Natural GasNatural GasA World of VolatilityA World of Volatility

Patrick J. StrangeSenior Vice President

Energy Marketing & Trading ConferenceUniversity of Houston

January 26, 2006 AGL Resources. All Rights Reserved.

2Sequent Energy (P. Strange) January 2006

About Sequent Energy…About Sequent Energy…

• Location: Houston, Texas• Wholesale natural gas marketer, with

physical/logistical emphasis• Sold an average of 2.17 Bcf/day in 2005• Current headcount of 105, largely in Houston• Sold volumes to 510 counterparties in 2005• Conducts business on 49 pipelines

3Sequent Energy (P. Strange) January 2006

About AGL Resources…About AGL Resources…

• Parent Company: AGL Resources• NYSE: ATG• Credit Ratings: S&P – BBB+

Moody’s – Baa1

• Market Cap: $2.8 billion• Total Assets: $6.3 billion

Regulated UtilitiesRegulated Utilities Non - RegulatedNon - Regulated• Sequent Energy

Management• Pivotal • SouthStar (70%)

• Atlanta Gas Light Company

• Virginia Natural Gas Company

• Chattanooga Gas Company

• Elizabethtown Gas• Elkton Gas• Florida City Gas

4Sequent Energy (P. Strange) January 2006

AGL Resources’ FootprintAGL Resources’ Footprint

Florida City Gas

Virginia Natural Gas

Chattanooga Gas

Atlanta Gas Light

Virginia Gas

Elkton Gas

Elizabethtown Gas

Jefferson Island Storage and Hub

Macon LNG

Riverdale LNG

Cherokee LNG

Chattanooga LNG

Satellite LNG

5Sequent Energy (P. Strange) January 2006

TradingTrading

This word can take on a different meaning depending on your particular focus

What trading means at Sequent: (customer focused)• Optimizing portfolio positions• Physical spread options (transportation)• Physical storage options (cash, futures, time)• Modest risk limits (proprietary trading)

What trading does not mean at Sequent:• Large outright speculative positions • Financial market making

6Sequent Energy (P. Strange) January 2006

2005 – A Year of Extremes2005 – A Year of Extremes

• Supply, weather and uncertainty were drivers of domestic gas price volatility

• Hurricanes created significant challenges for entire industry

• New entrants into market with mostly financial trading bias

• Outright price and basis volatility• Continued consolidation in the energy

industry

7Sequent Energy (P. Strange) January 2006

Supply, Weather andSupply, Weather and Uncertainty Uncertainty

• More gas being consumed to produce

electricity– Provides support for prices during traditional

injection period

• New supply additions looking for market– Barnett Shale– Rockies

• Traditional supply basins trying to keep up• LNG players have options

– Cargo’s routed to higher price markets

It appears…

Uncertainty of market direction creates waves of buying and selling.

8Sequent Energy (P. Strange) January 2006

Hurricane Barrage Hurricane Barrage of 2005of 2005

* At peak 75.9% of Gulf Coast region gas shut in

* 18% (1.7 Bcf/d) remains shut in

Hurricane Rita’s Path

* Per Bentek Energy LLC

9Sequent Energy (P. Strange) January 2006

New EntrantsNew Entrants

• Influx of capital into energy commodities

• Emergence of new players has not necessarily translated into more depth and liquidity in the physical market

• Imbalance of financial and physical participants has created cash vs. futures volatility

10Sequent Energy (P. Strange) January 2006

Price and BasisPrice and Basis

10

RockiesRockiesChicagoChicago

Mid Cont FieldMid Cont Field

S. TexasS. Texas

Mid AtlanticMid Atlantic

NortheastNortheast

Henry HubHenry Hub

WahaWaha

7.9407.025

5.470

7.150

5.645

7.235

5.875

7.205

5.755

8.255

6.410

6.310

8.940

9.190

8.470

6.630

Locational Spreads**Rockies to HenryWaha to HenryMC to HenryChicago to HenryMA to HenryNE to HenrySTX to HenryFlorida Z3 to Henry

2005(.94)

(.765)(.655)

(.1).22

2.78(.535)

.46

2006(1.23)

(1.105)(1.05)(.315).215.685

(1.02).02

Florida Zone 3Florida Zone 38.275

6.870

**Gas Daily Price comparisons are for Jan 25, 2005 & Jan 25, 2006

11Sequent Energy (P. Strange) January 2006

Consolidation Within Consolidation Within Energy IndustryEnergy Industry

ProducersProducers

UtilitiesUtilities

PipelinesPipelines

Chevron/UnocalConoco/BurlingtonOxy/Vintage

Duke/CinergyExelon/PSEGFPL/Constellation

Enterprise/Gulf TerraEnergy Transfer/Houston PipelineLoews/GulfSouth

12Sequent Energy (P. Strange) January 2006

2006 and Beyond2006 and Beyond

• The landscape will change, however; most roads lead to continued volatility

• Pipeline flows could change dramatically

• New supply and infrastructure projects• LNG (baseload or swing)• Keeping up with the peak demand• Credit and cash flow• Regulation (federal and state)

13Sequent Energy (P. Strange) January 2006

Capacity Designed for Gulf ProductionCapacity Designed for Gulf Production

Source: EIA, Office of Oil and Gas, Natural Gas Division

1,000 Bcf

2,000 Bcf

3,000 Bcf

4,000 Bcf

5,000 Bcf

5,000 Bcf

4,000 Bcf

3,000 Bcf

2,000 Bcf

1,000 Bcf

2,00

0 B

cf

14Sequent Energy (P. Strange) January 2006

New Supply andNew Supply andInfrastructure ProjectsInfrastructure Projects

Expansions needed to help facilitate movinggas west to east. Many major expansion projects announced. Do they all make it?

ETX to LouisianaETX to Louisiana

West to EastWest to East

SupplySupplyBarnett ShaleFayetteville ShaleNorth Louisiana

El PasoKinder Morgan/Sempra

CenterpointGulf SouthKinder Morgan/CrosstexRegencyTrunkline

15Sequent Energy (P. Strange) January 2006

Liquified Natural GasLiquified Natural Gas

• The U.S.’s ability to receive LNG will continue to expand

• Entrance of U.S. into the global gas market

• Will the U.S. be a swing market for LNG?

• What impact will LNG have on basis values?

16Sequent Energy (P. Strange) January 2006

Peak Demand Is Growing Faster Peak Demand Is Growing Faster Than Average DemandThan Average Demand

0.33

0.80

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Annual Growth Winter Growth

Compound Annual Growth Rate of Gas Consumed(Residential and Commercial Customers)

Since 1973, winter load (Dec-Feb) is growing more than twice as fast as annual load

Declining Use Per Customer Masks Declining Use Per Customer Masks The Challenge of Infrastructure DevelopmentThe Challenge of Infrastructure Development

0

20

40

60

80

100

120

No

rmal

ized

Mcf

per

Yea

r

1980 1990 2001 2010 2020

Natural Gas Use Per Residential Customer

Patterns in Residential Natural Gas Consumption, 1980-2001. American Gas Association

17Sequent Energy (P. Strange) January 2006

Credit and Cash FlowCredit and Cash Flow

• Consolidation challenges– Less players does not equal

more credit per counterparty– Mergers do not equal stronger

balance sheets

• High commodity prices • Working capital for storage

18Sequent Energy (P. Strange) January 2006

Issues LDCs and Regulators Must BalanceIssues LDCs and Regulators Must Balance

IncreasingIncreasingAvailableAvailableSupplySupply

IncreasingIncreasingAvailableAvailableSupplySupply

FirmFirmVersusVersus

Peaking NeedsPeaking Needs

FirmFirmVersusVersus

Peaking NeedsPeaking Needs

RealigningRealigningPortfoliosPortfoliosTo MeetTo MeetNeedsNeeds

RealigningRealigningPortfoliosPortfoliosTo MeetTo MeetNeedsNeeds

Meeting Future Customer NeedsMeeting Future Customer Needs