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

4. $1 $2 $3 $4 $5 Constant 2003 Dollars Nominal Dollars Projection $0 1975197719791981 1983198519871989199119931995 1997 199920012003 Dollars per Thousand Cubic Feet Sources: History: EIA; Projections: Short-Term Energy Outlook, August 2003 Average Annual Wellhead Prices Have Been Close To The Record High Price Set In 1983

5. This Winter Was Colder Than Last Winter And Colder than Normal in Some Regions (Cumulative Heating Degree Days, Heating Season 2002-2003) Source: Derived from Heating Degree Day Monitoring, National Climatic Center.

6. Factors Contributing to High Gas Prices 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

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 Definition of Consuming Sectors ConceptOld ParadigmNew Paradigm IndustrialReported by gas companies as deliveries to industrial or nonutility generators Reported by gas companies as deliveries to industrial Electric Utility/ Electric Power Reported receipts by regulated utilities Reported receipts by regulated utilities and NUGS in power business

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. Notes: Includes LNG. Net Imports equal imports minus exports. Sources: EIA, Short-Term Energy Outlook, August 2003 Projections LNG 590 LNG 490 LNG 230 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 199319941995199619971998199920002001200220032004 BCF ImportsExports Imports and Exports Increase in ’03 and ’04, Net Imports will Increase Slightly

13. Gas Storage Projections For 2003, Compared to Historical Levels 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. Band is Maximum and Minimum Values 1998-2002 ~ 2,853 Bcf assuming 5-Yr. Avg. Refill Rate 2,188 Bcf in Underground Storage as of August 8, 2003 ~ 3,053 Bcf assuming 5-Yr Maximum Refill Rate Projections

14. Total Natural Gas Demand Is Expected to Remain Flat For the Next Two Years Sources: History: EIA; Projections: Short-Term Energy Outlook, August 2003. -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% 19911992199319941995199619971998199920002001200220032004 Percent Change 0 10 20 30 40 50 60 70 80 90 Billion Cubic Feet per Day – Percent Change (Left Axis)– Total (Right Axis) HistoryProjection

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

16. 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 Jan-01 Mar-01 May-01 Jul-01 Sep-01 Nov-01 Jan-02 Mar-02 May-02 Jul-02 Sep-02 Nov-02 Jan-03 Mar-03 May-03 Jul-03 Sep-03 Nov-03 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Monthly Dollars per Thousand Cubic Feet Projections Natural Gas Spot Prices Are Expected to Average about $5 for remainder of 2003 (Base Case and 95% Confidence Interval*) Sources: History: Natural Gas Week; Projections: EIA’s Short-Term Energy Outlook, August 2003. *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. Average Spot Price: about $5.40 /Mcf in 2003 about $4.46 /Mcf in 2004

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.  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. Summary