CANADIAN WINTER 2023 MARKET UPDATE WEBINAR

After the call summary

Compiled: Oct. 9, 2023

Important highlights at a glance

The following is a quick overview of the most important elements of the Canadian Winter 2023 Market Update presentation.

Weather outlook

The El Niño Southern Oscillation

(ENSO) region has continued to

experience strong warming trends

(both sea surface/subsurface

temps) since spring and is now in a

moderate El Niño phase, which is

expected to strengthen through

the early winter months before

trailing off in late winter (which is typical of ENSO to peak

mid-winter). When you add other factors to the ENSO

measure, including GLAAM, which is a measure of the

intensity of the zonal circulation around the equator, the

data points to warmer overall risks.

According to Agriculture and Agri-Food Canada’s National

Agroclimate Information Service, drought conditions have

increased across Canada since August 2022. This would

be expected to continue if we remain in an El Niño phase.

Over the last 20 years, climate trends in the major

Canadian cities include yearly increases in heating degree

days (HDDs) for Calgary (3.8/yr) and Edmonton (4.6/yr),

and yearly decreases in HDDs for Toronto (-7.9/yr) and

Ottawa (-6.2/yr). This is more inconsistent than what we

see across the U.S. and may be attributed to lower

latitudes seeing faster changes in climate and/or Canadian

cities not growing at the same rate as U.S. cities.

Environment Canada winter forecasts

Environment Canada’s forecast

probability for Dec. 2023-February

2024, which shows the percent

chance of a particular region to be

normal, leaning warm, or leaning

cooler during the winter months, is

showing warm leans in higher

percentages across most of Canada.

Regulatory

Ontario

“Powering Ontario’s Growth” plan, released by the Ontario

government, outlines the actions the province is taking to

meet electricity demand over the long term, including:

 Expanding nuclear

 Building its renewable portfolio

 Prioritizing transmission infrastructure

 Addressing transmission bottlenecks

Federal

CER: On Aug. 10, the federal government released draft

Clean Electricity Regulation (CER), targeting a net-zero

carbon emissions electricity grid by 2035. The final version

is expected in 2024 and, if implemented, would take effect

on Jan. 1, 2025.

 Applies to grid-connected fossil fuel generation units

of 25 MW or greater

 Applies a carbon intensity cap (prohibition) of 30

tonnes CO

/GWh if there is any net electricity delivery

to the grid storage, end-of-season forecasts are

calling for 3,700-3,900 Bcf by mid-November.

Carbon Tax: continues to increase annually, with the next

rate update/increase occurring on April 1, 2024.

Alberta

Renewable moratorium: The government announced a

pause on approving any new renewable projects until Feb

2024. The Alberta Utilities Commission, which is

conducting an inquiry for renewable development, will

continue processing applications during the moratorium,

but no approvals will be issued. The AUC also announced

new requirements for new app files on/after Aug. 3.

Regulated Rate Option (RRO) deferral: Consumers on the

RRO saw a rate ceiling of 13.5 cents to alleviate costs

during the cold winter period. The difference between the

approved regulated rates and the price ceiling will be

collected until December 2024 by adding 2-4 cents to the

monthly regulated rate. The government is expected to

announce changes to the current structure.

Market Fundamentals

Natural gas

The story in the U.S.: the lack of winter caused a storage

surplus of 285 Bcf above 5-year average levels (1.83 Tcf

winter exit). Henry Hub gas prices dipped to lows of

$2.32/MMBtu on average so far this summer. Production

remains steady, despite low prices, and was up 4.6 Bcf/day

YTD average vs. last year but growth has stalled. This year

we have set record highs for power burns and LNG

feedgas demand, which are helping to rebalance the

surplus overhang left from last winter.

A big pullback in producer infrastructure observed in this

year’s low-price environment could spell trouble for supply

to keep up with natural declines let alone the second wave

of LNG demand incoming.

What does a winter

El Niño mean?

El Niño conditions

typically indicate

dryer/warmer

weather for Canada.

CANADIAN WINTER 2023 MARKET UPDATE WEBINAR

After the call summary

Compiled: Oct. 9, 2023

Natural gas

(con’t): t

Although near-term fundamentals are bearish, long-term

fundamentals are more bullish as a result of growing

demand for power burn and LNG feedgas.

 LNG capacity currently sits at 14.5 Bcf/d.

 LNG feedgas has grown +1.1 Bcf/d summer to date

 Next LNG wave expected in second half of 2024

 Between the U.S. and Mexico, at least 9.4 Bcf

incremental LNG feedgas demand growing to 23.9

Bcf/d by 2028

 Canadian LNG demand could grow to 4.4 Bcf/day

Eastern/Western Canadian storage levels: are expected to

exit winter at 50% full for Alberta and 30% full for Dawn.

Demand—Eastern Canada: demand relatively flat

summer-over-summer at 1.5 Bcf/day, despite moderate

weather. Expecting flat Y-o-Y demand per degree to

continue into winter season.

Supply—Western Canada: upon completion of expansions

on Nova system, there was record-setting production this

year up to 14.2 Bcf. Fires and maintenance did impact

production, but supply remains strong when the system is

unconstrained. Looking for supply to grow +0.2 Bcf/day

winter-over-winter with risk to the upside.

Demand—Western Canada: demand was 240 Mmcf

higher (up 4.5%) summer-over-summer, mostly

attributable to oil sand growth and strong ResComm

demand. Power burn demand fell 2.3%, in part as a result

of renewable penetration. Largest increase in demand this

winter is driven by increased contracting pulling away

supply at East Gate for exports east to the Midwest/Dawn.

This winter is expected to be slightly tighter in terms of

demand outpacing supply and increasing the need for

storage withdrawals (Y-o-Y increase of 0.3 Bcf/day).

However, we are entering this winter with significantly

more inventory and are still expected to exit winter at

record levels. Overall AECO looks to remain very well

supplied and under bearish pressure this winter and

heading into next year.

Power

Western Canada: Historically, coal generation was the

inframarginal unit setting the market price in AECO,

however the coal-to-gas (CTG) plants, which account for

2.6 GW of gen, are now the inframarginal unit, with a range

of heat rates.

Generation buildout:

4.4 GW is currently under

construction, with an additional 1.8GW with in-service

dates under review.

Economic withholding:

during tight market conditions,

generators can hold back to influence/drive up prices. This

is one of the most impactful short-term fundamentals,

which we would expect to soften going into the back half

of 2024.

AESO fundamentals:

Bullish risks Bullish risks

•

increased voluntary

carbon/carbon costs

•

increased volatility on

tielines/interjurisdictional

flows

•

construction delays for

new generation

•

coal-to-gas units retiring

early/economic outages

•

renewables causing

higher hourly volatility

•

increased renewable

growth/more $0/MWh

•

increased low heat rate

thermal generation

•

less economic

withholding

Eastern Canada: Ontario market is largely contracted with

high levels of generation buildout, leading to less price

volatility compared to Alberta. Although Ontario is a heat

rate market with power prices closely tied to gas, heat

rates are up in 2023 compared to 2022, and power prices

are down versus 2022, due to nuclear unit refurbishments.

Market renewal: Ontario is expected to implement a

market renewal concept in May 2025 (previously

scheduled to launch in November) that enhances

efficiency via a single schedule market, streamlines the

settlement process and allows for more effective price

signals for future buildout. The key changes include

moving to a nodal market (vs. pool price), using a day-

ahead market to schedule energy, adding tools for

reliability (ERUC), and making enhancements to the

capacity market.

Strategy Considerations

Buying in a contango market:

near-term prices are

showing value, especially over 2022, but the market has

moved from backwardated last year to a contango, so

there is less opportunity for reducing price over the term

by going long-term.

Even though higher than near-term, long-term prices

have fallen. And, there are bullish factors that could impact

longer-term prices in the future, making prices now for the

long-term potentially a value.