Northeastern Winter Gas Outlook New York City remains constrained, but increased Marcellus production is bearish for non-ny deliveries.

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1 ? Northeastern Winter Gas Outlook New York City remains constrained, but increased Marcellus production is bearish for non-ny deliveries. Morningstar Commodities Research 2 December Jordan Grimes Sr. Commodities Analyst, Power and Gas jordan.grimes@morningstar.com Executive Summary New York City-area gas infrastructure will be slightly more robust this winter than last winter, but a sustained cold blast could again strain the system. The Marcellus and Utica shales will be producing about 4 bcf/day more supply this winter than last winter, which should ensure gas availability in the East. But pipelines moving gas into the New York City area remain constrained despite a few incremental expansions moving gas east from the Marcellus (Team and Northeast Connector). On high-demand days, utilities and gas generators in New York City are still the marginal buyers of gas. Peak-shaving liquefied natural gas facilities help relieve constraints on peak days, but supply at these facilities is limited to cold days. We believe there is upside risk to Transcontinental Zone 6 New York at current winter prices because of unsolved constraints moving gas to New York City. Also, New York City demand is set to tick up this winter by at least 100 mmcf/day, since more than 1,000 buildings have converted to cleaner-burning fuels in the first six months of alone under the NYC Clean Heat program. We are still bearish TETCO-M3 and Transco-Z6 Non-NY at current winter prices because we believe the additional 4 bcf/day of incremental supply out of the Marcellus will relieve these basis points this winter. Deliveries along TETCO-M3 are particularly exposed to downside price risk when New York City is sufficiently supplied. Key Takeaways Bullish: Constraints are still present moving gas into New York city-gates. The Northeast Connector is the only year-over-year improvement moving gas beyond the constraint. Transco-Rockaway will distribute Transco-Z6 NY more efficiently but won't relieve major constraints. Bullish: Peak-shaving LNG capacity in the New York City area is less than one third of New England, which can leave the New York City area short on supply during sustained cold winters. Bearish: Increased output from the Marcellus and the 300 mmcf/day expansion along Texas Eastern Market Zone 3 will add downside pressure to TETCO-M3 and Transco-Z6 Non-NY. Bearish: The gas scheduling day has been modified to better align with gas generators to help increase efficiency and reduce fear-buying from generators. Also, we believe there will be more power plants this winter with dual-fuel capability and more onsite fuel oil to burn if needed. Winter Strip Fixed Prices and Basis Fixed Basis January February March January February March TETCO-M Transco-Z6 (NY) Transco Z6 (Non-NY) Source: EOX Live. Mark Date: Dec. 1,

2 Page 2 of 13 Gas Basis Forecast: TETCO-M3 Increased supply out of the Marcellus Shale (now more than 18 bcf/day) and expansions along Texas Eastern M3 should help increase flows east into the New York region. However, New York City has become the marginal buyer of TETCO-M3 on extremely cold days since the New Jersey-New York pipeline was completed under the Hudson River to Consolidated Edison s Manhattan customers. The NYC Clean Heat program, which then-mayor Michael Bloomberg helped pass in 2011, is adding to gas demand in the city. During the first six months of Mayor Bill De Blasio s term, the NYC Clean Heat program has led to more than 1,000 building heating system conversions to gas, biofuel, or steam, many in Manhattan. The first major conversion deadline is January Con Ed has estimated that the program could lead to a 100 mmcf/day-200 mmcf/day increase in gas demand. In general, we think the market is beginning to price in the downside to winter TETCO-M3, but we still think there is further to fall (Exhibit 1). Exhibit 1. Current Capacities along Texas Eastern Market Zone 3 Source: Spectra Energy However, there are key risks to our bearish outlook. The expansions along TETCO-M3 leave gas capacity moving east of the Linden compressor in New Jersey to New York City unchanged at about 2,200 mmcf/day (Exhibit 2). Therefore, on extremely high demand days, we think prices will remain high for deliveries at TETCO-M3 New York city-gates as gas supply remains tight east of the Linden compressor.

3 Price ($/mmbtu) Fixed Price ($/mmbtu) Morningstar Commodities Research 2 December Page 3 of 13 Exhibit 2. Current Fixed-Price TETCO-M3 Versus Henry Hub (Winter -2015) Henry Hub (Nymex) TETCO-M3 Fixed Price $8 $7 $6 $5 $4 Sources: Nymex, EOX Live. $3 December January February March Maximum capacity along the Texas Eastern M3 pipeline moving east through Chambersburg, Pennsylvania, is approximately 2,550 mmcf/day. As our analysis shows, as flows increase over 2,100 mmcf/day in winter, prices along TETCO-M3 increase exponentially (Exhibit 3). Exhibit 3. Quantity Scheduled Through Chambersburg, Pennsylvania, Constraint and Corresponding Price (Winter ) TETCO-M3 $100 $80 $60 $40 $20 $0 1,000 1,200 1,400 1,600 1,800 2,000 2,200 2,400 Source: Spectra Energy. Capacity usage, Linden (mmcf/day) Gas Basis Forecast: Transco Zone 6 (NY and Non-NY) The 18 bcf/day coming out of the Marcellus this winter will help meet demand, but bottlenecks remain at Transco-Leidy Line stations 515 and 517, making it difficult to get the cheaper Marcellus gas to the constrained Transco-Z6 winter market. Deliveries from Transco-Leidy Line should add more downside pressure to winter Transco-Z6 NY and Transco-Z6 Non-NY as the cheaper gas flows east into New York City and Public Service Enterprise Group territories. Unlike TETCO-M3, Transco-Z6 prices deliveries into New York City separately from deliveries west of the Linden compressor. Therefore on extremely cold days, when New York City demand from Con Ed and National Grid bid up the price of gas at the New York city-gates, TETCO-M3 and Transco-Z6 NY have the most upside, as New York City is the marginal buyer at these basis points. Currently, 1,779 mmcf/day from the Transco pipeline is able to reach Manhattan and Long Island in the winter once beyond the Linden constraint and Station 207.

4 Page 4 of 13 The Transco-Rockaway Lateral is scheduled to be completed in the first quarter of 2015, but it is unlikely to substantially increase the gas supply into New York city-gates, as Station 207's 547 mmcf/day capacity still limits flows (Exhibit 4). We expect flows into New York city-gates will increase via the Rockaway Lateral by a net of less than 100 mmcf/day because of the completion of the Northeast Connector project. Given the increased demand from the NYC Clean Heat program, we still see Transco- Z6 NY having the most upside to current prices, since many of the previous constraints have not yet been solved. Exhibit 4. Map of Transcontinental Zone 6 Source: Williams We are bearish Transco-Z6 Non-NY at current prices because we believe the increased Marcellus supply is net bearish deliveries along this segment (Exhibit 5).

5 Price ($/mmbtu) Fixed Price ($/mmbtu) Morningstar Commodities Research 2 December Page 5 of 13 Exhibit 5. Current Fixed-Price Transco-Z6 Non-NY and Transco-Z6 NY Versus Henry Hub (Winter -15) Henry Hub (Nymex) Transco-Z6 Non-NY Transco-Z6 NY $16 $14 $12 $10 $8 $6 Source: Nymex, EOX Live. $4 December January February March The constraint risks at Transco-Z6 Non-NY is the close relationship between prices and quantity scheduled through the Linden constraint along the Transcontinental pipeline, just outside the New York city-gates (Exhibit 6). In winter, as the scheduled quantity increases about 2,100 mmcf/day through Linden, buyers begin to bid up the last incremental supply at the constraint point. The marginal price paid for deliveries to Linden can set the corresponding Transco-Z6 Non-NY price. Exhibit 6. Quantity Scheduled Through Linden Constraint Along Transco-Z6 and Corresponding Price (Winter ) Transco-Z6 Non-NY $140 $120 $100 $80 $60 $40 $20 $0 1,800 1,900 2,000 2,100 2,200 2,300 Source: Williams, Morningstar. Capacity Usage, Linden (mmcf/day) Peak-Day Scenarios Our peak-day scenarios focus solely on the ConEd and National Grid territories in New York City, which cover all five boroughs. Our analysis assumes there are no supply constraints or outages upstream of the city-gates. We also assume that pipelines into the city can be fully utilized and that there is an unlimited supply of gas upstream. Morningstar Peak Day: We assume that New York City has access to 4,364 mmbtu of gas from interstate pipelines and that the system is able to draw on 1,091 mmbtu from peakshaving LNG facilities. We also assume that Con Ed and National Grid customers use their

6 Page 6 of 13 entire 3,793 mmbtu peak-day design. This leaves 1,662 mmbtu available for generating power. The 3,900 megawatts of generation that use natural gas as a primary fuel then can burn 1,103 mmbtu of gas using an average heat rate of 11. In this ideal scenario, New York City is long 559 mmbtu of gas. The 6,000 MW of generation that use natural gas as a secondary fuel can burn the balance if needed. We realize that there are many problems that could occur upstream or even downstream that could prevent this base scenario from playing out, but it s meant to help show the basic peak winter supply and demand factors. Morningstar Peak Day Constrained: The same scenario as the base case, except we now assume that New York City has burned through all of its 5.2 bcf of peak-shaving LNG. This would take days of sustained cold, depending on the gas burn rate. We also assume 100 mmbtu of increased demand from commercial fuel switching as required by the NYC Clean Heat program. After gas generation consumption, New York City will be short 632 mmbtu. This scenario does not consider the possibility that electricity imports from PJM, ISO- NE, or western New York state could meet incremental electric demand. This scenario also does not consider the possibility of inner-city gas generation burning fuel oil as a backup. Exhibit 7. Morningstar Gas Supply Scenario Analyses, New York City New York City Region Winter -15 Morningstar Peak Day Morningstar Peak Day, Constrained Total Supply 4,364 4,364 National Grid Peak Day Design (2,443) (2,443) Con Ed Peak Day Design (1,350) (1,350) Peak Shaving 1,091 0 Replacement Supply For Commercial Fuel Switching (NYC Clean Heat Plan) 0 (100) Interruptible Demand Leftover for Electic Demand 1, Electric Generator Peak Day Demand (1,103) (1,103) Shortage/Surplus Gas Leftover 559 (632) Source: Morningstar, Con Ed, National Grid, ISO-NY Northeast Supply Outlook There are four major interstate pipelines that supply most of the gas demand in New York City: Texas Eastern, Tennessee Gas, Transcontinental, and Iroquois. These pipelines divide into many separate routes as they approach the city, so there are more than 10 entries for gas to flow into through citygates, including the soon-to-be-completed Transco-Rockaway Lateral (Exhibit 8).

7 Page 7 of 13 Exhibit 8. City-Gate Entryways for Major Interstate Pipelines into New York City Source: Morningstar Combined, the pipelines can deliver up to 4,364 mmcf/day to meet New York City winter gas demand. Approximately 3,279 mmcf/day of this capacity has firm gas contracts into the city, with the remaining capacity for interruptible gas generators and incremental local distribution company (LDC) demand (Exhibit 9). Exhibit 9. New York City Pipeline Supply, Winter -15. Pipeline Max Capacity into NYC Firm Capacity Committed Interruptible for Gas Generators TGP-NY Area (Bergen County, N.J.) Transco -NYC 1,368 1, Iroquois-Long Island-Hunts Point TETCO-ConEd (NJ-NY) TETCO-Staten Island Total 4,364 3,279 1,085 Source: Company Reports, Morningstar. Because of constraints on the pipeline system that can prevent all of this gas from entering the city, New York City also relies on peak-shaving facilities to meet demand on extremely cold days. There is approximately 3.2 bcf of LNG peak-shaving storage capacity in the Con Ed and National Grid territories

8 Page 8 of 13 that can vaporize the LNG at a rate of 691 mmcf/day. There is another peak-shaving facility in Carlstadt, New Jersey, that holds up to 2 bcf of LNG and can vaporize it at 400 mmcf/day. These facilities are very important during high-demand periods and are utilized only about 10 days a year. This supply can be vaporized and delivered at a rate of 1,024 mmcf/day (Exhibit 10). If vaporized at that rate, LNG tanks would be empty after just five days, but we assume that withdrawal rates are not being fully utilized and that there is enough supply for high-demand days in the winter, with withdrawal rates at 400 mmcf/day. It takes nearly 200 days to refill the empty tanks, so any refill will only be incremental during the winter. Liquification and injection rates are very slow, at mmcf/day at these facilities, so it can take months to restock after it s used. This is why sustained cold periods can constrain New York City infrastructure more than intermittent cold periods. Exhibit 10. Peak-Shaving Capacity in New York City Area Peak Shaving (mmbtu/day) Storage Vaporization Rate Injection Rate New York 3, New Jersey 2, Total 5,200 1, Source: Williams Transcontinental Pipeline Portal The limited peak-shaving capacity in the New York City area is why a sustained cold spell can be extremely bullish for gas delivered to the city. After Con Ed and National Grid burn through all the peakshaving LNG on very cold days, supply for the utilities is limited to pipeline capacity into the city. Therefore, more gas supply is likely will be available on a cold day in early January than a cold day in February. A large LNG storage explosion on Staten Island in 1973 forced legislation preventing further LNG storage expansion in the New York City area. Northeast Demand Outlook There are three major sources of natural gas demand in New York City: residential and commercial, electric, and steam. To meet this demand, the city's gas delivery infrastructure is dynamic and complex (Exhibit 11).

9 Page 9 of 13 Exhibit 11. Diagram of New York City Utility Systems Source: New York City. Residential and commercial customers represent the largest draw on supply and own most of the firm transmission rights. Steam customers supply heat through many buildings in New York City but can burn other liquid fuels if needed. Electric generators in the city can supply 9,921 MW of electricity, but only 3,909 MW use natural gas as their primary fuel (Exhibit 12). The electric generators in the city are very inefficient and run only when electricity demand exceeds imports. On peak winter days when this 3,909 MW of inner-city electric capacity is needed, we estimate that it represents about 1,031 mmcf/day at an 11 heat rate. These gas generators must compete with Con Ed and National Grid customers for the scarce gas supply on the pipelines. Exhibit 12. New York City Generator Capacity by Fuel Source (Zone J) Primary Fuel Backup Fuel Capacity (MW) #2 Fuel Oil Natural Gas 656 #6 Fuel Oil Natural Gas 4,167 Kerosene Natural Gas 1,189 Natural Gas #2 Fuel Oil 3,909 Total 9,921 Sources: ISO-NY, Con Ed Last year s total New York winter gas demand (November-March) was approximately 14% higher than the five-year average because of extremely cold weather (exhibits 13-15). Generator demand, on the

10 Gas demand (mmcf/day) Heating Degree Days Morningstar Commodities Research 2 December Page 10 of 13 other hand, was down 5% in winter versus winter , reflecting dual-fuel generators' ability to burn oil or kerosene when gas prices spike. Exhibit 13. Winter New York City Heating-Degree Days Versus the Five-Year Average Heating Degree Days Year Average Source: NOAA. 0 November December January February March Exhibit 14. Average Total Daily Winter Gas Demand in New York Average 6,000 5,500 5,000 4,500 4,000 3,500 3,000 Source: EIA. 2,500 November December January February March

11 Gas demand (mmcf/day) Gas demand (mmcf/day) Morningstar Commodities Research 2 December Page 11 of 13 Exhibit 15. Average Daily Gas Demand From Electric Generators in New York Average 1,400 1,300 1,200 1,100 1, Source: EIA. 800 November December January February March In the Mid-Atlantic, total gas and gas generator demand increased year over year, most likely because of the less-constrained pipeline system and less usage of dual-fuel generators (exhibits 16 and 17). Exhibit 16. Average Daily Gas Demand in the Mid-Atlantic Average 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 Source: EIA. 3,000 November December January February March

12 Gas demand (mmcf/day) Gas demand (mmcf/day) Morningstar Commodities Research 2 December Page 12 of 13 Exhibit 17. Average Daily Gas Demand From Electric Generators in the Mid-Atlantic , , Average 2,000 1,600 1,200 Source: EIA. 800 November December January February March Storage Levels During the week that ended March 25, storage levels hit a five-year low, with just 822 bcf of working gas in storage. The very cold winter depleted the reserves, with massive withdrawals to feed residential heating demand and gas-hungry peaking electric generators trying to keep the lights on during strong demand. Gas traders immediately looked ahead to winter -15, realizing the potential for reservoirs to remain depleted for another winter and creating a possible shortage. We now know this not to be the case. A mild summer coupled with increased production in the Marcellus and Utica shales allowed for record injections. We now expect stocks to be at or near the five-year minimum (Exhibit 18), which is obviously low, but nothing worrisome, assuming a normal winter. K Exhibit 18. Storage Levels and Forecast ,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Source: EIA, Morningstar Week

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