John E' Olson, CFA SVP

1
International Association For Energy Economics
Energy Markets At a Crossroads Has Deregulation
Failed?
John E. Olson, CFASVP Chief Investment
OfficerSanders Morris HarrisHouston,
TX713/220-5151
The Houston Club
December 12, 2002
2
Market Trading Profile Since 10/15/01
Market Performance Latest 10/15/01 Delta
Standard Poors' 500 892
1090 -198 -18 Standard Poors' 400
1015 1264 -249 -20 Dow Jones
Industrials 8473 9348
-874 -9 NASDAQ Composite 1367
1696 -329 -19
3
Daily Energy Trading Profile Energy Conglomerates
Energy Conglomerates Latest 10/15/01
CMS Energy 8.68 21.72
(60) Dominion Resources 50.02 59.39
(16) Duke Energy 19.25 38.32
(50) Dynegy 1.14 42.45
(97) El Paso 6.72 51.46
(87) Kinder Morgan 40.65 50.64
(20) Williams 2.23 29.15
(92) Average 18.38 41.88
(60) Enron 0.10 33.17
(100)
4
Daily Energy Trading Profile Merchant Power
Independent Power Producers Latest
10/15/01 Delta AES Corp 2.72
14.87 -12.15 -82 Calpine 3.37
26.61 -23.24 -87 Dynegy 1.14
42.45 -41.31 -97 Mirant Energy 1.85
26.98 -25.13 -93 Reliant Resources
2.37 19.10 -16.73 -88 Average
2.29 26.00 -23.71 -89
5
(No Transcript)
6
(No Transcript)
7
(No Transcript)
8
The Efficient Market Hypothesis is the Most
Remarkable Error In the History of Economic
Theory.
Lawrence SummersSecretary of TreasuryPresident,
Harvard College
9
LJM/Rhythms Transaction Structure
10
The Issues - I

• Fair Value Accounting
• Mark to Market Accounting
• Mark to Model
• Finance
• Special Purpose Vehicles/Recourse
  Issues Phantom Equity Performance Bonuses
• Structured Finance

11
The Issues - II

• Disclosures
• Gains on Asset Sales
• Off Balance Sheet Asset and Capital Structures
• Cash vs. Paper Earnings Derivative
  Positions/Recourse
• Wall Street
• Investment Banking vs. Securities
  Research Stock Options

12
The Capitalists Are So Hungry For Profits That
They Will Sell Us The Rope to Hang Them With.
V.I. Lenin (1920)
13
Your Friendly Rating Agency
They have failed miserably in their strategy
The Rope we gave them the first time doesnt
have much left to it. Many firms have actually
turned it into a noose.We are not company
advocates. We are indifferent.
Standard Poors SpokesmanThursday, August 1,
2002
14
The California Law was One of the Stupidest
Laws Ever Passed on Any Subject at Any
Time Congressman Ed Markey (Dem, Mass) Joint
Senate House Energy ConferenceThursday, July
25, 2002
15
Maoist Self Criticism?
Who Were The Idiots Who Passed (Californias)
AB 1890 to Deregulate Only Half The Ledger?
State Rep Jim CuneenDem. San JoseNovember, 2002
16
Market Trading LiquidityHenry Hub
17
The Energy Marketing Industry
Dec. Dec. 2001
2002E Sales/Trading
4,000 5,000 1,500
2,000 Accounting/Systems 6,000
7,000 2,000 3,000 Specialists (TE,
Etc.) 2,000 3,000 500
1,500 Total 12,000 15,000
4,000 6,500
Source Ben Schlesinger Associates (2001)
18
Markets Can Remain Irrational Longer Than You
Can Remain Solvent.
John Maynard Keynes
19
ONEOKMarketing EBIT1999-2002E
20
Investing CredentialsCorporate AmericaLast Ten
Years
21
Investing CredentialsCorporate America Next Five
Years
22
Pipeline ROEs()
Sources NGSA Data
23
CaliforniaRetail Energy ROEs
Sources Sempra Energy
24
Major Producer Profitability
Sources First Call, Zacks, Sanders Morris
25
El Paso Energy Imputed Profitability
Profile(December, 2001)
26
El Paso Energy Imputed Profitability
Profile(November, 2002)
27
Duke EnergyImputed Profitability Profile
()(December, 2001)
28
Duke EnergyImputed Profitability Profile
()(September, 2002)
29
The Williams CompaniesImputed ROEs ()
(December, 2001)
30
The Williams CompaniesImputed ROEs ()
(September, 2002)
31
30 TCFGas Marketin 2012?

• Gas Wells 10,000/year to 20-25,000/year
• 10 Year Spending Needs
• B
• Gas Gathering 10
• Pipelines 45-50
• Domestic EP 645

Source National Petroleum Council
32
EIA 2003 ForecastsGas Supply (TCF)
33
EIA 2003 ForecastsDomestic Production
34
Drilling ScenariosGas Well Drilling Reserve
Replacement Trends 2002-2011E
35
Natural Gas ProductionAverage Annual Growth
Rates 1970 - 2000
36
U.S. Natural Gas Production Steep Declines in
2002, Even with More Spending, Might not See
Growth in 2003
2Q03E
3Q03E
4Q03E
InteEP (mmcf/d)
18932
18854
18827
19024
18924
18884
18809
19094
Seq. Change
-4.5
-0.4
-0.1
1.0
-0.5
-0.2
-0.4
1.5
Y over Y Change
-6.9
-7.2
-5.4
-4.0
0.0
0.2
-0.1
0.4
37
(No Transcript)
38
Natural Gas Futures
2005
2001
2002
2003
2004
39
Crude Oil Futures
2005
2001
2002
2003
2004
40
Domestic Wellhead Revenues1970 2006E (
Billions)