Panel: Re-plumbing the North American Gas Transmission Grid 2.0

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1 Panel: Re-plumbing the North American Gas Transmission Grid 2.0 Presented to Platts Gas Storage Outlook Scott R. Smith President & CEO January 11, 2016

2 Outline of discussion Midstream Energy Holdings and Focus for Current Assets Near Term Market and Implications Update on Changing Pipeline Flows Pertinent to MEH Development Issues for Gas Storage Page 2

3 Midstream Energy Holdings (MEH) - Midstream infrastructure with a natural gas storage focus Midstream Energy Holdings Quantum Energy Partners Sponsored by Quantum Energy Partners Midstream and natural gas storage focused One operating storage facility and one storage project under development: East Cheyenne Gas Storage Bcf depleted high deliverability, multi-cycle reservoir serving the Cheyenne Hub from NE Colorado Tallulah Gas Storage Bcf salt cavern facility in NE Louisiana Continually reviewing acquisition opportunities and greenfield development Experienced management team for storage and gathering/small scale pipeline development Founded in 1998 Investor in MEH since 2008 $9.5 billion in assets / capital under stewardship Focused on supporting proven management teams or acquiring operating assets Substantial amount of capital available to invest during energy market downturn Collectively focused on leveraging investment in Midstream Energy Holdings while market evolves and seeking new opportunities to deploy capital in the midstream sector (including storage) Page 3

4 East Cheyenne Gas Storage Project Design Two depleted reservoirs in NE Colorado with a certificated working gas capacity of 18.9 Bcf: West Peetz and Lewis Creek fields < 1 mile apart Received FERC 7(c) in August 2010 Market Based Rate (MBR) Structure Currently with sort term contract portfolio Expansion potential to 30+ Bcf In commercial operations Current capacity Bcf Debt agreement with Macquarie Final injection capacity of 350 MMcf/d and withdrawal capacity of 350 MMcf/d Capable of providing 3-4 turn service based on market needs Firm access to Cheyenne Hub: Connected to Trailblazer Manage transportation portfolio that provides services at Cheyenne Hub and NNG / NGPL Amarillo Considering alternative interconnects if supported by market Cheyenne Hub Location East of Cheyenne Hub Page 4

5 Tallulah Gas Storage Project Design Location East of Delhi Hub Domal salt cavern storage with 24+ Bcf working gas capacity (3 caverns of just over 8 Bcf each) FERC 7(c) Authorization issued March 18, 2011 Market Based Rate Structure Maintaining land position for salt dome Injection capacity of 900 MMCFD and withdrawal capacity of 1,525 MMCFD Designed as 6-turn service Located adjacent to 6 interstate pipelines and near the Delhi Hub Requires sufficient market commitment to initiate construction Delhi Hub Page 5

6 Current focus to maximize MEH asset value East Cheyenne Gas Storage Tallulah Gas Storage Increase market access: Innovative transportation structure(s) to increase ability to move gas back and forth to the Cheyenne Hub Interconnection with REX Continue de-risking project for future owner: Multiple reservoirs with multiple horizons create growth opportunities Manage expansion of current reservoir to final state Manage day to day operations as planned Continue to integrate facility into the Rockies market Seek long term contracts from utilities (as Front Range market continues to transition) Provide no-notice services in partnership with pipelines Manage / minimize capital as market evolves Monetize and/or enhance value of option to construct: Project represents a future option to provide flexibility services to support management of gas supply / demand at a critical point on the transport grid Maintain key permits and control of key land positions Minimize costs to maintain project Continue to seek partners and markets to initiate development of Tallulah Gas Storage project in 2017 / 2018: 2+ year development window Targeted in operation 2019 / 2020 Leverage MEH team skills to enhance value of existing assets AND identify additional opportunities to deploy capital in the midstream sector Page 6

7 Weather forecasts show El Nino trend continuing varying impact depends on region of country October 26, 2015 January 4, 2016 Source: Frontier Weather Page 7

8 Trends near settlement for seasonal spreads (NYMEX) provide indication of potential paths for short term storage value drivers NYMEX seasonal spread after warm winter (2011/2012 with ending storage inventory at 2.5 TCF) NYMEX seasonal spread after cold winter (polar vortex in 2014 / 2015 with ending storage inventory at 1.5 Tcf) Page 8

9 Implications for 2016 short term storage contract rates Upside / Downside Decrease or limited seasonal spread/volatility growth El Nino expectations dissipates colder winter than currently forecast Shale production price response is substantially higher than expected rate of decrease higher Power generation continues at strong / record levels 1 st phase of LNG coming online Dec/Jan with strong export volumes Weather Supply Demand Increase or grow seasonal spread/volatility growth Warmer weather from El Nino and high ending winter inventories Beginning winter storage inventories are at all time high now and expected to reach 4.0 Tcf by the end of storage injection season Ending withdrawal inventories of 2.2 Tcf + Shale production is slowing down but will it remains at healthy levels (mitigates upward price volatility) rate of decrease lower Marcellus growth and REX backhaul creates concerns for Rockies market in shoulder / summer months Normal hydro fill season in west decreasing spring / early summer power demand Current market factors and behavior indicates more pressure to upside on short term storage rates for 2016 Page 9

10 Marcellus / Utica remains a key driver for changing flows across the U.S. Projected Marcellus / Utica production growth as pipeline expansions come online Pipeline Project Name In-Service Date Capacity (MMCf/d) Transco Leidy Southeast Transco Atlantic Sunrise Dominion Atlantic Coast EQT Mountain Valley Transco Diamond East Source: Goldman Sachs, Platts, Genscape, Bentek Page 10

11 REX backhauls will enhance Cheyenne Hub and Opal as key market points in the Rockies Cheyenne Hub will emerge as a seasonal null point in Zone 2 of REX at Cheyenne Hub as NE supplies continue to push supplies to the West on Rex Volatility of demand competing against supply will require alternatives to manage volatility driven from REX displacements Declining flows Increased flows Growing demand in West to feed LNG exports and backfilling SW flows to Mexico REX expansions with Marcellus & Utica growth increases backhauls on REX Xcel to meet 100% RPS by Renewable intermittence increases daily volatility. DJ Basin supply competing with REX or moving into midcontinent Page 11

12 REX flows west to east (Zone 2 to Zone 3) have declined substantially due to Marcellus / Utica and weather REX Z2 to Z3 Throughput Source: REX Page 12

13 New pipeline pathways have emerged Forward hauls from Appalachia to Gulf and Gulf region expansions Pipeline Project Name In-Service Date Capacity (MMCf/d) TGP Broad/Utica ANR SEML TETCO Ohio Pipeline Energy TGT Louisiana project CGT Rayne Express TETCO Gulf Markets 2016/ Transco Appalachian Connector Source: Pipeline co websites Page 13

14 NE Louisiana will continue to transition as a key pivot point in market depending on demand fluctuations Delhi and Perryville hubs are key locations to swing gas between supply sources and market demand Growing demand / exports in the Southeast and Louisiana and increased volatility will occur due to competition between LNG, Power Demand and Mexico exports Declining flows Increased flows Flat to declining Barnett supply Displaced production from Midcontinent / Rockies seeks new markets NE supply backhauls to liquid hubs in La. estimated at ~14 Bcfd Eagle Ford supporting TX exports and power gen demand Industrial demand growth 6+ Bcfd Growing demand in SE driven by power gen 3+ Bcfd Cameron LNG Growing exports to Mexico 6+ Bcfd Declining GOM supplies Demand from La. only LNG Exports 4+ Bcfd Page 14

15 Over next few years, major fundamental changes will impact intraday flow patterns and the need for storage to balance the pipeline grid Renewables: Uneven hourly renewable generation from wind and solar requires variable thermal generation to balance Replacement of coal fired generation and growing power demand: Growth in gas fired generation to meet baseload and varying hourly power demand LNG exports: Daily variation of gas liquefaction capability due to changes in ambient temperature Unexpected facility outages Varying demand for US LNG (LNG exports are not baseload) Shifting demand centers can use storage to support transportation grid: Mexico exports Industrial demand growth Page 15

16 Intraday swings for gas expected to rise with EPA s Clean Power Plan Source: Black & Veatch Page 16

17 Temperature impact to gas requirements for LNG liquefaction is significant Ambient temperatures changes in the Gulf Coast could create variation in efficiency of the gas turbines used to liquefy natural gas. Source: Black & Veatch Page 17

18 New storage development will not occur without strategic or operational based commitments Expansion or new build has stopped unless there is strategic market support: Price spreads and volatility does not support investing capital Expansion cancellations New build project on hold or abandoned Recent storage transactions are currently below replacement costs $4 million / Bcf is general average of recent transactions Rule of thumb costs for new storage construction: o o Reservoir: ~ $8 million to $12 million/bcf Salt: ~ $12 million to $16 million/bcf Balancing needs that justify capital investment for storage (that are not spread option / forward curve driven): Balancing flows in pipeline systems Mitigate pipeline penalties during OFO situations Physical insurance against black swan events Provide firm flexibility, load following and no-notice services Asset position to facilitate marketing activities Page 18

19 Higher storage contract rates will be driven by operational needs and volatility Decreasing Impact to Firm Storage Contract Rates OPERATIONAL VALUE (INSURANCE) Security of Supply (User) Security of Demand (Producer) Daily and Hourly Balancing Renewable Intermittence Penalty Avoidance VOLATILITY VALUE Weather Short Term Constraints Anomalies SEASONAL SPREAD VALUE Shale supply Supply/Demand Forecast Current Firm Storage Value The value of storage will be driven by Volatility and Operational components Requires physical interconnectivity to provide operational value Volatility extraction enhanced with access to multiple markets Given supply influx from the Northeast along with gas on gas competition from regional supplies, spread values will decrease until demand catches up in the later years Summer peak competing with injection for winter Electric power price volatility (GFEG demand setting the hourly margin) LNG exports increase price volatility due to competition between LNG tolling and power demands while adding to operational needs (hurricanes, LNG plant trip, etc.) Page 19

20 Scott R. Smith President & CEO Midstream Energy Holdings