinery

Dry natural gas

A82

A2a. OIL & GAS: FUTURE OUTLOOK MODELING CONTEXT

140

We projected production by basin and economic impacts for Ohio

Modeling approach will analyze Ohio production and economic implications

Using best available data, our energy model assesses the competitiveness of each basin in North America to project future production

Given the production volumes, we analyze infrastructure requirements to bring the gas to market

The projected production sales revenue and infrastructure capital expenditures are feed into the IMPLAN, a model of economic interactions across sectors within a particular region, to project impact on GDP and employment

Supply model and infrastructure analysis

IMPLAN Model

Gas/Liquids Production Revenue Infrastructure Capex

GDP Impact Employment

We will make use of IMPLAN and other energy models along with best available data

Data

ResourceDrilling activity

Well completions Market

Capex/ Opex

A83



141

Since there is much uncertainty, we analyzed multiple scenarios for Utica production

Although Ohio has little or no control over geologic and drilling economic factors, it is important to test how alternative assumptions might affect its energy future and efficacy of different policy options

We developed three scenarios for Utica production by modifying key uncertainties in resource size and rate of extraction

Uncertainty

Technically recoverable resource (TRR)

Drilling activity (maximum number of rigs in a play)

Ramp up rate

High TRR (530 Tcf)

High drilling activity (100%)

High ramp up rate (100%)

Base

Moderate (265 Tcf)

Moderate drilling activity (50%)

High ramp up rate (100%)

High Production Low Production

Moderate (265 Tcf)

Low drilling activity (15%)

Low ramp up rate (20%)

Scenarios

A84



142

To assess the scale of the gas opportunity, we analyzed potential supply scenarios and their implications for Ohio

State impactsIndustry sales and capital expendituresAssess overall state-level GDP impact of various production scenariosCreate picture of overall jobs impact of various production scenarios

Project production by scenario

Downstream opportunities

Midstream infrastructure

Test controllable actions

1 2 3 4

5

Run base case

Develop high and low cases based on uncertainties in above ground and below ground factors

Analyze severance tax (e.g., 1%, 5%)

Analyze regulatory scenarios (e.g., enhanced cement casing)

Analyze capacity requirements given production scenario

Determine

Determine incremental industrial demand and opportunities for attraction

A85



143

Oil price fluctuations have a series of small, nuanced effects on the natural gas market

Decreases in oil prices have nuanced effects on the natural gas market...

Lower servicing costs driven by lower rig usage; would improve wellhead economics

Possible increase in rate of conversion from coal fired to gas fired generation, as resulting lower gas prices improve gas vs. coal economics

Decrease in value of NGLs and LTOs may drive activity away from these wells in favor of wells with greater dry gas content

Could marginally delay Utica play development

Oil prices have experienced tremendous volatility in the past 10 years

While oil prices have fluctuated significantly, overall demand for natural gas is not affected by oil prices The outputs in future modeling around the natural gas opportunity are based on a go-forward oil price of $60 per barrel

USD per barrel


0

20

40

60

80

100

120

2012201120102009 2013 20162014 2015

5-year historical

average

Model price ($60)

A86


144

In aggregate, these effects have little to no impact on the magnitude of the natural gas opportunity in Ohio

Decreases in oil prices could yield a small shift from wet gas to dry gas production

Dry gas

Wet gas

A decrease in oil prices changes well economics to make wet gas extraction slightly less favorableThis could potentially move extraction activity further east toward the Marcellus basin, where more dry gas existsThis could potentially move some economic activity outside of Ohio, although this effect is expected to be very small

Dry gas

Wet gas

These shifts would cause little to no effect on the overall GDP impact of natural gas activity

All else being equal, these shifts in the mix of natural gas production would yield a minimal effect on the overall GDP impact of the natural gas opportunityOverall demand is driven by the export markets, and is therefore largely untouched by oil prices0

3

6

9

Total GDP gain

$8.0-8.5

Gas and oil production

Supporting industries

USD per barrel

64

36

Wet gas Dry gas

30

70

2030 projected Illustrative mix with lower oil prices

Breakdown of wet and dry gas

A87


145

Table of contents


A88





146

0

5

10

15

20

25

30

35

40

45

Gas ProductionBcfd

1817162015 242322212019 20302928272625

Production volumes in Ohio and the Appalachian region are projected to grow rapidly

Marcellus (Non-Ohio)

Utica (Non-Ohio)Ohio

Ohio will benefit from state and regional production

Ohio production is projected to double over next 15 years, but the larger market trend is set by continued production growth in the Marcellus

Production growth in the Marcellus and Utica basins have depressed prices in the region, caused gas flow reversals, and resulted in a number of proposals for pipeline projects to export gas and liquids out of the region

2015 actual production as exceeded the modeling reference case, but is still

case scenario modeling

In the Reference case, Utica production grows sharply butis overshadowed by the continued growth of the Marcellus


OHIO GAS FUTURE: REFERENCE CASE

1

A89

A2b. OIL & GAS: FUTURE OUTLOOK OUTCOMES Return to pg. 16

147

Utica production will be primarily dry gas, but there willbe significant volume of NGL production


00.51.01.52.02.53.03.54.04.55.05.56.0

ProductionBcfd

203029282726252423222120191817162015

Dry Gas


1

Ohio has a long history of dry gas production, but wet gas production of NGLs are relatively new to the state

Ohio will require infrastructure expansion to fully accommodate and capture value of NGLproduction

2015 actual production as exceeded the modeling reference case, but is still

case scenario modeling

NGLs

Ohio production of both dry gas and NGLs are projected to double over the next decade

NGLs are a new opportunity for Ohio

A90

A2b. OIL & GAS: FUTURE OUTLOOK OUTCOMES

148

To understand impact of controllable actions, we analyze wellhead productivity by county


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Average Initial production(4Q2014-1Q2015)Mcfe/day

Car

roll

Col

umbi

ana

Gue

rnse

y

Har

rison

Bel

mon

t

Nob

le

Mon

roe

TotalGas Oil

Drilling productivity per well varies widely by county in Ohio

There appears to be two distinct groups based well productivity


2

Drilling activity in 2014 showed three counties with high productivity while the rest showed much lower productivity

Carroll county has fairly low productivity; however, it is the leading county in terms of total gas production

Based on initial production (IP), decline curves, and drilling costs data, we can compute breakeven prices, which represent the Henry Hub price necessary to provide the average well within a basin a 10% rate of return on a 15-year discounted cash flow basis

A91


149

After computing breakeven prices from well productivitydata, we compare basins to show relative competitiveness

5.24.8

4.74.7

4.64.54.5

4.44.0

3.83.8

3.63.6

3.43.43.4

3.33.23.2

3.02.82.8

Devonian OHOhio-Carroll

Ohio-Other

Ohio-Belmont

Ohio-Guernsey

Ohio-Harrison

Ohio-MonroeOhio-Noble

Estimated breakeven prices by basin in 2015, $/MMBtu

$3.70 Nymex1

2

1 Average NYMEX futures prices from Jan 2016 to June 2024 (July 24, 2015)

Source: DrillingInfo; Ohio Department of Natural Resources

Utica is expected to be advantaged

On average, the Utica is estimated to be among the lowest cost supply basins

However, examination by county reveals that the four top counties (Monroe, Noble, Belmont, and Harrison) are highly competitive, but the others are not economic at current price expectations, as reflected by Nymex futures prices

The Utica is still an emerging basin and its unit production cost is expected to decline more rapidly than average

Oil is assumed to be $60/bbl in the gas breakeven price calculations

A92



Return to pg. 18

150

Drilling activity appears to validate the computed breakeven prices



2

050

100150200250300350400450500550600650700

Total ProductionMMcfe/day

Other

GuernseyNobleMonroe

Harrison

Belmont

Carroll

1Q 2015

4Q 2014

3Q 2014

2Q 2014

1Q 2014

4Q 2013

3Q 2013

2Q 2013

2126

353640

51

100

01020

3040506070

8090

100

Number of New Wells (4Q14-1Q15)

Oth

ers

Mon

roe

Har

rison

Nob

le

Bel

mon

t

Gue

rnse

y

Car

roll

Counties with rapidly increasing production are those computed to have the lowest breakeven prices

With the exception of Carroll county, focus of initial shale gas drilling in Ohio, still leads in new wells, but emerging counties are catching up

A93


151

Base case HighLowBy varying key uncertainties by their range of values, we can gauge the impact on the breakeven price for a well

The largest determinant of breakeven price is total recoverable volume of a well, followed by capital (drilling and completion) and operating costs

Controllable actions, such as requiring enhanced cement casing or imposing a moderately higher severance tax, have minimal impacts on breakeven price but could sway production decisions in marginal areas

Impact relative to base case % change to breakeven price

Considered severance tax and drilling regulations areestimated to have minimal impact on breakeven price

Severance tax

Enhance casing

O&M costs

Completion cost

Drilling cost

Recoverable volume

Source: Variability in recoverable volumes given by IP rates for the top (Monroe) and lower tier (Carroll) counties; costs were assumed to vary + 25%; enhanced cases is assumed to add $87k/well and severance tax is assumed to increase from 1% to 5%


2

Calculation of a breakeven price is dominated by the recoverable volume

A94


152

0

100

200

300

400

500

600

700

Ethane Productionkb/d

203029282726252423222120191817162015

Projected ethane production in Appalachia is estimated to be sufficient to supply more than six world-scale ethane cracker1 in the future

Ohio could benefit from construction of ethane crackers in the State

Ohio production is projected to be able to feed up to six crackers, but additional ethane can also be imported from other statesOnce liquids are separated from the gas stream and fractionated into a purity product, ethane can be fed into an ethane cracker to produce ethylene, an important intermediate product in the petrochemical industryHowever, Ohio must compete with other states for ethane cracker projects, as well as export of ethane to the Gulf and international destinations

1 cracker

2 crackers

3 crackers

Ethane feedstock

Growth in ethane production will be sufficient to potentiallysupply multiple ethane crackers

1 World-scale ethane cracker is estimated to consume about 100 kb/d



4

A95


Margin for three additional world scale crackers with projected ethane production

153

GDPby $8.3 billion and sustain over 130,000 jobs in 2025

0123456789

Services2Manufacturing1 Total GDP gainGas and oil production

Other sectors3

$ Billion

Source: IMPLAN model results

1 Includes chemicals, metals, paper and pulp, and rubber and plastics manufacturing.2 Includes professional services, management, real estate, health care, education, leisure, and hospitality.3 Includes wholesale and retail trade, construction, transport and warehousing, agriculture, mining, and government.

Sector jobs 55 19 42 22 138


5

A96


154

Shale gas production could With growth in shale gas production, the O&G extraction sector is projected to grow in importance

The projected valued added from shale gas production represents a 1.4% increase 2014 GDP of $583 billion

The projected values represent a strong growth over the 0.2% share that oil and gas extraction captured in 2012 and are comparable to the shares captured by utilities and motor vehicles

Even though the Utica is still an emerging basin, it is already one of the top 6 shale gas producing basins in the US and has potential to grow much higher

Shale gas production in Ohio is projected to significantly

Sources IMPLAN model results; US Dept of Commerce Bureau of Economic Analysis; US Bureau of Labor Statistics

5

0

0.5

1.0

1.5

2.0

2.5

% GDP

Share of Ohio GDP (2012)

0.2%

Motor Vehicles

2.4%

Utilities

1.9%

O&G Extraction

2.0

2.5

1.5

1.0

0.5

0O&G extraction

Services

0.3 Manufacturing

Impact in 2025% GDP

Other

% GDP

0.4

1.40.3

0.5

A97



155

Table of contents


A98





156

Shale gas production could With growth in shale gas production, the O&G extraction sector is projected to grow in importance

The projected valued added represents 1.2%-2.1% increase

$583 billion

The projected values represent a strong growth over the 0.2% share that oil and gas extraction captured in 2012 and are comparable to the shares captured by utilities and motor vehicles

Even though the Utica is still an emerging basin, it is already one of the top 6 shale gas producing basins in the US and has potential to grow much higher

Shale gas production in Ohio is projected to significantly

Source: IMPLAN model results; US Dept of Commerce Bureau of Economic Analysis; US Bureau of Labor Statistics

OHIO GAS FUTURE: SENSITIVITY CASES

5

0

0.5

1.0

1.5

2.0

2.5

1.4%

GDP % Impact (2025)

% GDP

1.2%

2.1%

0

0.5

1.0

1.5

2.0

2.5

Share of Ohio GDP (2012)

O&G Extraction

Utilities

1.9%

0.2%

Motor Vehicles

% GDP

2.4%

A99


157

Shale gas production could With potential for much higher production volumes, the economic impact on Ohio could be much higher

By 2025 when the basin is projected gas

production could add $6.5-13.7

Cumulative impact of shale gas production from 2015 to 2030 ranges from $149-230 GDP

The impacts measure:

Direct impacts arising from wages and expenditures within the O&G sector

Indirect impacts arising throughout the O&G supply chain

Induced impact arising from household spending from income earning either directly or indirectly from the O&G sector

Uncertainty in production implies high upside potential, but limited downside

Sources IMPLAN model results; US Dept of Commerce Bureau of Economic Analysis; US Bureau of Labor Statistics


5

8.3

13.7

6.5

$ Billion

Value Added (2025)

Low caseReference case High case

149

230

122

$ Billion

Cumulative Value Added (2015- 2030)

A100


158

Impact of Utica on employment could be much larger than present

Direct and indirect employment impacts due to shale gas span multiple sectors

Number of jobs attributable to shale gas production in Ohio is projected to range from 108 to 225 thousand with an average of 137 thousand by 2025 when Utica production is expected to reach full maturity

The jobs represents 1.9-3.9% impact relative to the 2015 Ohio civilian labor force of 5,739 thousand

By comparison, there were 23 thousand jobs in O&G extraction in 2013

Shale gas production and concomitant infrastructure expansion are projected to support a large number of jobs

Source: IMPLAN model results; US Bureau of Labor Statistics; US Bureau of Economic Analysis; Ohio Development Service Agency


5

5589

43

18

31

14

42

68

33

22

37

17

020406080

100120140160180200220240

Employment Impact (2025)Number of Jobs (Thousands)

Low

225

137

Base

108

High

Manufacturing

Services

O&G extraction

Other

A101


159

Table of contents


A102





160

Executive summary: Severance tax

The average effective tax rate of shale gas producing states is 8.3%, ranging from 6.3% to 11.3%

The cost to extract gas from the Utica basin is competitive with other states and projected to fall further as more wells are established

The Utica basin has the 5th lowest break-even price out of 16 U.S. basins

The break-even price fell by 38% between 2014 and 2015 to $3.30 per MMBtu

An increased severance tax is not projected to significantly alter the difference between the break-even price and the average NYMEX future price

A 5% severance tax is projected to increase the break-even price of gas extraction by 2%

At the break-even price, the average well is projected to pay a total of $650k in severance tax (not discounted)

Revenues from a severance tax can be targeted

fund, which feeds into ODNR

Other states allocate tax revenue to infrastructure, counties, rainy day funds, and state agencies

A103

A2c. OIL & GAS: FUTURE OUTLOOK SEVERANCE TAX

161

Among major shale gas producing states in the rate on horizontal wells producing natural gas ranks last

Source: Ernst & Young report on severance taxes conducted for the Ohio Business Roundtable, 2014

Effective tax rate (ETR) on horizontal wells producing natural gas, natural gas liquids and oil

7.6%

7.6%8.1%

9.5%

1.5%6.3%

8.0%

11.3%

Ohio has the smallest severance tax of all comparison states

The average ETR of all other states is 8.3%

ETR is 85% below the average rate for all other states

Low High

A104


162

Break-even price levels across US basins, $/MMBtu

3.3

5.4

The cost to extract gas from the Utica basin is lower than many basins in

2014 2015 (current 1% severance tax) 2015 (5% severance tax)

3.4

All other basins Utica

Source: DrillingInfo, Ohio Dept. of Natural Resources; Tax rate is the only variance in the column

A105


163

1 Present values calculated with a 10% discount rate. Estimated for an average Utica Rich Gas well with an EUR of 3.7 BcfSource: Drillinginfo; RigData; OBRT working team modeling and analysis

Percent of total present value1 To illustrate economic drivers, we examine a well with 3.7 Bcf of recoverable gas volume

An increased severance tax of 5% determines ~3.3% of a

compared to ~1% at the current severance tax rate

Except for supplies at the margin, a small change in breakeven price is likely to have minimal or no impact on production decisions

At the break-even price, the average well pays $650k in severance tax (total, not discounted) P

rofit

-7%

Seve

ranc

e ta

x

Gro

ss M

argi

n

-3.3%

-0.3%

-17.8%

100%

Dril

ling

cost

O&

M c

osts

Roy

altie

s

Com

plet

ion

cost

-26.7%

11%

-25.0%

-20.0%

Tota

l Val

ue

Capital and variable costs drive profitability of a well with given resource volume

Taxes are minor factors determining profitability

An increased severance tax is not projected to have a significant effect on well profitability

A106


164

Some other large energy producing states have used oil and gas severance taxes for specific funds, such as infrastructure and education

A107


Source: National Conference of State Legislatures; EIA; State Government of Ohio; State Government of Louisiana, State Government of West Virginia, State Government of Pennsylvania; State Government of Oklahoma; State Government of Texas

100%

10%

100%

43%25%

90%

40%

10%

60%

20%

75%30%

45%

12%

40%

95%

North Dakota

Arkansas OklahomaOhio3Michigan Texas

5%

West Virginia

Penn-sylvania

General Fund

Rainy Day Fund

Counties

State agencies

Education

Infrastructure

514 188224

$M 2014 State SeveranceRevenues

Breakdown of state expenditures of severance revenues (2014)

44 5774

1 Estimated 2013 2 gas 3 Ohio GRF allocated to DNR following GRF allocation, with 10% for orphaned wells

%

77 1493 59

165

The Ohio Business Roundtable is pleased to release an independent analysis click

The Ohio Business Roundtable is pleased to release an independent analysis click here conducted by Ernst & Young of the severance tax provisions of

-an update to a similar analysis the firm conducted two years ago for the Roundtable and, therefore, reflects the changes the Governor made from his original severance tax proposals to the General Assembly in 2012. In brief, Ernst & Young, both in this report and in the report we released two years ago,

with which Ohio competes for capital investment, including Michigan,

shale-rich states of Arkansas, North Dakota, Oklahoma and Texas. Ernst & Young concludes that even after the proposed severance tax would be

competitor states, and by a wide margin. Moreover, given our effective tax rate

reason to believe that it will prevent or slow development of the oil and gas

tax policy that recognizes the bounty of our natural resources and will keep our state growing. We hope this continued fact-based analysis commissioned by the Roundtable will be useful to lawmakers in their deliberations and,

-biennium budget review.

BRT position as stated on April 21, 2014

A deeper look at the current proposal to increase severance tax

Implications of tax increase

Governor Kasich proposed a 6.5% tax on oil and gas at the fracking well head and a 4.5% tax on natural gas and natural gas liquids obtained downstream

The tax was expected to raise $270 M in annual revenue

80% of revenue would fund tax cuts

20% of revenue would go to counties with wells

Ohio General Assembly delayed proposal and decided conduct more research where the proposal later stalled

Source: Ohio Business Roundtable

A108


http://www.ohiobrt.com/sitecake-content/fc2d89a0-c95f-11e3-953d-000000000000-1.pdf

http://www.ohiobrt.com/sitecake-content/fc2d89a0-c95f-11e3-953d-000000000000-1.pdf

166

Contents




167

Table of contents

Appendix B: Electric power1. Historical fact base: Electric power

a. Pricingb. Demandc. Supplyd. Tax and regulatory

2. Future outlook: Electric powera. Modeling contextb. Summary of modeling resultsc. Detailed modeling resultsd. Infrastructure investment analysis

B1

168

B1. ELECTRIC POWER: HISTORICAL FACT BASE

:

Low-cost: Power prices in line with or less than key competitors

Reliable: Able to effectively meet load at all times, including peak demand periods

Predictable: Able to forecast power prices with a good degree of accuracy

Timeframe: 2000-2014

Competitive states neighboring states and states competing for industrial demand:

Regional EconomicIllinois

Indiana

West Virginia

Kentucky

Pennsylvania

Michigan

Georgia

North Carolina

South Carolina

Texas

Louisiana

B2

169

Section summary: Power

PricesRetail Prices have been competitive with the peer states for the last 15 years and 7% lower than the US overall average during the last 6 yearsWholesale prices have been competitive with peer regions; wholesale volatility has spiked recently due to weather impacts (Polar Vortex) and transmission/congestion impactsA well-functioning SSO auction should shield customers from exposure to wholesale volatility

Demandoverall power demand has declined 1.2%, led by 3.0% decrease in industrial demand

Industrial power demand at both the state and national level has fallen despite rising industrial GDPIncreased shale gas operations in Eastern Ohio has led to a growth in power demand

SupplyContinued power supply-demand split in Ohio is occurring along-side additional generation asset retirementsCoal plant retirements continue, outpacing new capacity build-out; although gas-fired generation asset in the construction pipeline are growingAccelerated asset retirements in Ohio are expected to increase reliance on imports, leading to potentially large investment in transmission infrastructure not only in Ohio but across the nationDistribution reliability in Ohio has remained relatively constant over the last 5 years

B3

B1. ELECTRIC POWER: HISTORICAL FACT BASE

170

Table of contents


B4

1. Historical fact base: Electric powera. Pricingb. Demandc. Supplyd. Tax and regulatory


171

Over last 6 years, Ohio retail rates have been 7% lower than the US overall average, however many peer state averages are even lower

6-ye

ar a

vera

ge (2

010-

2015

) in

$/M

Wh


B5

B1a. ELECTRIC POWER: HISTORICAL FACT BASE PRICING Return to pg. 28

70

75

77

79

84

88

89

91

91

93

95

NC

WA

IN

IL

LA

KY

WV

US

PA

MI

CT

OH

GA

166

101

103

TX

107

SC

42

54

56

60

60

61

62

63

63

64

64

68

70

74

74MI

MA 132

PA

GA

TX

NC

NY

SC

LA

WV

IL

OH

IN

WA

US

KY

72

82

83

85

85

86

87

92

97

97

97

98

NY

106

KY

142

US

PA

IN

MI

CA

156

LA

OH

GA

SC

104

IL

NC

TX

ID

WV

85

91

95

95

WA

LA

IN

NC 108

GA 111

106

TX 114

WV

KY

OH

188

US

139

CT

121

MI

119

134

115

SC

IL

116

PA

Overall ResidentialCommercialIndustrial

Ohio US averageCompetition

172

benchmark large industrial states in the last 15 years

45

40

0

80

90

85

35

55

65

75

70

60

50

201405 130703 09 100804 0602 11012000 12

SC

LAWV

GA

IL

MI

PA

OHIN TX

NCKY

Industrial Retail Rates

$/MWh CAGR %

3.0 MI

3.9 PA

4.4 IN

2.4 NC

3.2 WV

2.8 OH

3.5 GA

3.9 SC

2.3 TX

1.3 LA

4.6 KY

2.9 IL

State


B6

B1a. ELECTRIC POWER: HISTORICAL FACT BASE PRICING

173

Commercial prices in Ohio have also increased in the last 15 years, but remain high relative to benchmark states

85

105100

90

60

80

65

95

120

70

55

110

115

0

75

05 08 131211090402 07 20142000 01 03 1006

GA

KY

OH MI

ILLA

TX

PA

SC

NCWV

IN

Commercial Retail Rates

$/MWh CAGR %

MI

IN

NC

WV

OH

GA

SC

TX

LA

KY

2.3

3.1

3.7

2.3

2.7

1.9

3.3

3.7

1.2

1.6

4.5

1.4 IL

State


PA

B7


174

Similarly, residential prices in Ohio have continued to increase, and remain relatively higher than benchmark states

140

80

150

120

100

130

90

70

60

0

110

0502 11 2014131009 1208070604032000 01

TX

SC WV

PALAGA

MI

IN

OH

NC

IL KY

Residential Retail Rates

$/MWh CAGR %

3.9 MI

2.8

3.7 IN

2.4 NC

2.7 WV

2.7 OH

2.9 GA

3.7 SC

2.9 TX

1.3 LA

4.6 KY

1.8 IL

State


PA

B8


175

Industrial rates for utilities (2000 2013)

50

120

40

60

80

0

90

70

110

100

270

30

06 1311100807 12022000 0903 0401 05

Kentucky Utilities Co

Indianapolis Power & Light

Southwestern Electric Power Co

Commonwealth Edison Co

Consumers Energy Co

Entergy Texas Inc

Ohio Power Co

PECO Energy CoDuke Energy Ohio

Indiana Michigan Power CoDuke Energy Indiana

Monongahela Power Co

Southwestern Public Service CoDuke Energy Carolinas

PPL Electric Utilities Corp

Louisville Gas & Electric Co

Ohio Edison Co

Entergy Louisiana Inc South Carolina Electric & Gas Co

Georgia Power Co

Duke Energy Progress

DTE Electric Co

AmerenIP

Industrial Retail Rates

$/MWh

Source: Ventyx, Energy Velocity (Energy Information Administration (EIA) 861 Data)

CAGR %

3.6 Regional

2.6

3.6 Ohio Power

Entity

Economic

0.1 Ohio Edison

6.0 Duke Ohio

B9


176

0

110

150

130

140

100

90

120

80

70

60

50

131211100903 0504022000 0601 0807


Southwestern Public Service Co

Southwestern Electric Power Co

South Carolina Electric & Gas CoLouisville Gas & Electric CoConsumers Energy Co

Ohio Edison Co

Duke Energy Ohio

Monongahela Power CoDTE Electric Co

AmerenIP

Indiana Michigan Power Co

Georgia Power Co


PECO Energy Co

Duke Energy Progress

Entergy Louisiana Inc


Entergy Texas Inc

Duke Energy Indiana Ohio Power Co

Commonwealth Edison Co

Duke Energy Carolinas

Commercial Retail Rates

$/MWh


CAGR %

3.2 Regional

2.5

6.7 Ohio Power

Entity

Economic

1.5 Ohio Edison

3.7 Duke Ohio

Commercial rates for utilities (2000 2013)

B10


177

100

70

110

150

140

130

80

50

0

60

160

90

120

12111009 130701 03 0804 06052000 02


Southwestern Public Service Co

South Carolina Electric & Gas CoLouisville Gas & Electric Co

Entergy Texas Inc

Indiana Michigan Power Co

Commonwealth Edison Co Duke Energy Progress

Ohio Power Co

Ohio Edison Co


Georgia Power Co

Entergy Louisiana Inc

Duke Energy Ohio

Southwestern Electric Power CoMonongahela Power Co


PECO Energy Co

Duke Energy Indiana

Duke Energy Carolinas

DTE Electric Co

Consumers Energy Co

AmerenIP

Residential Retail Rates

$/MWh


CAGR %

3.4 Regional

2.8

5.6 Ohio Power

Entity

Economic

0.7 Ohio Edison

2.8 Duke Ohio

Residential rates for utilities (2000 2013)

B11


178

Comparison of retail and wholesale prices in Ohio and neighboring states

Pennsylvania$/MWh

West Virginia$/MWh

Ohio$/MWh

140

80

130

70

0

50

60

40

90

110

100

120

1409

70

40

50

0

60

130

90

110

120

140

100

80

1409

120

90

70

50

40

110

60

80

0

140

130

100

1409

AEP Hub PENELEC HubAP Hub

Indiana$/MWh

70

40

140

120

110

100

90

80

130

60

50

009 14

AEP Hub


CAGR 2008-2014

3.1

2.5

XX%

4.5

2.5

2.4

1.6

3.9

1.5

2.4

3.9

5.2

4.4

1.3

3.4

4.4

4.7

ResidentialCommercialWholesale energyIndustrial

2004 2004 2004 2004

A few key factors are driving the spread

Wholesale price addersT&D investments

Changes in the industrial load factorOther charges, riders and subsidies

B12


179

In PJM, increases in specific adders have accounted for some of the spread between wholesale energy and retail rates

Source: PJM Annual Report

1 PJM-wide average

Wholesale energy price

Wholesale capacity adder

Other wholesale adders

Retail T&D charges

Taxes

2013 data1

$/MWh39

7

8

Varies based on territory

Varies based on state

2014 data1

$/MWh 53

9

10

Varies based on territory

Varies based on state

ExplanationPrice paid for wholesale electricity procured from the grid

Price paid for capacity charges, to make up for the PJM capacity pricesUsually a fraction of the wholesale energy price

Other operational costs for PJM, including those because of transmission upgrades, are split equally among the zonesTransmission service charges are the largest expense in this category

Distribution utilities add charges for transmission and distribution for serviceAccount for about a quarter of the total retail price of electricity

Local taxes are applied on the retail price of electricity

B13


180

250

200

150

100

50

0

Dispatch cost1

($/MWh)

0102030405060708090100

0 50,000 100,000 150,000 200,000

Load duration% of hours

Capacity or load, MW

In a year with low gas prices, PJM utilizes coal assets for ~10% of the total hours; imports from MISO could replace retired coal generation


1 2014 numbers. Assuming a $3/MMBtu gas price

PJM cost curve MISO cost curve

Coal

Gas

Oil

Nuclear

Hydro

Renewable

Other

Imports

010

20304050

607080

90100

175,000150,000125,000100,00075,00050,00025,0000

Load duration% of hours

Capacity or load, MW

300

250

200

150

100

50

0

Dispatch cost1

($/MWh)

CoalOil

GasNuclear

Hydro

Renewable

Other

Key takeawaysPJM relies on hydro, nuclear and CCGT for more than 90% of the hours in a year with a gas price of $3/MMBtuLack of adequate economics in the energy market and additional costs for emission controls will push more coal plants into retirement, including

plantsCheap imports from MISO can help fill in the gap, in addition to new CCGTsAs more coal assets are retired and replaced by imports in Ohio, transmission capacity will become a bigger concern

B14


181

Day ahead energy prices for Ohio zones have mirrored the broader PJMtrends but with lower peaks and troughs

85

80

75

70

65

60

55

50

45

40

35

300

09080706052004 13121110 14

PJM Zonal Day Ahead Power Prices$/MWh


Key takeaways

Day ahead power prices in PJM have gone through cycles of peaks and troughs in the last decade

PJM East zones sees a pronounced fluctuation of power prices due to congestion in transmission capacity in their zones

PJM West zones, including Ohio zones,

related price spikes to the same extent as PJM East

With more coal, possibly nuclear, being retired from PJM West zones and replaced by imports from MISO, congestion might become an issue

45

40

35

300

85

70

80

75

65

60

55

50

141312111009080706052004

Other PJM West Zones

Ohio Zones

PJM East Zones

B15

B1a. ELECTRIC POWER: HISTORICAL FACT BASE PRICING Return to pg. 34

182

Volatility in PJM energy markets has been low except for two specific periods


020406080

100120

2004

2015

05 0807 14130906 1210 11

%

0

50

100

150

200

0906 1211 2015

14131008072004

05

%

Volatility trends

1 Standard Deviation/Mean

Volatility1 in Day Ahead markets Volatility1 in Real Time markets

Volatility spiked in 2014 due to polar vortex but seems to be unchanged over the years

ATSI zone had a spike in volatility in 2013 due to local transmission constraints, which was a localized event

2013 spike caused by local transmission constraints

2014 volatility spike caused by polar vortex

PJM-RTO ZONEATSIAEP

B16


183

01,0002,0003,0004,0005,0006,0007,0008,0009,000

10,00011,00012,00013,00014,00015,00016,000

1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0 13.0 14.0 15.0 16.0 17.0 18.0 19.0 20.0 21.0 22.0 23.0 24.0

1,800

0

1,000

1,200

1,400

1,600

2,400

2,200

200

2,000

400

600

800

Hour ending

141126167

1,8031,800

1,512

72 75

306

506

55103

Dispatch cost1

($/MWh)

28

2013 ATSI congestion was caused by a small difference in load forecast during a high temperature period, coupled with several unplanned outages

Source: PJM Operations and Markets Report

1 Load forecast was off by 2.5% on the days of July 15, 16 and 18

ATSI tie line MW

ATSI hourly MW load (preliminary)

ATSI load with Emergency DR

Transmission line capacity reached

ATSI zonal LMP Emergency DRused to meet load

Emergency DRpriced at $1,800/MWh

Key takeawaysJuly, 2013 was a really hot month in the PJM region and warnings were issued regarding higher than usual load forecastsSome power plants in ATSI zone were on unforeseen outages so power imports had to be used to meet loadDemand prediction was higher than predicted1 in the late afternoon hoursThis forced grid operators to use Emergency DR in the region as import capacity was maxed out and local generators were on outagesSince Emergency DR is priced at $1,800/MWh, relying on them caused prices, and volatility, to spike

B17


184

Table of contents


B18



185

2.7% decrease in industrial demand


Growth rate (y-o-y, 2008-2015)

Commercial ResidentialOverallStates Industrial

-0.1% -0.5%-1.2%Ohio -2.7%

3.1 % 1.7%1.6%Texas -0.4%

-0.4% -0.6%-0.7%Illinois -1.2%

-0.3% -0.8%-0.8%Indiana -1.1%

-0.7%-3.1%Kentucky -6.1%

-1.1% 0.1%-0.4%Pennsylvania -0.3%

0.1% -0.4%-0.8%West Virginia -1,7%

0.0% 0.2%0.0%Georgia -0.3%

0.0% 0.1%0.1%South Carolina 0.0%

0.2% 0.2%0.0%US -0.7%

0.4% 0.4%0.3%North Carolina -0.1%

-0.1% -0.4%-0.5%Michigan -1.2%

1.2% 1.2%1.7%Louisiana 2.7%

What has happened to power demand from 2008-2015?

Flat to negative load growth in the US overall

Commercial and residential loads have remained relatively stable

Industrial load growth has been challenged across the US

-0.6%

B19

B1b. ELECTRIC POWER: HISTORICAL FACT BASE DEMAND Return to pg. 29, 30

186

Total retail sales for US

TWh TWh

Total retail sales for Ohio

TWh

Total retail sales for Indiana

TWh

Total retail sales for Illinois

Ohio experienced severe industrial load loss during the recession that has not recovered, while commercial and residential loads have remained flat

09

159

46

15455

146

475153

594549

2008

50

11

155

4754

-1.16% p.a.

53

12

47

14

149

4754

10

152

13

52

53 53

149

4752

49

147

2015

52

4847

IndustrialCommercialResidential

1,404

959

13

3,7193,684

9551,338

1,391

12

3,687

9861,327

14

1,3561,329

2008

1,451

1,329

10

3,725 3,742

983

09

3,589

917 962

1,364

1,3071,009

1,375

-0.03% p.a.

3,740

1,336

1,380 1,427

11 2015

1,400

3,717

9591,358

5044

4652

14447

42

-0.71% p.a.

14

140

4351

43 43

49

09

14247

1211

51 51

141

4450

10

52

47144136

2008

47

45

46143

13

13745

2015

4250

46

33105

11 14

33103

2433

-0.78% p.a.

104

12

46

105

48

13

2424

09 10

48 46

3533

106

2008

10734 3425 2424

4724

43

99

2015

101

452432

Financial crisis


B20

B1b. ELECTRIC POWER: HISTORICAL FACT BASE DEMAND

187

Total retail sales for Pennsylvania

TWh TWh

Total retail sales for Texas

Total retail sales for Kentucky

TWh

Total retail sales for West Virgina

All states lost power demand during the recession, mostly driven by loss in industrial power demand

+1.59% p.a.

14

381

138

143

13

367

92135

140

12

97133122

365

11

347 345146138128

9597

10

356 370

118

09

137

128100

130

2008

106113

96

388

2015

144

141103

IndustrialResidential Commercial

201511

55144

43

148

46

54

12

43

09

145

4749

10

149

4348

5453

48

13

44

55

46

143

44

53

2008

150 145

47

54

4744

48

-0.40% p.a.

14

146

48

54

3111

31 31

1212

128

33

8

14

-0.83% p.a.

13812

12 13

128

11

12

12

10

32

09

30

11

34

158

1212 128 8

2008 2015

13

32

811

14

31

27

-3.10% p.a.

77

1936

2726

8919

09

8389

45

94

44

13

21

11

90

19

10 12

441927

44

292028

2008

19

9327

46

75

2015

301926


TWh

Financial crisis

B21


188

Industrial power demand at both the state and national level has fallen despite rising industrial GDP

+3% p.a.

2014

0.58

2012

0.54

2008

0.49

2004

0.45

2000

0.39

Ohio, Industrial Takeaways

US, Industrial

Industrial demand for power has dropped in Ohio and nationally in the last 15 yearsIndustrial GDP, on the other hand, has grown in the same periodGiven these movements, fall in industrial demand can be explained by one of the following

Improvement in industrial energy efficiencyHigher price per unit of production that keeps GDP high despite production falling

GDP, $ Trillions Power demand, TWh

-2% p.a.

2014

49

2012

53

2008

59

2004

59

2000

68

+4% p.a.

2014

17

2012

16

2008

15

2004

12

2000

10

GDP, $ Trillions Power demand, TWh

959

-1% p.a.

20142012

986

2008

1,009

2004

1,018

2000

1,069

B22



189

Power sales in Utica and Marcellus counties1

Gross production volume by gas source, Ohio Key Insights

However, regional demand near the Utica Basin in Eastern Ohio has increased by ~17% since 2011

Bcf

+67% p.a.

14

365

13

184

12

84

2011

79

ConventionalTight gasShale oilShale gas

7.615.644.734.75

+17% p.a.

1413122011

TWh

1 AEP territory only

Gas operations have had an exponential growth in the last 3 years in Ohio

This has led to a corresponding increase in power sales in Ohio in the Utica/Marcellus regions

AEP has seen a corresponding 17% increase in power sales in its territory, more in the last 3 years

B23



190

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B24



191

Demand and Generation in Ohio

Ohio generation supply has declined faster than demand in recent years, increasing reliance on out-of-state generation

06

147

10

136

05

153

136

2015

144146

159

153155

162

155

2004 09

148

154

08

157

07

160

122

154

149

135

13

137

14

149

12

152

130

11

155



TWH

4 2 -1 4 4 7 7 12 15 8 10

XX Imports as a share of total demand1 (%)

Key takeaways

Share of imports has gone up in Ohio

Imports peaked, as a share of demand in 2015 due in part to coal retirements

With low gas prices to start 2016, imports could rise as a share of demand going forward

1 Assuming all in-state generation is used in Ohio. The actual number will be higher than those shown on this chart

B25

B1c. ELECTRIC POWER: HISTORICAL FACT BASE SUPPLY Return to pg. 32, 33

17

192

Ohio generation supply has declined faster than demand inrecent years, increasing reliance on out-of-state generation


Demand and Generation in KY

Demand and Generation in PA Demand and Generation in IL

Demand and Generation in WV

TWh TWh

146146146145149149144150152146148144

216222228223227230219222226219218215

131211 1408 100706 092004 201505

Demand

State Generation

3331313132303434323029 32

72817673798171

9194949490

06 1008 1409 1211 1307052004 2015

928989

10

89

77

90

12

89

11

98 98

9083

9094

91

14

91

09

93

13

98

07

97

06

99

05

98

2004 08

95

87

75

2015

83

140142144142144137144146143145139 138

194202203198199201194199200192194192

14110605 12 13100908072004 2015

TWhTWh

Key takeaways

Other large, industrial states around Ohio have generation in excess of demand

This is true for deregulated states like PA or IL and for regulated ones like WV and KY

B26

B1c. ELECTRIC POWER: HISTORICAL FACT BASE SUPPLY

193

GWPower generation capacity

since 2004 due to retirements

24 2320

16

2 22

10 1011

2

10

0

2004

1

1

2015

10

1

2014

1 1

2008

Oil CoalNuclearGasRenewables


1 Layered in the announced retirements on the existing capacity in April, 2015

Coal plant retirements have decreased coal plant capacity by 35% since 2004

Little change in capacity for other types of generation

B27

B1c. ELECTRIC POWER: HISTORICAL FACT BASE SUPPLY Return to pg. 35

194

Gas has increased output has come down by ~44% since 2004



TWhPower generation mix

2014

91

2008

312

16

240

132

180 1

2004

129

2116

17

12

73

2015

29

Renewables GasOther Nuclear Coal

Coal plant retirements and low gas prices led to a 44% decrease in coal generation and 16-fold increase in gas generation since 2004

Renewables are a minor

generation mix

B28


195

Many peer states are seeing an increase in gas and a reduction in coal in their overall generation mix


Change in generation mix by fuel source, 2004- 2015 (%)CoalStates Gas

-27%Ohio 23%

-12%Texas 4%

-11%Illinois 4%

-21%Indiana 16%

-7%Kentucky 7%

-24%Pennsylvania 23%

-3%West Virginia 1%

-34%Georgia 34%

-17%South Carolina 13%

-28%North Carolina 26%

-11%Michigan 7%

-8%Louisiana 14%

Shift to gas reflects falling gas prices and increased cost of coal generated power

Georgia, North Carolina, Pennsylvania and Ohio lead competitor states in pivot to gas generation

B29


196

since 2005 due to retirements


GWPower generation capacity, PJM

92 91 80

36 3537

58 60 66

17 1618

2014

12

2008

12

2005

10

CoalGas NuclearRenewablesOil

Coal plant retirements have decreased coal plant capacity by 14% since 2005

This has aligned with a 14% increase in gas capacity in the same period

B30


197

output has come down by ~34% since 2005


TWhPower generation mix, PJM

537 515357

267 273

277

138

56 18 797

-34%

2014

23 1

2008

85711

2005

865

44 9

CoalGas NuclearRenewablesOther

Coal plant retirements and low gas prices led to 34% decrease in coal generation and 3-fold increase in gas generation since 2005

Renewables are ~3% of total generation in PJM


B31


198

Replacing lost capacity requires an extensive process


B32


New plant pipeline for Ohio# of units

New capacity pipeline for Ohio, 2015MW

Coal

NuclearOther

Water

Gas

Renew

Grand Total

Row Labels

Coal

NuclearOther

Water

Gas

Renew

Grand Total

Row Labels

29

App Pending

13

6,045

Feasibility

25

1,710

Permitted

2

16

2,302

Proposed

13

6

2,332

Under const.

6

12

800 2,042 1,9921,650

20 2602,095 3419 71,500

App PendingFeasibility PermittedProposed Under const.

1 315 3 6

163

1112 6

Return to pg. 36

4801,060

11

199

Sample case studies: Generation construction projects

Source: Ventyx, Energy Velocity, Press Search

B33



Perm

ittin

gU

nder

con

stru

ctio

nPr

e-pe

rmitt

ing

1,100 MW, $1.1B

2015 Columbiana County, OH

Feasibility The project is completing environmental studies before applying for permits

South Field Energy Facility

1

1,414 MW 2011 Wilkesville, OH

Construction pending, to come online in 2018

The project is waiting on several permits and approvalsRolling Hills

Conversion4

800 MW 2015 Lordstown, OH

Proposed, to come online by 2018

Plant received approval from the state and construction on the plant is pending

LordstownEnergy Center

2

800 MW, $850M

2012 Oregon, OH

Construction in progress, to come online in 2017

Construction began in December 2014 after the project secured financing

Oregon Energy Center (#1)

5

700 MW, $900M

2013 Carroll County, OH


The project has all the approvals, is currently in full construction stage

Carroll County6

500 MW, $645M

2014 Middletown, OH

Under construction, to come online in 2018

Construction began after NTEEnergy secured financing in October 2015

Middletown Energy Center

7

Project size Announced Location Latest status Reason for latest statusProject

800 MW 2013 Oregon, OH Pre-permitting Proposal to double the size of Oregon Energy Center under construction


3

200

Distribution reliability in Ohio has stayed constant in the last 5 years


0

50

100

150

200

141312112010

Dayton Power and Light

Duke Energy Ohio

Toledo Edison

Ohio Edison

Cleveland Electric

Ohio Power

Columbus Southern

AEP Ohio1

Minutes/outage

00.20.40.60.81.01.21.4

141312112010

# of outages/customer

1 Ohio Power and Columbus Southern combined into AEP Ohio in 2013

Customer Average Interruption Duration Index System Average Interruption Frequency Index

Definition of outages

Minimum outage length included is 5 minutesTransmission related outages are excludedMajor storms are excluded

B34


201

20

10

642

12

181614

22

8

02020

19.8

19

19.2

1514

20.2

1813 1711 12 16

14.8

04

9.3

5.1

16.9

03

8.6

6.1

19.0

7.7

1005

8.9

0907

11.9

08

5.5

0201 062000

4.94.6

10.29.1

USD billion Actuals Forecast (EEI)

Historical US IOU transmission construction expenditure 2000-2013, and EEI estimation for investment 2014-2017

Expected range for annual spend 2012-2018

Expected market of $20bn p.a. range through to 2017

However, large investments in T&D are expected across the country in the next 5 years

Source: EIA; EEI; Energy Velocity; SNL; analyst reports; expert interviews

B35


202

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B36



203

PJM has proposed changes to its capacity market mechanism to address concerns about the performance of capacity resources

Source: PJM

Previously Proposed

Capacity Product

Obligation to be availableBased on average availability

Obligation to deliver energy, if scheduled and dispatched by PJM, during Compliance HoursBased on delivery during specific hours

Compliance hours

The hours during the delivery year when PJM implements any emergency procedure event requiring implementation of Demand Response or the loading of emergency capacity

500 hours per year (about 340 during summer and 160 during winter)

Penalties for under-performance

LMP-basedPenalties not enforced if EFORduring compliance hours less than 5 year average or if deemed out of management control

Capacity multiplied by net CONE multiplied by days in delivery year divided by number of compliance hoursAnnually capped at 1.5 x MW x net CONE x days in yearPenalties for underperformance are used to reward over-performance at other units

Demand response/EE

Only annual DR treated as a supply resourceIf court rules against FERC, alternate proposal to treat DR as a demand reduction

Treated as a supply resource

B37

B1d. ELECTRIC POWER: HISTORICAL FACT BASE TAX & REGULATORY Return to pg. 41

204

Expected EPA regulations will add costs of power generated from coal

Source: EPA; NERC; Trade press, regulator interviews

Overview Implementation

Cross State Air Pollution Rule(CSAPR)

Mercury and Air Toxics Rule (MATS)

National Ambient Air Quality Standards (NAAQS)

Greenhouse Gas (GHG ) Rules

Clean Water Act 316(b) Rule

Effluent Limitation Guidelines (ELG)

Coal Combustions Residuals Rule (CCR)

2015: Phase I NOx and SO2 reductions2017: Phase II NOx and SO2 reductions

04/16/15: Requirements became effective

Scope and timing of requirements to implement revised NAAQS is uncertain

Final 111(b) & 111(d) rules expected in 2015Scope and timing of requirements to implement revised NAAQS is uncertain

Implementation ongoing in parallel with existing permit renewal processes

Final ELG Rule expected by Sept 30, 2015

10/17/15: Requirements become effective

Finalized by U.S. EPA in 2011Designed to reduce mercury, acid gas, and other hazardous air pollutant emissions from new and existing coal- and oil-fired electric utility units

Clean Air Act requires U.S. EPA to periodically review NAAQSRecent NAAQS revisions include those for SO2 (2010), NOx(2010), fine particulate matter (2012) and ozone (proposed in 2014)Revisions could drive NOx and SO2 emission reductions

U.S. EPA proposed Clean Air Act Section 111(d) GHGguidelines for existing fossil fuel-fired electric generating units in 2014U.S. EPA proposed Clean Air Act Section 111(b) GHG standards for new fossil fuel-fired electric generating units in 2014

Finalized by U.S. EPA in 2014Designed to address potential impacts to aquatic species due to impingement and entrainment by cooling water systems

Clean Water Act requires U.S. EPA to review and update ELGthat regulate water discharge from steam-electric units)U.S. EPA proposed updated ELG in 2013

Finalized by U.S. EPA in 2014Regulates the disposal and use of coal combustion byproducts

Finalized by U.S. EPA in 2011Designed to reduce the interstate transport of NOx and SO2 emissions across the eastern half of the United States

B38

B1d. ELECTRIC POWER: HISTORICAL FACT BASE TAX & REGULATORY

205

Ohio electric power consumer charges comparison

Average electric bill for an industrial customer with a 50,000 kW demand and 25,000,000 kWh load factor by selected state ($/month)

Source: Edison Electric Institute

Generation

Transmission

Delivery

Total avg. rate

Ohio

1,592,72088%

211,95112%

96,6161%

1,810,451

Pennsylvania

2,196,42890%

107,4174%

192,5078%

2,443,353

Virginia

1,521,62390%

158,1259%

26,7102%

1,698,437

Variability of chargesOhio and Virginia have similar generation fees, so the difference in total rates stems from greater delivery and transmission chargesPennsylvania charges significantly more for generation and delivery

B39

B1d. ELECTRIC POWER: HISTORICAL FACT BASE TAX & REGULATORY

206

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B40



207

modeled the key drivers and uncertainties

Use analytics, including standalone models, that capture the essence of the market and impact of key variables

Gas modelPower model

controllabledeterminants

Use best available data

Be transparent with approach, data, and assumptions so that participants can offer alternatives if available

Understand key uncertainties affecting

competitiveness

Build a FACT BASE showing sensitivity of outcomes to various uncertainties relative to a base case

Highlight those sensitivities for Ohio to consider going forward

Analyze prospects for specific companies

Analyze specific investments or opportunities

Forecast prices or new builds

How we are doing itWhat we are trying to do What we are not trying to do

B41

B2. ELECTRIC POWER: FUTURE OUTLOOK

208

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B42



209

bookend cases with sensitivity around the base caseOur base case

1 2015 Real $

Scenario attributes

Scenario 3: Business as Usual

Scenario 4: Reasonable high gas, high mandates

Scenario 2: Reasonable low gas, low mandates

Bearish on market Market expected Bullish on market

Scenario 5: High gas, low mandates

Extremely unlikely

Scenario 1: Low gas, high mandates

Extremely unlikely

Scenario 3+: Business as Usual with no RPS

Market expectedProb-abilities

HH gas price: Low ($3/MMBtu1)

Policy: High RPS + Federal ITC for solar extended

Technology:High uptake of Energy Efficiency and Distributed Generation technologies

HH gas price: Reasonably low ($3.0/MMBtu1)

Policy: BAURPS + Federal ITC for solar not extended

Technology: Low uptake of Energy Efficiency and Distributed Generation technologies

HH gas price: BAU($4/MMBtu1)


Technology: BAU uptake of Energy Efficiency and Distributed Generation technologies

HH gas price: BAU($4/MMBtu1)

Policy: No RPS + Federal ITC for solar not extended

Technology: BAU uptake of Energy Efficiency and Distributed Generation technologies

HH gas price: Reasonably high ($4.5/MMBtu1)

Policy: High RPS + Federal ITC for solar extended

Technology: High uptake of Energy Efficiency and Distributed Generation technologies

HH gas price: High ($6/MMBtu1)


Technology: Low uptake of Energy Efficiency and Distributed Generation technologies

B43

B2a. ELECTRIC POWER: FUTURE OUTLOOK MODELING CONTEXT

Source: BRT Working Team Analysis

Return to pg. 38

210

Table of contents


B44



211

High level summary notes

Prices: High renewable penetration leads to lower wholesale prices

Scenarios 1 and 2 have the same gas prices but renewables force prices down in 1Scenario 4, despite having a higher gas price, converges with Scenario 2 on pricing

Demand contraction leads to really high retail pricesHigh adoption of EE/DG technologies leads to significant reduction in demandTotal costs to serve load are spread across a lower total MWh, leading to higher prices

Low gas price coupled with lower mandates lead to the most favorable retail prices

Demand:Residential demand forecasted to contract across all scenarios significant departure from the past

Largely due to the adoption of Behavioral EECommercial demand likely to contract as well, also a departure from the historical

Larger impact of DG adoption for commercial; EE opportunity not as high as residentialIndustrial demand largely expected to grow also a huge departure from the past

Increased gas operations in Ohio could increase demand even furtherSupply:

Diversification with more gas and renewables seen across all scenariosGrowth in utility scale renewables is dominated by wind in unconstrained cases

High RPS forces increased solar penetrationShare of coal generation expected to drop from 68%; can go down as low as 18%

B45

B2b. ELECTRIC POWER: FUTURE OUTLOOK RESULTS SUMMARY


Return to pg. 39

John Funk

John Funk

212

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B46



213

Our wholesale power model solves Eastern Interconnect simultaneously

How we are doing itFootprint modeled

Alberta

BritishColumbia

Manitoba

Newfoundland

NorthwestTerritories Nunavut

Ontario

QuebecSaskat-chewan

YuconTerritory

Canada

California

Idaho

Nevada

Oregon

Washing-ton

Arizona

Utah

Colorado

Montana

New Mexico

Wyoming

Kansas

North Dakota

Nebraska

Oklahoma

South Dakota

Texas

Arkansas

Iowa

Louisiana

Minnesota

Missouri

Alabama

Illinois Indiana

Michigan

Missis-sippi

Tennessee

Wisconsin

Ohio

West Virginia

Pennsylvania

New York

Virginia

North Carolina

South Carolina

Georgia

Florida

Washington, DC

Delaware

Maryland

New Jersey

Connecticut

Massachusetts

New Hampshire

Rhode Island

Maine

MRO NPCC

RFC

SERCSPP

FRCC

Model solves the Eastern Interconnect simultaneously

This includes a geographical footprint as wide as Quebec in the North to Florida in the South and Saskatchewan/ Oklahoma in the West

Ohio is covered by its constituent utility regions: AEP, FE and Duke territories

The model has basis differentials across 26 gas pricing hubs to convert Henry Hub prices into local hub prices

B47

B2c. ELECTRIC POWER: FUTURE OUTLOOK DETAILED RESULTS


214

Details on important aspects across the three models

RetailTopics Demand Wholesale

Gas prices Not considered Not considered

Henry Hub (HH) price taken as scenario inputsBasis differential forecasts used to get prices at 26 gas price hubs in this geography

Transmission footprint

Not considered Historical investment data included

Regional footprint across the transmission areasNo load flow analysis performed unconstrained capacity

Geographical footprint of modeling

Ohio only Ohio only47 transmission areas from Western Canada to FloridaAEP, ATSI and DEOK regions modeled in OhioAEP region consist of the following utility territories: AEP, Dayton and DUQDEOK region consists of Duke and EKPC

Renewables Adoption of new, disruptive technologies, both

MandatedEconomic

Mandated through RPS targetsModeled a hybrid Eastern Interconnect wide RPStarget, given unlimited trading is allowed

Inputs from Demand and Wholesale model

Do not model PJM capacity pricesAuction process much of a black box

Capacity Prices

Not considered Not considered

B48



215

Effective CAGR%, 2013 2030 0.6% -0.5%

We see demand growth rates ranging from -1.0% to 0.9%across our scenarios

34.2 36.0 29.2 41.8 34.8 47.4

31.1 33.328.6

35.928.5

36.0

34.7 29.426.0

32.0

26.0

32.0

1.9

Scenario 2

110.6

0.9

Scenario1

84.7

0.9

Scenario 3

100.6

Change in transpor-tation (EV) demand

1.9

Change in Industrial demand

1.8

Change in Commer-cialdemand1

2.2

Change in Residen-tialdemand1

Scenario 5

2.2

117.6

2.2

Scenario4

91.5-5.4

2013 baseline demand

100.0

Source: BRT Working Team Analysis1 Includes distributed generation

0.9%-1.0%~0%

Ohio retail sales load forecast

% of 2013 actual retail sales

Residential IndustrialCommercial Transportation

B49


216

Change in peak demand is driven primarily by the commercial sector

0.9

29.730.2

37.534.3

33.035.5

2030 peak demand

101.1

Change in Transportation (EV) demand

0.9

Change in Industrial peak demand

-0.5

Change in Commercial peak demand1

3.2

Change in Residential peak demand1

-2.5

2013 baseline peak demand

100.0


TransportationCommercial IndustrialResidential

1 Includes distributed generation

Ohio peak demand forecast

% of 2013 peak (July) - 2pm 2013 vs 6pm 2013

B50


217

Solar adoption in Ohio has been forecasted based uponexpected learning curve of DG installations

We forecast the expected learning curve for solar installations

4349

70

100

0

2040

6080

100

2015 20252020 2030

393958

86

0

20

40

60

80

100

20202015 20302025

Commercial cost of installation (learning curve), Ohio (indexed1)

Residential cost of installation (learning curve), Ohio (indexed1)

5665

91100

0

2040

6080

100

2020 2025 20302015

5252

7687

0

20

40

60

80

100

2030202520202015

Leveled cost of electricity, Residential installs, Ohio (indexed1)

Leveled cost of electricity, Commercial installs, Ohio (indexed1)

And obtain the expected LCoE for comparison to retail rates

B51



Return to pg. 37

Layered on incentives and system lifetime

Base case assumptionsFederal ITC expires as expected in 2017Net metering remains in placeSystem lifetime of 20 years; 8% discount rate

High adoption assumption modifications

Federal ITC extended

1 Installation costs (left side) and electricity costs (right side) indexed separately

218

Table of contents


B52



219

Executive summary: Infrastructure investment

Gas capacity grows slowly while gas generation has dramatically increased

48%

Seven gas generation projects in the pipeline that are projected to add ~5 capacity

Five of the seven gas generation projects are either permitted or under construction, while two projects await permits

developing new gas generating capacity is consistent with that of other states

The probability of success in Ohio for proposed gas generating capacity is similar to that of other states in the region

Taxes and regulations faced by power plant owners in Ohio do not differ significantly from regional counterparts

Ohio can continue to encourage the development of gas generating capacity by improving transparency and continuing to look for ways to streamline the development process

B53

B2d. ELECTRIC POWER: FUTURE OUTLOOK INFRASTRUCTURE INVESTMENT

220

As coal generating assets are retired, gas generating capacity remains fixed despite increased gas generation

GW

Power generation capacity (OH)

24 2320

2 2

2

10 1011

1

2014

1 11

2004 2008

Nuclear

CoalGas

Renewables

Oil %Power generation mix (OH)

110.3

12

0.3

2008 2014

86

2 0.6

181

68

0.5

2004

1

87

110.5

Other CoalGas

NuclearRenewables


B54


221

Demand and Generation in Ohio

The share of power imports increases as coal assets are retired

06

147

10

136

05

153

136

2015

144146

159

153155

162

155

2004 09

148

154

08

157

07

160

122

154

149

135

13

137

14

149

12

152

130

11

155



TWH

4 2 -1 4 4 7 7 12 15 8 10

XX Imports as a share of total demand1 (%)

Key takeaways

Share of imports has gone up in Ohio

With significant coal retirements scheduled for 2015, imports would rise as a share of demand going forward

Imports peaked, as a share of demand, in 2012 when gas prices were at a record low

1 Assuming all in-state generation is used in Ohio. The actual number will be higher than those shown on this chart


17

B55

222

Summary of capacity development stages

Pre-permitting

Permitting

Under construction

Details

Feasibility studies conductedPlant specifications proposedPermits filed and awaiting approval

Pre-permitting steps completedAt least one permit receivedAdditional permits pendingSite prepared for construction

Pre-permitting and permitting steps completedConstruction in progress

B56


223

Pennsylvania, Virginia, and Ohio lead the region in developing new gas generating capacity


Status of regional gas generating capacity development# of plants

5,308 4,086 3,639 14,027 5,385 549

Key takeaways

Plants in development in Ohio are projected to increase gas generation capacity by 48%

Cheap gas prices due to the Marcellus shale play partly explain

development

Total amount of added capacity varies between plants depending on turbine size

20 1

4

PA

1

VA

0

WV

2

21

3

17

1

MD

0

OH

7

2

02

6

32

3

3

5

0

9

NJ

Under constructionPermittingPre-permitting

# MW of capacity

B57


224


Perm

ittin

gU

nder

con

stru

ctio

nPr

e-pe

rmitt

ing

1,100 MW, $1.1B

2015 Columbiana County, OH

Feasibility The project is completing environmental studies before applying for permits

South Field Energy Facility

1

1,414 MW 2011 Wilkesville, OH

Construction pending, to come online in 2018

The project is waiting on several permits and approvalsRolling Hills

Conversion4

800 MW 2015 Lordstown, OH

Proposed, to come online by 2018

Plant received approval from the state and construction on the plant is pending

LordstownEnergy Center

2

800 MW, $850M

2012 Oregon, OH


Construction began in December 2014 after the project secured financing


5

700 MW, $900M

2013 Carroll County, OH


The project has all the approvals, is currently in full construction stage

Carroll County6

500 MW, $645M

2014 Middletown, OH

Under construction, to come online in 2018

Construction began after NTEEnergy secured financing in October 2015

Middletown Energy Center

7

Project size Announced Location Latest status Reason for latest statusProject

800 MW 2013 Oregon, OH Pre-permitting Proposal to double the size of Oregon Energy Center under construction


3

Source: Ventyx, Energy Velocity, Press search

B58


225

Success rates for gas turbine approval in Ohio lag, but success rates per MW of proposed capacity are on par with regional and national averages


Success rate for gas generation capacity (MW) by stage (1998-2015)2

%100

5646

97

5638

98

6344

Pre-permitting Permitting Under construction

1 Success is defined as proceeding through subsequent stages and coming online; Gas generation capacity measured in number of turbines

Key takeaways

Turbines proposed in Ohio are somewhat less likely to be approved than turbines proposed in other states

The probability of approval for a MW of capacity in Ohio is similar to the regional and national average

The probability of passing through each stage of the process depends on market, financing, and regulatory factors

Ohio Region United States

Success rates for generation capacity (turbines) by stage (1998-2015)1

%100

6255

9974

60

9981

66

Pre-permitting Permitting Under construction

Ohio Region United States

2 Gas generation capacity measured in number of MW

B59


226

of their development processes

Issue Challenges posed by lack of transparency

Intermittent capacity requirements

California conducts intermittent capacity requirement studies to communicate demand for intermittent capacity

Adds steps to the proposal processForces developers to invest in fast peaking capacity instead of consistent capacity

Permitting processPermitting boards in Texas, and many other states, provide regular feedback to companies applying for permits

Increases uncertainty for companies attempting to obtain permitsIncreases lobbying costs

Construction tax liability

Many states clearly communicate sales tax liability, so companies can factor it into their overall project budget

Creates uncertainty in construction cost structure

State specific environmental regulations

New Jersey provides a database of state specific environmental regulations that clearly define the specifics of each regulation

Slows the permitting and approval processIncreases barriers to entry for companies entering the state

Source: Expert interviews; Press search

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McKinsey & Co. Report: Ohio Energy Competitiveness

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Transcript of McKinsey & Co. Report: Ohio Energy Competitiveness