Natural Gas Markets:What Next?

Ted LenartAVP Supply Ventures

Nicor Gas

Agenda

Status of Nicor Gas’ Customer Select ProgramCurrent Natural Gas Supply/Demand Forces at

WorkGas-Fired Power Generation

Customer Select

Q: What is Customer Select?

A: A Nicor Gas Program that allows eligible customers - business and residential - the opportunity to choose their natural gas provider

Why is Nicor Gas offering such a program?

Nicor Gas still transports gas / no earnings impact

Nicor Gas supports choice and deregulationCustomers should benefit from competition

(lower prices and new services)

Customer Select

Industrial32%

Residential43%

Commercial25%

2000 Deliveries = 526 Bcf

Customer Select

1984: Very large customers1986: All commercial/industrial customers

eligible1989: Comprehensive unbundling of tariffs1996: Significant tariff changes to further

enhance services1998: Customer Select pilot for

aggregation services

History of Nicor Gas Unbundling

Customer SelectSmall Commercial/Industrial

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

1998 1999 2000 2001

CustomersEligible

CustomersSigned Up

Customer SelectResidential

0

50,000

100,000

150,000

200,000

250,000

300,000

1998 1999 2000 2001

CustomersEligible

CustomersSigned Up

Eligible Residential Towns (2000)

Kane

LakeMcHenryBoo

ne

StephensonJoDaviess

CookDeKalb

Ogle

Lee

Carroll

Whiteside

Henry

Mercer

Bureau LaSalle

Kendall

Grundy

Kankakee

Iroquois

Livingston

Ford

Woodford

Tazewell

Hancock

Adams

Pike

DeWitt ChampaignVermillion

Will

McLean

DuPage

WinnebagoEligible Towns(2000)

Nicor Territory

BloomingdaleCarol StreamGlendale Hts.AddisonWheaton

NormalBloomington

Glen EllynDowners GroveBolingbrookLockportJoliet

RoscoeMachesney ParkLoves ParkRockford

Customer Select:Proposal for Expansion

August 2000 – Nicor Gas filed expansion program with the Illinois Commerce Commission (ICC) All 2 million customers eligible Signup to begin March 2001

September 2000 – ICC suspended proposal/opened investigation

July 2001 – ICC decision expected March 2002 – Enrollment would begin (if program

approved)

Observations

Number of retail marketers has remained relatively stable

No fixed price offerings in 2001Nicor Gas is a leader in retail unbundlingNicor Gas will continue to offer a sales serviceCustomers benefit from choice

Gas Supply/Demand and Midwest Power Generation

Supply/Demand Forces

SupplyNatural Gas rig count @ 994 vs. 634 this week last

year2001 Production expected to average 600 MMcf/d

more than last year

Supply/Demand Forces

DemandSummer Storage Fill Requirements

Need to exceed last year’s summer (May-Oct) injections by 1.1 Bcf/d to meet October 30, 2000 levels

Reduced Industrial Demand2.8 Bcf/d lower than last year

Fuel Switching (#6 @ $3.65-$3.75)Economic slowdown

Reduce residential demand5 to 15% reduction due to conservation

Supply/Demand ForcesObservations

April 2001 storage injections exceeded April 2000 injections by 7 Bcf/d

Prices have moderated with improving level of storage inventory

North American GenerationProject Status

Source: Cambridge Energy Research Associates.

Complete

Under Construction

Proposed100

80

2005

70

60

50

40

30

20

10

0200420032002200120001999

Gigawatts

90

1999

Source: Cambridge Energy Research Associates.

25

Bcfper

Day

DecOctSepAugJulJunMayAprMarFebJan Nov

20

15

10

5

0

Average1990–1992

2000

1998

1996

1999

2001

The US Summer Power Peak:Gas Demand for Power Generation

MWs

Peakers 14,560

CombinedCycle 20,685

Total 35,245

WISCONSIN

MICHIGAN

ILLINOIS

INDIANA

MISSOURI

Peakers6,860 MW

CombinedCycle5,230 MW

Peakers940 MW

CombinedCycle2,650 MW

Peakers3,000 MW

CombinedCycle2,190 MW

Peakers2,220 MW

CombinedCycle5,180 MW

Peakers1,540 MW

CombinedCycle5,435 MW

Gas-Fired PowerGeneration

Midwest Power Plants(Proposed or Under Construction)

3,500

3,000

Nov

MillionCubic

Feetper

Day

Dec

20012000

1999

1998

1995

1990-1992Avg

2,500

2,000

1,500

1,000

500

0OctSepAugJulJunMayAprMarFebJan

Source: Cambridge Energy Research Associates.10310-4

The Growing Surge in Midwestern Summer Power Demand for Gas

Gas-Fired Power Generation

Incremental Demand (Midwest)Summer 2001

Peaking - 10 Bcf (Assumes avg. plant burns 680 hrs)Combined Cycle - 30 Bcf (Assumes avg. plant burns

(1,875 hrs)

Summer 2002Peaking - 15 Bcf (Assumes avg. plant burns 680 hrs)Combined Cycle - 40 Bcf (Assumes avg. plant burns

1,875 hrs)

Conclusion

Strong early storage refill has improved short-term outlook

Summer power generation demand will slow storage refill rate

Growing natural gas supply is needed to satisfy new power generation demand and to moderate prices in the future