© 2000 JN-2080039-1

Natural Gas Outlook & IssuesAB 1890 Implementation Group

Annual MeetingNovember 14, 2000

®

© 2000 JN-2080039-2

U.S. Average Gas Prices by Sector1985 vs. 1999(In constant 1999$)

0

1

2

3

4

5

6

7

8

9

10

Residential Commercial Industrial Electric Generation

19851999

The average real price to all end users has fallen 42% under open access. In the prior decade,

real prices increased 71%.

-30%

-37%

-48%-48%

$/M

MB

tu

© 2000 JN-2080039-3

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U.S. Natural Gas City Gate Cost Decline(Billions 1999$)

Source: U.S. DOE Natural Gas Annual, Table 21, and Natural Gas Monthly, May 2000

$174.2Total

savingssince 1984[Price savings volume]x

© 2000 JN-2080039-4

®

2.352.54

2.632.632.74

2.232.302.272.07

1.781.781.87

4.414.324.21

4.224.24

4.254.26

4.284.37

4.66

4.945.20

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: NYMEX (9-11-00 close)

2001

2000

1999

2001

2000

1999$2.37

2.662.75

2.99

3.47

4.30 4.25

4.20 4.05

5.015.14 $5.24

projected

historical

U.S. Natural Gas Spot Price Outlook

(in $/MMBtu Henry Hub, LA.)

© 2000 JN-2080039-5

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U.S. Residential Natural Gas Prices Since 1984

(1999$/MMBtu)

Source: U.S. DOE (EIA)

Residentials will purchase gas this winter at real prices last paid in 1986/87

2000/2001Winter Estimate

$8.70

6.62

6.977.20

6.73

6.62

7.20

7.10

6.997.12

7.397.58

7.708.12

8.869.48

$9.81

5.00

5.50

6.006.507.00

7.50

8.00

8.509.009.50

10.00

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 20001984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

© 2000 JN-2080039-6

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Backwardation Price Curve for Wellhead Gas

($/MMBtu)$5.15This

Winter

$4.25Next

Winter

$3.75Winter 02/03

Source: NYMEX (September 11, 2000)

© 2000 JN-2080039-7

®

Factors Influencing Natural Gas Prices

Strong Economy - Demand for Power Generation and Manufacturing

Declining Natural Gas Production

Warmer Than Normal Winters the Past 3 Years

U.S. Gas Storage Levels Lowest in Past 6 Years

Other Heating Fuels Showing Significantly Higher Prices & Lower Stock Levels

© 2000 JN-2080039-8

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Increased Price Volatility has Become Common in the Gas Industry

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Do

llars

pe

r M

cf

Nominal Dollars

1999 Dollars

January 1980 - January 2000

© 2000 JN-2080039-9

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Weather

Economic/business conditions

Stock levels

Pipeline capacity

Operational difficulties

Lack of timely,reliable information

Affects Supply Affects DemandAffects Supply Affects Demand

What Are The Main Drivers Of Short-term

Price Volatility?

© 2000 JN-2080039-10

Commodity / Risk Management

© 2000 JN-2080039-11

®

Why Hedge?

Eliminate uncertainty

Not hedging, i.e. buying on spot, is the same as speculating

Buying index still leaves you at the mercy of market conditions

Smooth production costs - be able to budget effectively - costs are known up front

Minimizes exposure to cyclical cash flows

© 2000 JN-2080039-12

®

2000/01 Winter Price Hedging($/MMBtu)

2.50

3.00

3.50

4.00

4.50

5.008/31/00 Lock-in Price for Dec. ‘00/Jan ‘01 - $4.80/MMBtu

Historic 2000 prices through August

Jan/Feb 2000 Hedge for Dec. ‘00/Jan ‘01 - $2.79/MMBtu

Jan Feb Mar Apr May Jun Jul Aug

2000

© 2000 JN-2080039-13

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Fixed Price

Index PriceVolatilityLessLess MoreMore

Price Risk Continuum

Many pricing options exist between fixed and index

© 2000 JN-2080039-14

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Commodity Products

Values and Limitations

Product Value Limitations

Fixed Certainty in budgeting Protection from retail price volatility Potential for savings off baseline

Possibility of being “out of the money”

Index Parity with market commodity price Ability to gain deregulation benefits

from broad region (not just from the present utility)

Exposure to market volatility, uncertainty of planning

Index with Options

Caps provide protection against upward price movement

Guaranteed savings off market price (we always do better than the index by x%)

Cap options can be more expensive than fixed price alternatives

© 2000 JN-2080039-15

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Basic Tools: Financial Instruments

Risk Management products are all based on the following basic financial instruments

- Forwards/Futures

- Options: Calls and (caps) and puts (floors)

- Swaps

These instruments can be customized to address the specific needs and sensitivities of the hedging firm.

© 2000 JN-2080039-16

®

Keys to a Successful Risk

Management Program

Risk management is used to decrease uncertainty - not to beat the market

Belief that future outcomes can be changed

Doing nothing is the same as speculating

Risk management is a dynamic, iterative process

Have a view on the market and be prepared to change course

© 2000 JN-2080039-17

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The Future: Electronic Commerce Comes of Age

Crude and Products are also available

© 2000 SW-2060214-18

© 2000 JN-2080039-19

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Regulatory Death Spiral

Tight Supply

Price Caps

Price S

urg

eL

ess

Su

pp

lyM

ore

Dem

and Regulated

Shortages

BrownoutsBlackoutsBlackouts