PRIVILEGED & CONFIDENTIAL — FOR INTERNAL USE ONLY Shale Gas One Power Industry Perspective Lauren Quam Manager, Market Analytics FirstEnergy Solutions

2 Who is FirstEnergy Solutions n Competitive subsidiary of FirstEnergy Corp. –Nation’s largest investor-owned electric utility based on serving six million customers –Ten utilities throughout OH, PA, NJ, MD, VA and WVA n Fourth largest retail supplier of electricity in US to C&I accounts –Fifth largest retail supplier to residential electric accounts n FES’ family of companies owns approximately 21,000 MW of unregulated generating capacity –Non-emitting nuclear, scrubbed baseload coal, natural gas, pumped-storage hydro and other renewables

3 FirstEnergy’s Unregulated Generating Sources Coal Gas/Oil Hydro Wind Nuclear Coal Gas/Oil Hydro Wind Nuclear Ohio Ohio Edison The Illuminating Company Toledo Edison Pennsylvania Met-Ed Penelec Penn Power West Penn Power West Virginia/Maryland/Virginia Mon Power Potomac Edison New Jersey Jersey Central Power & Light

4 States We Serve Michigan Actively serving and selling

5 Natural Gas Industry Background n Previously –North America would be increasingly reliant on Liquefied Natural Gas (LNG) imports to: –Meet a growing natural gas demand –Replace declining domestic production –Future natural gas prices would be strongly influenced by global gas/oil prices –Natural gas as a fuel for power generation was limited to a peaking role n Today –Domestic gas reserves measured in decades and centuries –Massive volumes for small increments in drilling expense –Relatively low long-term gas prices –North American natural gas prices are effectively de-coupled from global gas prices –Poised to become a “more baseload fuel” due to low emissions and cost

6 Outline n Power market mechanics n Historic gas and power prices n Key issues for the power industry n Role of natural gas in power sector n Impact of unconventional plays like Marcellus/Utica

7 Electricity Market Fundamentals Demand Curve (Load) n Load Shape n Load Growth Supply Curve (Generation): n Generation Stack Makeup n Generation Stack Costs Baseload Intermediate / Load Following Peaking Increasing Variable (Dispatch) Cost - $/MWh Time – Hours (Months, Years)

8 Natural Gas “Spot” Price Kingsgate PG&E Citygate Ventura Panhandle Tetco M2 Transco Z5 Henry Hub Dominion North Point Source: Intercontinental Exchange 10x Day Ahead Natural Gas Pricing Report (Weighted Average Index $ per mmBtu.)

9 Electricity “Spot” Price (On-Peak) Source: ISO Day-Ahead prices from PJM, ISO New England, CAISO, ERCOT, MISO and SPP where available. Otherwise daily physical power prices from Enerfax

10 Ozone (O 3 ) PM/PM 2.5 '08'09'10 '11'12'13 '14 '15 '16 '17 Begin CAIR Phase I Seasonal NOx Cap HAPs MACT proposed rule Revised Ozone NAAQS Begin CAIR Phase I Annual SO 2 Cap -- Adapted from Wegman (EPA 2003) Updated Next PM- 2.5 NAAQS Revision PM Transport Rule SO 2 Primary NAAQS SO X /NOx Secondary NAAQS NO 2 Primary NAAQS SO x /NO x CAMR & Delisting Rule vacated Hg/HAPS Transport Rule proposal issued (CAIR Replacement) HAPs MACT final rule expected CAIR Vacated HAPS MACT Compliance 3 yrs after final rule CAIR Remanded CAIR/Transport Begin CAIR Phase I Annual NOx Cap 316(b) proposed rule expected 316(b) final rule expected 316(b) Compliance 3-4 yrs after final rule Effluent Guidelines proposed rule expected Water Effluent Guidelines Final rule expected Effluent Guidelines Compliance 3-5 yrs after final rule Begin Compliance Requirements under Final CCB Rule (ground water monitoring, double liners, closure, dry ash conversion) Ash Proposed Rule for CCBs Management Final Rule for CCBs Mgmt Final Transport Rule Expected (CAIR Replacement) CO 2 CO 2 Regulation (PSD/BACT) Ozone NAAQS Revision Transport Rule Phase I Reductions Transport Rule Phase II Reductions Ozone Transport Rule GHG NSPS Proposal GHG NSPS Final Environmental Regulatory Timeline

11 Expected Results of Environmental Regulation n Effect on coal plants: –Estimated 9 GW to 90 GW coal plants will be retired –Remaining plants retrofitted with environmental controls n Natural gas fired power plants: –Existing plants will be required to generate more –New natural gas fired power plants will be constructed, further adding to power sector gas demand

12 Wide Range of Retirement Expectations

PJM Supply Curve

PJM Supply Curve Based on $9 Gas

15 End result…Opportunities n Natural gas plants will play increasingly important role in setting the hourly price of electricity and in energy production in general n Power sector gas demand could increase by 8-9TCF/year (~25%) by 2020 –This represents about 1/3 of the total power sector electricity production and about 1/3 of the total US natural gas demand

16 Final Points n Marcellus/Utica shale production contributes to healthy economies and strong domestic natural gas supply –Strong economy benefits the power sector; however, lower gas prices lead to lower electricity prices n Power industry’s generation fleet is changing, with natural gas expected to become an increasingly important fuel n Local natural gas resources like Marcellus and Utica are key to future U.S. natural gas supply picture n New market dynamics set the stage to achieve “operational synergies”