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Energy Marketing The Challenge of Creating Value Griff Jones President & CEO Twin Eagle Resource Management September 10, 2014 1 Energy Marketing: What you must get right… Must Have an Edge – hopefully more than one • Can be relationships, knowledge, product structuring, asset rights, etc. Strong, Long-term, and Diverse Customer Relationships • • • • Not enough to just focus on customer requirements Competitors may win deals but harder for them to take your relationships Employees must “buy in” and work as a team to support this goal Many customers create additional network value Solid and Agile Commercial Capabilities • • • • Must be able to provide better services that combine many strengths Do not limit capabilities to the very liquid markets and products Integration from energy producer to consumer is important Markets and customer needs change quickly – so must your game plan Integrity • Reputation matters -- Be consistently honorable, reliable, and equitable Risk Management • • Do not jeopardize business through excessive market risk, not responding to regulatory changes, lack of financial forecasting, etc. Hedge the intrinsic value, then focus on optimization and arbitrage 2 Energy Marketing: Combining Capabilities Value Chain Approach Sourcing & Supply Upstream & Downstream Access to the following: • • Supply from point of origin; wellhead and generator Supply from pools, interconnections, and ISO’s Logistics & Storage Best in class ability to provide reliable deliveries receipts and storage by the following: • • • Storage facilities Transmission Transportation Asset Management Risk Management Creative Solutions Experienced Asset Management Team. Risk Management Experts Customer Driven Solutions • • • • • • • • • • Physical & Financial Experts Dispatch & Logistic Specialist Physical & Financial Logistical Enterprise Assessment - Exposure Analysis - Risk Mitigation Creative Structures Optimal Hedging Tools Commodity Banking Custodial Services Monetization Strategies - Principal or Agent - PPA Negotiations - Capture Optionality - Financing Support Customers often require a mix of supply, asset management, logistics, and risk management expertise (e.g. full requirements gas supply, generation mgmt.) Physical logistics and asset management capabilities allow Twin Eagle to offer services that are very customized and often difficult for competitors to replicate 3 Twin Eagle Development Path Twin Eagle Today Company Formation and Franchise Development 2010 • Formation of Twin Eagle Resource Management, LLC by Chuck Watson and Griff Jones in September • $75 million Credit Facility from BNP Paribas 2011 • CHK equity investment in TERM • Credit Facility increased to $175 million • Strategic alliance to market CHK gas • LS Power equity investment in TERM • Strategic alliance formed w/LSP Energy Mgmt Agreements 2012 • Purchase of Enserco Energy, LLC (Denver) • Acquired Coal & Crude businesses • $60 million equity contribution from existing partners • Expanded Gas & Power business • Acquired Enbridge Gas Services in Appleton • Credit Facility increased to $325 million 2013 • Refocus wholesale marketing on Gas and Power activities • Focusing Midstream efforts on Rockies and Gulf Coast • Completed Wyoming rail facility for manifest service and storage tanks in Texas • Admitted Crestwood as partner in WY facility • $35 million Credit Facility for the Midstream entity 2014 • Experienced record earnings in Q1 • Completed sale of ENCOA, TERM’s retail business • Purchased majority interest (60%) in Frac Resources • Closed Equity Investment in TERM by Five Point Capital Partners and GSO Capital Partners, a subsidiary of Blackstone • Acquired Gold Spur Trucking, LLC • Acquired assets of JP Falco, LLC Accomplishments have resulted in a significant franchise 4 Twin Eagle Business Profile – diversified approach to market Two primary business segments provide broad North American energy marketing & logistics services 350 employees (255 Midstream, 95 Wholesale) with offices in Houston, Denver, Appleton (WI), Universal City (TX), and Calgary Wholesale Marketing Services Footprint & Volumes Recent Events Midstream Natural Gas Power Logistics Assets Leasehold Gathering End-user marketing Producers services Logistics services Risk management • Retailer supply • Generator hedging and services • Environmental hedges • Crude & Frac Sand Transloading and Storage • Crude Trucking • Crude & Gas Gathering • Spot and term marketing (crude, sand) • Pipeline, rail, and truck logistics 20 Bcf firm storage ~1 Bcf firm transport >2 Bcf/d physical sales >100 independent producer relationships • Solid capabilities throughout North America • Commercial services for 9,232 MW power generation • Strong presence in PJM, MISO, ERCOT, WECC, NEISO • 24hr real-time operations desk • ~30,000 bpd crude asset throughput • 15 crude terminals (WY,ND,MT) • ~130 trucks active in Bakken, Permian, Eagelford • 3 frac sand terminals • Crude storage at Pt. Arthur • Bakken and Rockies concentration, but expanding to other regions (TX shale basins) • Added staff to increase presence in Marcellus and Texas • Expanded exclusive power plant gas supply arrangements • Sold retail power book • Adding Rockies fullrequirements load • Commencing services to >2000 MW of new Texas generation • Acquired 60% of Frac Resources (Q1-14) • Acquired Gold Spur Trucking (Q2-14) • Purchased JP Falco crude trucking assets (Q2-14) • Pursuing storage and pipeline capacity rights adjacent to growing shale basins • • • • • • • • • ~20,000 bpd marketed crude 5 Twin Eagle’s Gas Contractual Assets TransGas Storage Calgary Office Empire ANR Storage Renaissance Panhandle Storage West Springfield Wallingford NGPL Storage Appleton Office MichCon Storage Dawn Storage Pittsburg Office Washington 10 OPP University Park North & South Richland Dominion Storage Stryker NICOR Storage Chicago Office Questar Clay Basin Resevoir Panhandle Storage Denver Office PG&E Gill Ranch West Deptford TGT Storage Rock Springs CG T Riverside Panhandle Storage SoCal Storage Harquahala Panhandle Storage WORSHAM Storage Enel TERM Office Locations KM Texas Fortistar Bastrop NGPL TEXOK Storage Storage: 20 Bcf Moss Bluff Storage Pine Prairie Storage Petal Storage EMA: 9,232 MW Egan Storage TECO Houston Office TERM Gas Transport Highgate TERM EMA TERM Wind EMA Transport: 1 Bcf/d Sandy Creek Temple I & II TERM Managed Gas Storage Paris Sherman Frontera Total Transport: Total Storage: Total EMA’s: 1.97 billion 19 Bcf 9,232 Mw 6 Marketing Business: Diversity Protects Value “It is the part of a wise man to keep himself today for tomorrow and not venture all his eggs in one basket” - Don Quixote A. Multi-commodity Capabilities • Allows cross-commodity opportunities -- e.g. management of power generation • Increases depth of market knowledge (fundamental linkages between markets) • Profits from crude, gas, and power marketing are not correlated; decreasing risk and helping avoid “boom-bust” financial results B. Multi-region Presence (but allocate resources based on level of opportunity in each region) • Weather can cause the “right market to be in” to be hard to forecast • Customers have needs that often cross regions • Transport crosses regions creating a need for expertise at both ends of the pipe C. Build a Team with Diverse Skillsets Across Full Value Chain • Takes strong physical operations, marketing, risk management all working together • The best opportunities may shift over time up and down the value chain 7 Daily Gas Sales Volume by Region: Aug. 2013 – Jul. 2014 Well balanced portfolio approach across all regions 8 Market Trends Create Opportunities A. Increasing Compliance Requirements & Risk (e.g. Dodd Frank) • Significant investment in IT, staff, consulting, & training • As more transactions are cleared, collateral forecasting becomes more important • Ability to take on compliance tasks from customers has added margin and loyalty B. Bank Pull-back from Energy Markets (e.g. Barclays, JP Morgan) • Liquidity for hedging has temporarily declined • Customers need capable marketers more now than five years ago C. Booming Shale Production • Some regional price spreads are much more volatile, creating asset opportunities, but also a need for careful risk management • Producers are increasingly holding transport capacity, but need help optimizing • Market is getting bigger as low prices drive increased demand (e.g. LNG, chemical production) creating incremental marketing opportunities • LNG and rising exports to Mexico create a need for marketers with the logistic resources and capabilities to manage large and varying supply requirements 9 Market Trends Can Create Opportunities D. Coal Generation Retirements • Coal steadily being replaced by gas and renewable generation • Shift creates opportunity to partner with new generators to provide gas supply and energy management services to help deliver power into market E. Midstream Asset Value • Need for new infrastructure and high multiples driving investment • Midstream asset value can be enhanced by marketing capabilities • Marketing relationships can help identify opportunities to deploy capital 10 Potential Pitfalls: Marketing is Not Easy A. Insufficient Capitalization & Collateral Capacity • Credit has a cost and is larger for those with weak balance sheets • Margin requirements can vary a lot based on market prices, contract terms, and exchange requirements – must have adequate credit facility • Many good companies have faltered due to a liquidity squeeze B. Non-Compliance • • • • Financial penalties are increasing FERC, NERC, ISOs, CFTC, and many others Customers and lenders want partners with strong compliance cultures Non-compliance distracts management from growing the business C. Reliance on Trading Profits • • • • • The best use of risk capital is to support customer transactions A focus on trading can take the marketers eye off the ball Market knowledge and risk management expertise is needed to be a strong marketer, but placing large bets on market direction is not Large trading presence can make customers concerned about a conflict of interest Trading inconsistent with building a steady-earning, origination focused business 11 Potential Pitfalls (continued) D. Trying to be Everything to Everyone • • • • Focus on regions, products, and services that are scalable Want markets that allow you to hedge Cost structure that is built for one deal is not that attractive Preference markets that provide collateral offsets E. Lack of Alignment • • Investors that are not committed to growing the company can create risk Employees and business leaders must share same view not only on financial goals but also about how to achieve them 12 Contact Us Photograph by George Courcier Alaska – Homer Twin Eagles Houston Office: Denver Office: 8847 W. Sam Houston Pkwy, N. Houston, Texas 77040 713.341.7300 – phone 713.341.7303 – fax 1900 16th Street, Suite 450 Denver, CO 80202 303.566.3403 – phone 303.568.3250 – fax Canada Office: Other: 250 – 6th Avenue SW, Suite 300 Bow Valley Square 4 Calgary, Alberta T2P 3H7 403.984.5353 – phone 403.930.5344 – fax [email protected] www.termna.com 13