Natural Gas Outlook

1. Natural Gas Outlook The Tennessee Regulatory Authority Natural Gas Symposium August 19, 2003 Roy Kass Energy Information Administration (EIA) Roy.Kass@eia.doe.gov www.eia.doe.gov

2. Outline • Natural Gas Market Overview • Short-term Outlook - Supply - Consumption - Prices

3. Natural Gas Spot Prices Are Volatile Henry Hub Daily $18.85 on 2/25/03 10.50 Midpoint Price 8.50 6.50 Dollars per MMBtu 4.50 2.50 0.50 Apr-03 Apr-00 Apr-01 Apr-98 Apr-99 Apr-02 Dec-02 Aug-99 Dec-99 Aug-00 Dec-00 Aug-01 Dec-01 Dec-97 Aug-98 Dec-98 Aug-02 Source: Natural Gas Intelligence, Natural Gas Index

4. Average Annual Wellhead Prices Have Been Close To The Record High Price Set In 1983 $5 Constant 2003 Dollars $4 $3 Dollars per Thousand Cubic Feet $2 Projection Nominal Dollars $1 $0 1999 2001 2003 1983 1985 1987 1989 1991 1993 1995 1975 1977 1979 1981 1997 Sources: History: EIA; Projections: Short-Term Energy Outlook, August 2003

5. This Winter Was Colder Than Last WinterAnd Colder than Normal in Some Regions(Cumulative Heating Degree Days, Heating Season 2002-2003) 4,000 United States United States Normal 3,500 United States Last Year 3,000 2,500 2,000 Heating Degree Days 1,500 1,000 500 0 04-Jan-03 11-Jan-03 18-Jan-03 25-Jan-03 15-Mar-03 22-Mar-03 29-Mar-03 08-Mar-03 01-Mar-03 02-Nov-02 09-Nov-02 16-Nov-02 23-Nov-02 30-Nov-02 01-Feb-03 08-Feb-03 14-Dec-02 21-Dec-02 28-Dec-02 15-Feb-03 22-Feb-03 07-Dec-02 Source: Derived from Heating Degree Day Monitoring, National Climatic Center.

6. Winter 2002/2003 High crude prices Cold weather in major gas markets Weak production Decrease in net imports in 2002 Relatively heavy stock drawdown Summer 2003 Storage inventory less than historical level Concern about supply adequacy next winter Lags in bringing new production to market Limited demand response to date Factors Contributing to High Gas Prices

7. Working Gas in Underground Storage Compared with 5-Year Range Source: EIA, Weekly Natural Gas Storage Report, August 14, 2003

8. EIA Has Changed Definitionof Consuming Sectors

9. Impact of New Definitions:Total United States, 2001 • Industrial Deliveries reduced by 1.3 Tcf • Electric Consumption increased by 2.6 Tcf • Net increase of 1.3 Tcf for the year

10. Short-Term Outlook for Natural Gas • Demand is expected to be essentially flat in 2003 and 2004 (under assumptions of normal weather) • Supply picture is mixed • Increasing completion rates are necessary to offset decline from producing wells • Year-over-year production is expected to increase in ’03 with rising numbers of gas rigs drilling • Net imports are expected to increase in 2003 and 2004 with notable increases in LNG imports • Storage refill is questionable (but recent signs are positive) • Extremes in market or weather conditions would change this outlook.

11. U.S. Natural Gas Production Growth is Modest in 2003 and 2004 Sources: EIA, Short-Term Energy Outlook, August 2003

12. Imports and Exports Increase in ’03 and ’04, Net Imports will Increase Slightly Projections 5,000 LNG LNG LNG 590 4,500 490 230 4,000 3,500 3,000 BCF 2,500 2,000 1,500 1,000 500 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Imports Exports Notes: Includes LNG. Net Imports equal imports minus exports. Sources: EIA, Short-Term Energy Outlook, August 2003

13. Gas Storage Projections For 2003, Compared to Historical Levels ~ 3,053 Bcf assuming 5-Yr Maximum Refill Rate Band is Maximum and Minimum Values 1998-2002 Projections ~ 2,853 Bcf assuming 5-Yr. Avg. Refill Rate 2,188 Bcf in Underground Storage as of August 8, 2003 Note: The gray shaded area represents the range of working gas in storage levels during the years 1998 to 2002. Source: EIA Weekly Natural Gas Storage Survey and EIA estimates. Max refill rate is the max monthly rate observed between 1998 and 2002. EIA estimate is based on EIA’s STEO forecast August, 2003.

14. Total Natural Gas Demand Is Expected to Remain Flat For the Next Two Years 12% 90 10% 80 History Projection 8% 70 6% 60 4% 50 Billion Cubic Feet per Day Percent Change 2% 40 0% 30 -2% 20 -4% 10 -6% 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Percent Change (Left Axis) Total (Right Axis) Sources: History: EIA; Projections: Short-Term Energy Outlook, August 2003.

15. Natural Gas in Storage on Nov. 1 Will Be Within the Range of the Past Five Years Estimate: 2,853 Bcf End Fill Season Average Refill Rate 1998-2002 Working Gas in Storage (billion cubic feet) Level as of August 8, 2003 2,188 Bcf Storage Stocks as of October 31 Beginning Fill Season Source: EIA data and estimate assuming average refill rate for August 9 – Oct. 31.

16. Natural Gas Spot Prices Are Expected to Average about $5 for remainder of 2003(Base Case and 95% Confidence Interval*) 10.0 9.0 Projections 8.0 7.0 6.0 5.0 Dollars per Thousand Cubic Feet 4.0 3.0 2.0 1.0 0.0 Jul-02 Jul-03 Jul-04 Jul-01 Nov-02 Jan-03 Nov-03 Nov-04 Jan-01 Nov-01 Jan-02 Sep-02 Sep-03 Jan-04 Sep-04 Sep-01 Mar-03 Mar-02 Mar-01 Mar-04 May-02 May-03 May-01 May-04 Monthly Average Spot Price: about $5.40 /Mcf in 2003 about $4.46 /Mcf in 2004 *The confidence intervals show +/- 2 standard errors based on the properties of the model. The ranges do not include the effects of major supply disruptions. Sources: History: Natural Gas Week; Projections: EIA’s Short-Term Energy Outlook, August 2003.

17. Mechanisms to Manage Price Risk • Trading in Futures Contracts • Longer-Term Contracts • Fixed-Price Contracts • Storage for Physicals Hedging • Ability to Use an Alternate Fuel • Residential Customers Can Choose Budget Payment Plans

18. Summary • The natural gas market will remain relatively tight over the near term. However, prices this winter will be slightly lower than last winter’s prices. • The gas market is vulnerable to upward price pressures from developments like severe weather or disruptions in supplies.