the project; approval for future …imaging.occeweb.com/ap/casefiles/occ30010536.pdfyearl year2 2015...

APPLICATION OF PUBLIC SERVICECOMPANY OF OKLAHOMA ("PSO") FORAPPROVAL OF THE COST RECOVERY OFTHE WIND CATCHER ENERGYCONNECTION PROJECT; ADETERMINATION THERE IS A NEED FORTHE PROJECT; APPROVAL FOR FUTURE1NCLUSION 1N BASE RATES COSTRECOVERY OF PRUDENT COSTRECOVERY RIDER; APPROVAL OFCERTAIN ACCOUNTING PROCEDURESREGARDING FEDERAL PRODUCTION TAXCREDITS; WAIVER OF OAC 165-35-38-5(e);AND SUCH OTHER RELIEF THECOMMISSION DEEMS PSO IS ENTITLED

ILEF DEC 0 4 2017BEFORE THE CORPORATION COMMISSION OF OKLA-.861:?il&ERK'S OFFICE - OKC

CORPORATION COMMISSIONOF OKLAHOMA

CAUSE NO. PUD 201700267

RESPONSIVE TESTIMONY OF

THOMAS A. PETRIE

ON BEHALF OF

INTERVENER WINDFALL COALITION

December 4, 2017

TESTIMONY INDEX

SUBJECT PAGE

I. INTRODUCTION 3

II. NATURAL GAS PRICE FORECASTS 5

III. ECONOMIC COST 13

IV. CONCLUSION 14

EXHIBIT

EXHIBIT TAP-1

RESPONSIVE TESTIMONY

EXHIBITS

DESCRIPTION

Tom Petrie — Expert Report: Support Materials and Information

2 CAUSE NO. PUD 201700267THOMAS A. PETRIE

BEFORE THE CORPORATION COMMISSION OF OKLAHOMA

APPLICATION OF PUBLIC SERVICECOMPANY OF OKLAHOMA ("PSO") FORAPPROVAL OF THE COST RECOVERY OFTHE WIND CATCHER ENERGYCONNECTION PROJECT; ADETERMINATION THERE IS A NEED FORTHE PROJECT; APPROVAL FOR FUTUREINCLUSION IN BASE RATES COSTRECOVERY OF PRUDENT COSTRECOVERY RIDER; APPROVAL OFCERTAIN ACCOUNTING PROCEDURESREGARDING FEDERAL PRODUCTION TAXCREDITS; WAIVER OF OAC 165-35-38-5(e);AND SUCH OTHER RELIEF THECOMMISSION DEEMS PSO IS ENTITLED

CAUSE NO. PUD 201700267

RESPONSIVE TESTIMONY OF THOMAS A. PETRIE ON BEHALF OF INTERVENER WINDFALL COALITION

I. INTRODUCTION

1 Q1: PLEASE STATE YOUR NAME, POSITION AND BUSINESS ADDRESS.

2 A: My name is Thomas A. Petrie. I am Chairman of Petrie Partners, LLC, an energy focused

3 investment banking firm that offers financial advisory services to the oil and gas industry.

4 My firm provides specialized advice on mergers, divestitures and acquisitions and private

5 placements. The business address is 1700 Lincoln Street, Denver, CO 80203.

6 Q2: PLEASE BRIEFLY DESCRIBE YOUR BACKGROUND AND

7 QUALIFICATIONS.

8 A: I received my Bachelor of Science degree from the U.S. Military Academy at West Point

9 and received my Masters of Science in Business Administration from Boston University.

10 Prior to Petrie Partners, I was Vice Chairman of Bank of America Merrill Lynch. I

11 joined Merrill Lynch in 2006 when they merged with Petrie Parkman & Co., an energy

RESPONSIVE TESTIMONY 3 CAUSE NO. PUD 201700267THOMAS A. PETRIE

1 investment banking firm that I had co-founded in 1989. Before Petrie Parkman & Co., I

2 was a Managing Director and Senior Oil Analyst of The First Boston Corporation.

3 In the 1970s, I began my career in the energy sector by analyzing publicly traded

4 securities. Since then, I have been an active advisor on more than $250 billion of energy

5 related mergers and acquisitions. Notably, my firm Petrie Parkman & Co. advised the

6 Kingdom of Saudi Arabia on its natural gas initiative, the State of Alaska on gas pipeline

7 options, and the U.S. Department of Energy on the sale of the Elk Hills oilfield.

8 I am a Chartered Financial Analyst. I was past President of the Board of Directors

9 of the National Association of Petroleum Investment Analysts. Also, I served on the

10 Securities and Exchange Commission Advisory Board on Oil and Gas Accounting.

11 Additionally, I've authored the book, FOLLOWING OIL: Four Decades of Cycle-Testing

12 Experiences and What They Foretell about U.S. Energy Independence.

13 Q3: HAVE YOU OR YOUR FIRM APPEARED AS A WITNESS BEFORE ANY

14 REGULATORY COMMISSIONS?

15 A: No, but I have been previously involved in providing energy policy and economic input

16 and advice to the governmental authorities noted above.

17 Q4: WHAT IS THE PURPOSE OF YOUR TESTIMONY?

18 A: I am here to provide expert testimony on my view of the intermediate and long term outlook

19 for natural gas supply, and resulting prices in the United States and what impact this price

20 may have on the economic merits of the Wind Catcher project. My price outlook contrasts

21 with the Base, Low and High price scenarios put forth by PSO in their supporting materials

22 used to justify the net present value and economic benefit of the Wind Catcher project.


1 II. NATURAL GAS PRICE FORECASTS

2 Q5: WHAT WOULD YOU NEED TO KNOW ABOUT NATURAL GAS PRICES TO

3 MAKE AN INFORMED INVESTMENT DECISION ABOUT A PROJECT LIKE

4 WIND CATCHER?

5 A: The big-picture theme for natural gas is that over the last decade, and for the better part of

6 this 21' century, technological enhancements in horizontal drilling and hydraulic

7 fracturing used when exploring for and developing natural gas reserves have revolutionized

8 the extraction of hydrocarbons from shale formations. The proliferation of unconventional

9 drilling in the United States has decreased commodity price volatility, and natural gas is

10 now a relatively more stably priced and plentiful hydrocarbon resource.

11 of Exhibit TAP-1 contains the chart below, which shows surging production

12 leading to low gas prices.

13

14

15

16

17

U.S. Natural Gas Production vs. Prices (1982 — 2017 YTD)

35

33

31

2s

ea.

27

-.n 25

O 23

21

19

17

NetunIGesProcludson

NNW& Gas Pnay

510 00

09 00

$8 00

57 00

56 00

se oo

$4 00

53 00

I $2 00

51 001982 1984 1986 19 88 1990 1992 19 94 1996 19 99 2000 2002 2004 2006 2006 20 10 2012 2014 2016

(nu9am3) somd see iumeN

The majority of the materials and assumptions that I have reviewed relating to the project

base its investment merits on the assumption of very high future natural gas prices, rising

costs in broad electrical generation and consumer rates and therefore, the need for an

alternative source of long term generation and supply.


1 Q6: PLEASE EXPLAIN YOUR NATURAL GAS PRICE OUTLOOK.

2 A: Although not always perfectly predictive, I believe that informed forecasts by credible,

3 independent third-party professionals and specialized organizations can form the basis for

4 a reasonable expectation and consensus perspective on likely future outcomes. Henry Hub

5 futures contracts trade on the New York Mercantile Exchange (NYMEX), and these futures

6 prices are widely used as a benchmark for forward months and years of expected natural

7 gas prices. The average of these thousands of futures contracts traded daily for natural gas

8 through 2021 are summarized in the graph below and on page 6 of Exhibit TAP-1. The

9 United States Energy Information Agency (EIA) also puts out monthly energy outlook

10 reports that provide predictions on natural gas prices. The forecast as of November 2017

11 is summarized on the same chart. Additionally, Bloomberg (BLOOM) and Factset (FCC)

12 are regarded as the authoritative clearing houses for aggregating publicly reported research

13 analyst forecasts of natural gas prices and these projections are captured below as well.

14 of Exhibit TAP-1 contains the chart below. This natural gas price outlook

15 shows that NYMEX futures, EIA estimates and broker research estimates from both

16 Bloomberg and Factset expect prices to average approximately $3.00 MMBtu for the next

17 several years.

18

RESPONSWE TESTIMONY 6 CAUSE NO. PUD 201700267THOMAS A. PETRIE

1 In the current commodity forecasting environment, the average of all forward futures

2 contracts, EIA estimates, and research analyst estimates from major fmancial institutions

3 provides an informed outlook on natural gas prices. Additionally, historical strip price

4 forecasts provide differentiated price insights.

5 of Exhibit TAP-1 contains the strip price chart below. The forecasts as of

6 2015, 2016 and 2017 for strip prices have consistently declined year over year, and the

7 forward five-year strip is currently averaging approximately $3.00 MMBtu.

8

9

10

11

12

13

14

15

16

Forward Strip (As of January 1)

55 CO

54.00

53 OD

4 4

I S2 OD

51 CO

SO ODYearl Year2

2015

2016

2017

Year3 Year 4 YearS Year6

The outlook for United States natural gas prices beyond ten years in the future is much

more uncertain. However, I know that over the long-run natural gas prices are determined

by supply and demand fundamentals. The natural gas market price is determined by the

number of producers and consumers of natural gas.

Q7: PLEASE EXPLAIN YOUR VIEW OF NATURAL GAS SUPPLY.

A: I believe that United States gas production will continue to outpace domestic consumption

because of abundant shale gas reserves and low breakeven well costs. Technological

advancements and more effective drilling programs have created a new era for United


1 States gas supply, and that is why American energy companies have been increasing gas

2 production for much of the past decade. Our country has a prolific resource base of natural

3 gas, and the ability of operators to detect and economically extract these resources keeps

4 improving. Additionally, operators can respond to natural gas price increases within 30-60

5 days by producing more of this plentiful resource, putting downward pressure on prices.

6 Page 14 of Exhibit TAP-1 contains the map below of basins and shale plays.

7 Significant amounts of natural gas resources in shale formations have become economic to

8 recover in recent years, thanks to drilling innovations.

9

10

11

12

13

Major Basins and Shale Plays Producing Significant Amounts of Natural Gas

Proved ShaleReserves 0)

Unproved ShaleResources 0).

US TechnicallyRecoverable ShaleResources ol

1,053 Tcf

On January 1, 2015, the EIA estimated that the technically recoverable shale resources in

the United States were 1,316 trillion cubic feet. If history is any guide, the energy industry

will continue to find new reserves and development opportunities going forward. American

ingenuity in the oil and gas sector is truly unmatched.


1 Page 15 of Exhibit TAP-1 contains the chart below, which shows dry gas shale

2 production increasing significantly since 2009. Key drivers of gas production growth are

3 coming from the Appalachia Marcellus/Utica, North Louisiana Haynesville, West Texas

4 Permian, and Oklahoma SCOOP/STACK plays.

5

6

7

8

9

10

11

12

13

14

15

Dry Gas Production by Shale Play (2009-2017 TID)

50

40

10

0Oct-09

Marcellusra hca

Haynesville• PermianIII Eagle Fordas WoodfordNI Bakken

Other

Oct-11 Oct-13 Oct-15

18.2

4.8

4.6

6.3

4.0

2 4

Oct-17

It is my belief and generally accepted within the sector that shale gas production will

continue to grow substantially. Increased drilling activity has occurred despite sustained

lower prices because drilling technology advances have lowered well costs and boosted

well productivity, improving margins and economic returns. Through my work at Petrie

Partners and frequent conversations with energy company executives, I have confidence

that technology advances will continue to be made over the next decade. Breakeven costs

in gas-weighted fields will keep coming down. Additionally, oil wells nationwide are

predicted to produce an additional 9 billion cubic feet a day of associated natural gas over

the next few years, according to estimates from Tudor, Pickering, Holt & Co. and

Macquarie Group. Most oil wells produce natural gas as a byproduct, and that gas output


1 rises commensurate as oil drilling accelerates. Oil drilling activity is expected to grow in

2 Oklahoma and West Texas, and these new wells will contribute to the natural gas supply

3 glut in the United States.

4 Page 12 of Exhibit TAP-1 contains the storage chart below. For the past few years,

5 the United States has had elevated storage levels of natural gas, which leads to lower prices.

6 Henry Hub prices have averaged less than $3.00 MMBtu during this time period.

7

Natural Gas In Underground Storage (Bcf)5,000

4,000

3,000

2,000

1,000

0Nov-15 May-16 Nov-16 May-17 Nov-17

5-yea Mat and Min Range (2012-2016) - 5 yea Ave iage , .Workr1g Gas in Storage

8 Rapid growth in United States reserves and production has resulted in an overproduced

9 situation relative to domestic demand, leading to significant, sustained builds in natural gas

10 storage for the last several years. United States supply capabilities are the key reason that

11 I believe natural gas prices will stay low for decades.

12 Q8: DO YOU AGREE WITH PSO'S ASSUMPTIONS ABOUT NATURAL GAS

13 PRICE FORECASTS?

14 A: PSO's price forecasts appear too high. Their forecast assumptions do not adequately

15 reflect the fundamentals that will likely drive the future supply/demand dynamic of the

16 United States domestic gas market.


1 Slide 21 of Wind Catcher Technical Conference Presentation from October 20,

2 2017 contains the chart below, which shows PSO's key pricing assumptions. The Low,

3 Base and High price cases start in 2021 approximately between $5.00 and $6.00 MMBtu.

4 Over the next 25 years, these PSO forecasts significantly increase to prices approximately

5 between $10.00 and $12.00 MMBtu.

6

14 ,

?---------

Natural Gas Henry Hub$/mmBtu, Nominal $

- Base

- Low

- • UR. Low Sens, tivity

................................ _ ..........

....... C'"..2.4Y also wwb,..,

_ ..

Is.f OL444 amnamio mks So% of"'On. for a

7 Page 17 of Exhibit TAP-1 contains the breakeven price chart below. Production is

8 profitable at prices below $3.00 MMBtu for most of these regions.

9

Wellhead

34 DO

Price Required For 10% IRR

3.70

3.29 3.30

$3 DD 2.90

s

i 2.112.20 2.20 221

2 A0

2.702.80 2.80

I 3200g

I

i

1 / DO

30 DOllama Kearns.. U.. Ulm Roam. Faa•••••• Boma GasTarry.*

- lippe41.4alaraIliz

- SW WM PAMoroallia

- agar G.klarvalka- Dry PA

Usca- Ory OH - Wm CH Vs. - Dry PA - ellat, Gas HO*.


1 The vast majority of gas producing regions in the United States are extremely profitable

2 at $4.00 MMBtu and above gas prices.

3 Q9: IF NATURAL GAS PRICES RISE ABOVE $4 MMBtu AS PSO FORECASTS,

4 HOW WOULD NATURAL GAS SUPPLY RESPOND?

5 A: I believe that any material increase in natural gas prices will result in a rapid acceleration

6 in development activity, bringing on additional ample supply, and this new supply would

7 drive down prices.

8 Additionally, if natural gas prices were to rise above $4 MMBtu, substantial

9 amounts of new resources would become viewed by operators as economic to drill.

10 Q10: IS PSO's LOW PRICE FORECAST HIGHER THAN RECENT PRICES?

11 A: PSO's 2017 Low forecast assumes a $4.69 MMBtu 2018 price average. This price is 57%

12 higher than 2017's year to date average price of approximately $2.98 MMBtu and 62%

13 higher than the current NYMEX futures 2018 average of approximately $2.90 MMBtu.

14 Page 9 of Exhibit TAP-1 contains the price chart below. Previous PSO forecasts

15 have consistently overestimated future natural gas prices in years 2012, 2013 and most

16 recently in 2017. These forecasts did not adequately account for significant increases in

17 United States production, which lowered natural gas prices.

18

PSO Low Price Case510 00

i S6 00

S4.00

z

82 00

•••

," ••

11 •

SO 002009

-.-2012 Low,"

—2013 Lan,t'1

—2017 Low"'

FlisfolicaP

2013 2017 2021 2025 2029


1 III. ECONOMIC COST

2 Q11: HOW WOULD REALISTIC NATURAL GAS PRICE EXPECTATIONS AFFECT

3 THE WIND CATCHER PROJECT'S ECONOMICS?

4 A: Page 24 of Exhibit TAP-1 contains the valuation table below. The table shows the

5

6

7

8 This analysis shows that the bulk of the NPV benefit comes in the form of production tax

9 credits and cost savings, but these benefits are not enough to offset the incremental capital

10 and costs of the project under likely future price scenarios.

11 Q12: HOW DID YOU PERFORM YOUR NET PRESENT VALUE ANALYSIS?

12 A: Our firm ran a line of best fit (regression), which was then used to calculate Adjusted

13 Production Cost Savings at realistic natural gas prices. I analyzed the effect of natural gas

14 prices on Adjusted Production Cost Savings because changes to the gas price variable had

15 an approximately 95% correlation to the results for PSO's assumed High, Base and Low

16 natural price scenarios. In the 2020 NPV table, lines 3 through 6 do not change due to

17 natural gas prices, and we assumed that line 2 has the same value as PSO's Base case.

18

results

MMBtu

of our illustrative net present value (NPV) analysis for $3.00, $4.00

pricing scenarios.

and $5.00

2020 NPV (SLIM)

1. Adjusted Production Cost Savings

2. Congestion and Loss Cost

Prices (2021-2045)

$3.00 S4.00 S5 00

$582 $892 $1,202($158) ($158) ($158)

3. Capacity Value $74 $74 $744. Wind Facility Revenue Requirement ($1,163) ($1,163) ($1,163)

5. Production Tax Credits $837 $837 $837

6. Gen-Tie Line Revenue Requirement ($538) ($538) ($538)

7. Total Benefits/(Costs) ($366) ($56) $254


1 Q13: WHAT ARE THE SIMILARITIES BETWEEN A PRIVATE SECTOR DECISION

2 TO INVEST IN A PROJECT LIKE WIND CATCHER AND THE COMMISSION'S

3 DECISION TO APPROVE THE PROJECT?

4 A: In my 43 years of financial sector experience evaluating the economic merits of various

5 investments, I think any individual, private or public company or organization should

6 evaluate a decision on whether to invest in a significant project based on the credibility of

7 the fmancial assumptions, which should be consistent with realistic market conditions, and

8 that the application of these assumptions in a diligent, intellectually honest manner yield

9 an attractive (profitable) outcome. For a project like Wind Catcher, I wouldn't expect a

10 private sector investor to approve a multi-billion dollar project if it had significant

11 unresolved revenue, regulatory and profitability issues.

12 Q14: IF REALISTIC NATURAL GAS PRICE FORECASTS ARE USED, HOW MUCH

13 OF THE NET BENEFIT OF THE PROJECT IS DUE TO TAX CREDITS?

14 A: Without production tax credits, we calculate the Wind Catcher project would only

15 breakeven at a future implied natural gas price of approximately $6.88 MMBtu. Even with

16 production tax credits of $837 MM, we calculate Wind Catcher will have a negative net

17 present value vs. potential alternatives, unless gas prices are above approximately $4.18

18 MMBtu.

19

20 IV. CONCLUSION

21 Q15: DOES THIS CONCLUDE YOUR RESPONSIVE TESTIMONY?

22 A: Yes, it does.

23


1 AFFIRMATION

2 I state under penalty of perjury under the laws of Oklahoma that the foregoing is true and correct

3 in substance and in fact to the best of my knowledge, information, and belief.

4

5 Signed:

6 Name: Thomas. A. Petrie

7 Date: iptiSITAW a) 2°17

DIRECT TESTIMONY 15 CAUSE NO. PUD 201700267THOMAS A. PETRIE

CERTIFICATE OF SERVICE

On this 4th day of December, 2017, a true and correct copy of the above and foregoingResponsive Testimony of Thomas A. Petrie on Behalf of Intervenor Windfall Coalition was sent viaelectronic mail to the following interested parties:

Brandy L. Wreath, DirectorMichael VelezNatasha ScottJudith JohnsonOlivia WaldkoetterOKLAHOMA CORPORATION COMMISSIONPublic Utility DivisionJim Thorpe Building2101 North Lincoln BoulevardP.O. Box 52000Oklahoma City, Oklahoma [email protected]@occemail.com [email protected] jjohnsona,occemail.com [email protected]

Jack P. FiteWHITE, COFFEY & FITE, P.C.2200 Northwest 50th Street, Suite 210Oklahoma City, Oklahoma 73112jfitewcgflaw.com

Thomas P. SchroedterPat NixonHALL, ESTILL, HARDWICK, GABLE, GOLDEN &NELSON, P.C.320 South Boston Avenue, Suite 200Tulsa, Oklahoma [email protected] pnixonhal1esti1l.com

Ms. Dara DerryberryMs. Katy Evans BorenMr. Jared B. HainesMs. Victoria D. KorrectA. Chase SnodgrassOFFICE OF THE OKLAHOMA ATTORNEYGENERAL313 N.W. 21st StreetOklahoma City, OK 73105Dara.DerryberryQoag.ok.gov [email protected] @oag.ok.gov [email protected] Chase.SnodgrassQoag.ok.gov

Joann Stevenson WorthingtonAMERICAN ELECTRIC POWER1601 Northwest Expressway, Suite 1400Oklahoma City, Oklahoma [email protected]

Cheryl A. VaughtScot A. ConnerVAUGHT & CONNER, PLLC1900 Northwest Expressway, Suite 1300Oklahoma City, Oklahoma [email protected]

James A. RothMarc EdwardsC. Eric DavisPHILLIPS MURRAH, P.C.Corporate Tower 13th Floor101 North Robinson AvenueOklahoma City, Oklahoma 73102iarothe,[email protected] [email protected]

Rick D. ChamberlainBEHRENS, WHEELER & CHAMBERLAIN6 Northeast 63rd Street, Suite 400Oklahoma City, Oklahoma 73105rchamberlainaokenergylaw.com

Deborah R. ThompsonOK ENERGY FIRM, PLLCP.O. Box 54632Oklahoma City, Oklahoma [email protected]

Michael D. HockleyRyan PulkrabekSPENCER FANE LLP1000 Walnut Street, Suite 1400Kansas City, Missouri [email protected] [email protected]

J. Eric TurnerDERRYBERRY & NAIFEH, LLP4800 North Lincoln BoulevardOklahoma City, Oklahoma [email protected]

Robert D. EdingerEDINGER LEONARD & BLAKLEY100 Park Avenue, Suite 500Oklahoma City, Oklahoma [email protected] REdingerAelbattorneys.com

Patrice DouglasJordan JacksonSPENCER FANE LLP9400 North Broadway Extension, Suite 600Oklahoma City, Oklahoma [email protected] [email protected]

Randall ElliottOMPAP.O. Box 1960Edmond, Oklahoma [email protected]

Jon LaaschJACOBSON & LAASCH212 East Second StreetEdmond, Oklahoma [email protected]

James R. FletcherJAMES R. FLETCHER, PLLCP.O. Box 627Guymon, Oklahoma [email protected]

Marvin T. GriffTHOMPSON HINE LLP1919 M Street, N.W., Suite 700Washington, D.C. [email protected]

Adam C. Doverspike

2

EXHIBITTAP-1

qp

Tom Petrie Expert Report:Support Materials and InformationDecember 4, 2017

Table of Contents

Tab Page

1. Introduction 1

2. Natural Gas Pricing Observations 3

3. Natural Gas Supply Overview 10

4. Illustrative Impact: Economic Modelling 23

Appendix

A. Thomas A. Petrie Biography 25

qpPetriePartners STRICTLY CONFIDENTIAL

Introduction

ql)PetriePartners STRICTLY CONFIDENTIAL

Introduction

Summary Observations

Overview

• Technological advancements by leading US E&P operators in 3D seismic surveys, horizontal drilling and hydraulicfracturing has encouraged the development of low risk, repeatable natural resources across large land positions

+ The natural gas market has become much more stable and developed

• Research analysts, government energy agencies and the current NYMEX based futures strip predict prices toaverage -$3.00 MMBtu for the foreseeable future

+ Gas supply will likely outpace domestic demand

• Elevated natural gas storage levels result in lower natural gas prices

• US-based Cheniere, Freeport LNG, Sempra Energy and Dominion Energy expect to export over 9 Bcfpd ofliquefied natural gas to international markets by 2021, as a result of oversupply

• Many US resource basins have large gas reserves and low break-even costs

• Production activity in the Marcellus, Utica, Permian and SCOOP/STACK shale plays continues to drive increasesin US gas supply

PetriePartners STRICTLY CONFIDENTIAL

Natural Gas PricingObservations


Natural Gas Pricing Observations

Key Themes for US Gas Market

Overview

+ Over the last 30 years, natural gas in the United States has evolved from a regulated rnarket to become a crucial inputfuel for utilities and industry

• Natural gas is now a relatively more stably priced and plentiful hydrocarbon resource

• The proliferation of unconventional drilling in the US has decreased oil and gas commodity price volatility

+ Natural gas prices have averaged less than $3.00 MMBtu since 2015

+ Abundant gas reserves and more effective drilling programs provide real-time flexibility to US producers

• In the event prices rise materially, producers can respond within 30-60 days to produce more natural gas

• Supply flexibility allows market prices to return more quickly to equilibrium levels

clpPetriePartners STRICTLY CONFIDENTIAL

4


A Transformed Natural Gas Outlook

• Surging natural gas production has led to low prices

• Petrochemical companies believe that US natural gas prices will remain low and globally competitive for decades

• Natural gas is a feedstock for the chemical industry, and US chemical investment linked to shale gas is $185 Bnand counting

U.S. Natural Gas Production vs. Prices (1982 — 2017 YTD)

35

33

31

to„8▪ 29

o.

O 27wu_

Jo 25

O • 23

- 21

19

17

- Natural Gas Production

— Natural Gas Prices

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Source'. EIA data as of October 2017 with prices before 1997 in $/Mcf. Arnerican Chemistry Council Fact Sheet for July 2017.

$10.00

$9.00

$8.00

$7.00

$6.00

$5.00

$4.00

$3.00

$2.00

$1.00

Natural Gas Price (

$/MMBtu)


5


Henry Hub Gas Outlook

Market Trends

+ Surging natural gas production in recent years hasmaterially reduced prices

+ Modern drilling techniques eliminate volatility byallowing producers to ramp up or ramp downproduction more quickly to meet demand

+ Research analysts and the market strip expect naturalgas prices to average approximately $3.00 MMStu forthe foreseeable future

Historical Henry Hub Spot Price ($/MMBtu)

$9.00 $8.68 $8.86

$6.00

$3.00

$0.00

d.Average

2002 2004 2006 2008 2010 2012 2014 2016

Source. Market data per FactSet and Bloomberg as of November 24, 2017, EIA STEO as of November 2017.

Gas Price Outlook ($/MMBtu)

$4.00

$3.00

$2.00

$1.00

$0.00

$2.81

FCC

EnOMStrip

Current 2017 2018 2019 2020 2021Spot

$4.00

$3.50

2018Gas

$3.00

(S MMBtu) $2.50

$2.00

$4.00

$3.50

2019Gas

$3. 00

(S,MMBLI)$2,50

$2.00

$3.50 Average:$3.30

$3.26 $3.12 $3.16 1,3 15 $3.10 $3.05 MO $3.00 S3.00 $3.00

1 1 1 1 1 1 1 1 1 1$IN4TO FCC era-) IF El dll am Strip

$3.50 Average:$3.11

153.30 $3.25 tl ,.

,-' $312 83.11 $3.10 53.00 $3.00 $3.00

1 I I 1 1 1 1 1 11 52.82

4D fl ci FCC efa) s Elm Strip 1114341.

MSC AVI1,094GA


6


Historical Strip Price ForecastsForward Strip (As of January 1)

$5.00

$4.00

+q$3.00co2

7- $2 00

$1 00

$0.00

2015

2016

2017

Yearl Year2 Year 3 Year4 Year5 Year6

Source' Market data per Bloomberg.


Naturai Gas Pricing Observations

Historical Strip Price Forecasts (2009 — YTD)$9.00

$7.50

$6.00

47:

2

a- $4.50ce)

'1":a_

$3.00

$1.50

$0.00

, ,,i

% 4 ,11, e- i, ,- ,...• ,

.3

A ,I liI V

,i-,%

II1

IIIV

I,IIIt n 1

1i• II 1

1 I

I 31

•

% 1V

Strip PriceForecasts as of (1):2009 gm=

2010201120122013 ono=

2014201520162017YTD (2)Historical ----

Jan-09 Jan-11

(1) Henry Hub Strip forecasts per Bloomberg for each year as of January 1.(2) Henry Hub Strip forecast per Bloomberg as of Novernber 24. 2017.

Jan-13 Jan-15 Jan-17 Jan-19


8


PSO Henry Hub Price ForecastsSummary PSO Base Price Case

$10.00

•Previous PSO forecasts overestimated future naturalgas prices

$8.00

• Forecasts failed to account for increased US2

$6 00

production, which lowered natural gas prices2a

%E $4.00

•PSO's 2017 price forecasts are significantly higherthan historical price averages for recent years $2.00

$0.00

PSO High Price Case$10.00

Nommal (S/MMBtu)

$8.00

$6.00

$4.00

$2.00

$0,00

%•%

—2013 Hight')

—2017 Hight')

— — Historicalt2)

2009 2013 2017 2021 2025 2029

z2012 Base)

— 2013 Base)

—2015 Basel

—2017 Base)

— Historical121

2009 2013 2017 2021 2025 2029

PSO Low Price Case$1 0.00

$8.00

I $6.0022

$4.00

$2.00

$0.00

(1) AEP-PSO forecasts per 2012, 2013, 2015 and 2017 PSO IRP Reports and Karl Bletzacker's Testimony on July 31, 2017.

(2) Henry Hub historical prices per Bloomberg as of November 24, 2017.

—2012 Loww

—2013 Low(1)

—2017 Low())

— — Htstoncal 2)

2009 2013 2017 2021 2025 2029


Natural Gas Supply Overview


I ()


Introduction

• Technological enhancements in horizontal drilling and hydraulic fracturing have revolutionized the extraction of oil

and gas from "source rock" shale geologic formations

4. As of January 1, 2015, the US Energy Information Administration estimates approximately 2,355 Tcf of technically

recoverable resources of dry natural gas in the United States

• At the 2015 resource estimate levels and the 2016 US consumption level of approximately 27.5 Tcf per year, the

United States has enough currently recoverable natural gas resource to last -86 years

• Key drivers of US gas production growth are coming from the Appalachia Marcellus/Utica, West Texas Permian and

Oklahoma SCOOP/STACK plays

• Large natural gas reserves and low breakeven costs in many shale plays ensure that the US will keep its new

position as a low-cost natural gas producer for many decades

• US gas production will continue to outpace domestic consumption, and elevated storage levels leads to lower prices



Industry Supply OverviewSupply Will Outpace US Demand Storage Above/Below 5-Year Average vs Gas Price (1)

+ When storage levels have been significantly above5-year average, gas prices sharply declined

•:• Underground storage has been near maximum 5-year levels for the past two years

+ EIA predicts US total gas supply will growapproximately 5.8 Bcfpd by December 2018

Natural Gas In Underground Storage (Bcf)5,000

4,000

3,000

2,000

1,000

0Nov-15 May-16 Nov-16 May-17 Nov-17

5-year Max and Min Range (2012-2016) - 5-year Average Working Gas in Storage

70%

g" 50%

.;;;,, 30%

1, 10%

> -10%

-30%

F-50%45-70%

Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17sum U.S. Storage Month Avg % Above or Below 5yr Avg

-Henry Hub Monthly Settle Pnce ($/mmbtu)

US Natural Gas Production and Imports (Bcfpd)

$14.0$13.0 et$12.04$11.0 x$10.0$9.0$8.0 E.$7.0$6.0 $5.0

r$4.0 too$3.0$2.0$1.0$0.0 I

86

84

82

Non-Gulf of Mexico Production

Net Imports

Marketed Production

Marketed Production Forecast

•

..'"O

5.9

8.0

7.0

6.0

It 80 5.0 I

O 780. 3.4 4.0 -

CIE 76 3.0 it7

2 74 1.1 ...\\\\\ 2.0co

cc5 72 1.0

to 70 0.0

13 68-0.7 -0.8 -0.7

-1.0 -1-11-'

it 66 -1.5 -2.0

64 -3.0

2015 2016 2017 2018

Source. EIA STEO as of November 2017, HA Weekly Underground Storage Report as of November 22, 2017.

(1) Henry Hub historical prices per Bloomberg as of November 24, 2017, storage data is monthly average of EIA weekly storage reports.


12


Natural Gas Proved Reserves

• As technology improves, the ability to detect andextract natural gas will also improve

• If prices rise, proved reserves will increase becausemore hydrocarbons become economically viable

• In 2015, average price of natural gas fell to $2.62MMBtu, declining over 40% compared to 2014

Proved Reserves In Shale Plays (Tcf)80

73

60

40

2020 19 17

13 127

0Marcellus Eagle Ford Woodford Barnett Haynesville Utica Fayetteville

Source: EIA US Natural Gas Proved Reserves Year-end 2015.

Natural Gas Total Proved Reserves (December 31, 2015)

U. 5. Total: 324.3 trillion cubic feet

billion cubic feet (statertiree count)

15,001 to 55,315

5,001 to 15,000

11111 1 . oo 1 to ssrao

11111 l to l. coo

0 (17)


13


Prolific Resource BaseMajor Basins and Shale Plays Producing Significant Amounts of Natural Gas

US TechnicallyRecoverable ShaleResources (1):

Unproved Resources 74 4 TcfRegional Production 9 0 Bcfpd

Unproved ResourcesRegional Production

Unproved Resources 23 0 Tcf/IFRegional Production 6 1 Bcfpd!

" Ir"..1t4. rtlb. -,,,,,i


Unproved Resources 52 2 TcfdRegional Production 6 2 Bcfpd

Unproved Resources 211 3 TcfRegional Productlon 19 6 Bcfpd

.1111'.4112.Utica


(1) Resource estimates as of January 1, 2015 per the EIA's Annual Energy Outlook 2017, US Geologic Survey in Haynesville Formation 2016. Proved reserves based on economic cutoff at current prices.(2) EIA Drilling Productivity Report as of July and November 2017.


1 4


Historical Production by Shale Play

Dry Gas Production by Shale Play (2009-2017 YTD)

50

40

et-

op- 30

c

-02

• 20

10

0Oct-09

• Marcellus• Utica• HaynesvilleMI PermianIII Eagle FordNil WoodfordIII Bakken

Other

Source: DrillingInfo and EIA Data as of October 1, 2017.

clpPetriePartners

Oct-11 Oct-13

STRICTLY CONFIDENTIAL

Oct-15

18.2

4.8

4.5

5.3

4.0

2.4

Oct-17


Rig Counts Through Downturn

Monthly Average of Horizontal Rigs

1,400

1,120

840

560

280

0Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17

m Permian• Marcellusm Utica• Haynesville• Eagle Fordm Woodford• Willistonm DJ-Niobrara

Other

45%

57,45%8%-0%

Source: Baker Hughes as of November 22, 2017.

clIPPetriePartners STRICTLY CONFIDENTIAL

16


Breakeven Prices For Natural Gas Plays

Wellhead Price Required For 10% IRR

$4.00

$3.00

22414 $2.00

$1.00

$0.00

2.112.20 2.20 2.21

2.40

2.702.80 2.80

2.90

3.29 3.30

3.70

Terryville Marcellus Marcellus Marcellus Utica Utica Haynesville Utica Utica Piceance Fayetteville Bamett Gas

- UpperRed - SW Wet PA - Super Rich - Dry PA - Dry OH - Wet OH Shale - Dry PA - Rich Gas Highlands

Source Evercore ISI research published on November 13, 2017, analysis assumes VVTI price of $5043bl.


1 7


Permian - Growing Gas SupplySupply Projections

❖ By the end of 2020, Permian gas production isexpected to increase by 5.5 Bcfpd from year-end2016 levels (1)

• By comparison, the Marcellus gas play isprojected to grow production by 6.1 Bcfpdduring the same period

• Most oil wells produce natural gas as abyproduct, and that gas output risescommensurate as oil drilling accelerates

Historical Permian Gas Production (2)

Production (Bcfpd)

6

5

4

3

2

0

1.9

1.4

1.3 1.3 1.3

1.51 I

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

5.6

I

3

1

4.3

.4

5.0

(1) Tudor Pickering Holt & Co. estimates from May 30, 2017 WSJ article.(2) Drillinglnfo gross gas production as of August 2017.

"Natural gas is gushing out of West Texas. abyproduct of frenzied drilling for oll...So far,Permian drillers have been unresponsive to falling localgas prices, focusing instead on U.S. crude priceswhich are trading around a two-year high at about $57a barrel... Bernstein analvsts estimate that theroughly 6 billion cubic feet of aas that needs to bemoved out of West Texas each dav will rise to 8.5billion cubic feet by late 2019, assuming oil pricesremain high enough to encourage drilling."

November 20, 2017 yIIIE WALL STREETJOERNAC,

"The oll-rich Permian Basin is emerging as a majorsource of new natural gas, a developrnent that coulddeepen an existing glut and pressure gas prices foryears...The new oil wells also produce natural gas,making it a nearly free byproduct...The region ispoised to rival new gas output from theAppalachian Marcellus Shale, the U.S.'s biggest gas-producing region._ Oil wells nationwide areexpected to generate another 9 billion cubic feet a dav of natural gas over the next several years."

May 30, 2017

THE WALL STRIEJOURNAL



Marcellus and Utica — Operator Perspective

Aarlintero

#secli sepRESOURCES

ECIT

tiRANGE RESOURCES

clpPetriePartners

"We continue to see outstanding results from our advanced completions in the Marcellus that -we began implementing in early 2016. In recognition of these productivity gains, our reserveengineers have now upgraded nearly 600 proved and probable drilling locations in the Marcellusfrom our previous 1.7 Bcf/1,000' type curve to an approximate 2.0 Scf/1.000' type curve. Theenhanced productivity...resulted in a further reduction in per unit development costs."

Paul Rady, Chairman and CEOAugust 2, 2017

'We have demonstrated that we lead the play and arguably lead all plays in terms of lateral length and -have been consistently the lowest-cost producer in the core of the Utica in terms of D&C cost per foot oflateral We remain excited about the progress we are continuing to make with our leading-edgesuper-lateral program and will maintain the concentration of our capital expenditures and focus oni longer lateral development:

Benjamin Hulbutt, President and CEONovember 9, 2017

" Acaulsition of Rice Energy Inc. (NYSE: Rice) represents a pivotal strategic opportunity for EQTto have an unmatched asset position — and.world-class inventory — in one of the most prolificnatural gas basins in the United States... EQT has been operating in the Appalachian Basin fornearly 130 years, has drilled more than 2,500 horizontal wells, and has drilled the longest lateral in theMarcelius (to-date) at 17,400 feet."

Press ReleaseOctober 10, 2017

"This is an exciting time for Range as we are nearing an inflection point in our Marcellus development...the last of our natural gas transPortation Prolects are coming on line over the next few monthswhich will allow us to develop our Marcellus Position overthe lona-term while having access tobetter priced markets...we believe Range's combination of high-quality assets and infrastructureprovide a solid foundation to deliver strong retums for many years."

STRICTLY CONFIDENTIAL

Jeff Ventura, CEOOctober 24, 2017

19


SCOOP and STACK - Operator Perspective

CIMAREA

Continental

devon

NEWFIELD

WWI

"Total company production for the quarter came in slightly above the high end of our forecast, averaging t1,143 million cubic feet equivalent (MMcfe) per day... Natural gas production exceeded previousestimates due to timing of completions in our Woodford downspacing pilot...Of note, Cimarex is announcinu drillina results from several Woodford shale wells in its Lone Rock area. Thesewells...show some of the best retums the companv has seen to date in the Woodford shale."

3017 Press ReleaseNovember 7, 2017

"10 [STACK] wells delivered a combined maximum rate of 16,400 barrels of oil per day and 33.7mmcubic feet of gas per day, or over 22,000 Boe per day...we also have record production report fromour fifth dual-zone Woodford densitv test...once again highlights the tremendous resource potential that exists in both SCOOP and STACK...the operating efficiencies and technologies wevedeveloped over the last couple of years are unleashing the true potential of our superior geologicassets." Jack Stark, President

November 8, 2017

"A key driver of our operational momentum is the advancement of multi-zone development activityacross our world-class STACK and Delaware Basin opportunities... The strongest asset-level performance in the guarter was from the company's STACK assets. where production advanced 26 percent compared to 2016 exit rates...14 new Meramec wells brought online in the STACK playthat achieved average 30-day rates of greater than 2,300 Boe per day (55 percent oil)."

3Q17 Press ReleaseOctober 31, 2017

"Our primary focus remains SCOOP and STACK in the Anadarko Basin. world-class resource,too-tier economics. Weve got very strong recent STACK HBP results kind of across the acreageposition...the Woodford and Meramec intervals are both source rock generating and really — reallywe've had strong performance north to south across the SCOOP and STACK acreage block.... So,good progress here, glad that were getting the data we need to plan for future development. And staytuned, big, big upside potential." Lee Boothby, Chairman and CEO

November 17, 2017


2()

Natural Gas Suppiy Overview

Operational Improvements Driving Superior Economics

Improvements Boost EURs

Meramec Production Gains

Leon Gundy Pilot ResultsCumulatwe ProductionMMcfe

2 000

,500

SOO

..-ii—Average Steidle Meiamec well

—Average lower MeramecweA

— — Avparle Patent Well

90 180

Days

270

Source: Company investor presentations.

'1)Operational Efficiencies eclipse Longer Laterals in Marcellus EOTImproving Economics • liorcellusSW PA tetersis extend from 8 000 to 12 000 - dramaeceey eveasmg Wyss

iA

44111

*ITN

ereCle

1StMt

nt............. *..........

1.44144 IOW Psi IOW hi IMO NI 01110100 Mt*. lllrlAWN Kt LAW

Outperforming SCOOP Wellscpncinfnrai STACK Productivity Gains gel

SCOOP Density Toots:

• ado. •

•

• 4. r••

• •

f.a.,••••••10 C.•••••••• OM,

•••••••••/••••••••••••

• •

re• •

•

•

w e

10=Sympeon Dolly Production

.3,1•01(1•1 adz Mit2.30:1606•MX•C•fin•

40Dere en Pmawiters

SO

140104 home, p4e1 r•••,/•••,•••••.•••.••••• a•••••••f,o 1/4 6.•1•1,•••••

• %Mk Odata •‘511..o.. ThI

• AVV,A,•••g• WI, 1 In 1.0e InP,•••

freeman & Stark MA11Ndb vs. 1,100 MOE TC

TAW Freeman WAN

Stark hallle

1.10a MOE TC

2


21


SCOOP/STACK Leading OperatorsHorizontal Wells Since 2014

Horizontal Rig Count (#)

1 513

1 212

8

6

• CLR• DVN• MRO• NFX• XEC• Othermow STACKSCOOP

Current Production (MMcfepd)

750

600

450

300

150

666629

557513

348

devonNEWFIELD

• C9PriPfncal =ATI /WKI4MY

marathonog

Net Acres (in 000s)

750

600

450

5 300

150

MarathonOil rrozpaSource: Drillinglnfo as of November 22, 2017, company investor presentations and press releases.

670

546

365 350

117

devon 4Cpprfrnental Marathon04 r‘vF•D rEgard


Illustrative Impact:Economic Modelling


Illustrative impact: Economic Modelling

NPV AnalysisSummary

+ Petrie analyzed the effect of natural gas pricesto Exhibit KDP-1, KDP-2 in Pearce's July 31,2017 testirnony, making a forecast of theproject's Adjusted Production Cost Savings

• Petrie based its assumed natural gas priceimpact to PSO's High, Base and Low pricescenarios, with a correlation to AdjustedProduction Cost Savings of approximately95%

• In the 2020 NPV table, lines 2 through 6are the sarne as the values in the Base case

+ Estimated Adjusted Production Cost Savingsunder $3.00, $4.00 and $5.00 MMBtu futureprice scenarios ranged between $582 MM to$1,202 MM vs. $1,944 MM in Pearce's Base case

2020 NPV ($MM) Prices (2021-2045)

$3.00 $4.00 $5.00

1. Adjusted Production Cost Savings $582 $892 $1,2022. Congestion and Loss Cost ($158) ($158) ($158)3. Capacity Value $74 $74 $744. Wind Facility Revenue Requirement ($1,163) ($1,163) ($1,163)5. Production Tax Credits $837 $837 $8376. Gen-Tie Line Revenue Requirement $538 $538 $538)7. Total Be nefits/(Costs) ($366) ($56) $254

Source Wind Catcher Technical Conference Presentation as of October 20, 2017.(1) Ultra Low price case uses 50% of PSO's Low price case for all years, OIEC's 515 Q. #8 Attachment 1.

Regression Analysis Chart

Adjusted Production Cost Savings (Nominal, $MM)

$300

$250

$200

$150

$100

$50

$0 $2 00

$3.00, $50.96

$4.00 $6.00 $8.00

Natural Gas Prices (VMMBtu, Nominal)

—High — Base — Low — Ultra Low l11

• High • Base • Low • Ultra Low(11

—In--Petrie .. ...Petrie

$10.00 $12.00


24

Appendix


Appendix

Thomas A. Petrie Biography

Prior to joining Petrie Partners as Chairman in 2012, Thomas A. Petrie was Vice Chairman ofBank of America Merrill Lynch. Previously, he was a co-founder of Petrie Parkman & Co., aDenver and Houston based energy investment banking firm that merged with Merrill Lynch

in December 2006. Mr. Petrie was a forrner Managing Director and Senior Oil Analyst of The

First Boston Corporation. During his career, Mr. Petrie has been an active advisor on more than

$250 billion of energy related mergers and acquisitions, including a number of the larger in theindustry. Among its other assignrnents, Petrie Parkman advised the Kingdom of Saudi Arabia

on its natural gas initiative, the State of Alaska on gas pipeline options, and the U.S. Department

of Energy on the sale of the Elk Hills oilfield.

An active member of several industry associations, Mr. Petrie is a past President and member of the Board of Directors of the

National Association of Petroleum Investment Analysts. He has served on the Securities and Exchange Commission Advisory Board

on Oil and Gas Accounting and has delivered a number of technical papers to the Society of Petroleum Engineers on the subjects of

petroleum valuation, merger and acquisition trends, and energy policy. He has been interviewed on numerous occasions by

Barron's and has also appeared on "The News Hour," CNBC, Bloomberg, Fox News, and "Consuelo Mack WealthTrack" on PBS.

He has also authored the book, FOLLOWING OIL: Four Decades of Cycle-Testing Experiences and What They Foretell about U.S. Energy

Independence.

Mr. Petrie served for six years as a Trustee of the Association of Graduates of the United States Military Academy at West Point as

well as ten years on the Board of Directors of the Gettysburg Foundation. Currently, he is a Trustee of the Denver Art Museum and

serves on the Board of Directors of the C.M. Russell Museum as well as the Colorado School of Mines Foundation Board of

Governors.

Mr. Petrie has a Bachelor of Science degree from the U.S. Military Academy at West Point and received his Masters of Science in

Business Administration from Boston University. In December 2005, Mr. Petrie received an Honorary Doctorate of Engineering

degree from the Colorado School of Mines. He is a Chartered Financial Analyst.


26

Exhibit: Plains & Eastern Clean Line and Public Service Co. of Oklahoma 345 kV System

laid Calm

Guymon

— Plains & Eastern Route - Oklahoma

• Cities

A PSO 345 kV Substations

— PSO 345 kV Transmission

AElk City

Lawton Lawton•

Oklaunion

Norman•

Ardmore

"N Tulsa North

Wekiwa

Delaware

Pittsburg

Miles

EXHIBIT "A"

Valliant

Sources: Ventyx, CLE, US Census Bureau 0 20 40 80 120 160

the project; approval for future …imaging.occeweb.com/ap/casefiles/occ30010536.pdfyearl year2 2015...

Documents