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John E. Olson, CFA SVP & Director of Research Sanders Morris Harris Houston, TX 713/220-5151 “The Stunning Collapse of the Energy Traders” August 14, 2002.

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Presentation on theme: "John E. Olson, CFA SVP & Director of Research Sanders Morris Harris Houston, TX 713/220-5151 “The Stunning Collapse of the Energy Traders” August 14, 2002."— Presentation transcript:

1 John E. Olson, CFA SVP & Director of Research Sanders Morris Harris Houston, TX 713/ “The Stunning Collapse of the Energy Traders” August 14, 2002 IPAA – Texas Southeast Regional Speakers’ Series The Shape of Things to Come

2 Standard & Poor’s 400 Average Annual Total Returns (%) Year70’s80’s90’s00’s Average7.2%17.2%19.4%-13.6%

3 Investing Credentials 1990s & Next Five Years EPS Growth % Payout % ROE Total Leverage Last Ten Years10.2%44%15.8%51.6% 2002E Next Five Years12.4%32%13.3%50.0%

4 Market Trading Profile Since 10/15/01 Market Performance: Latest10/15/01Delta % Standard & Poors' % Standard & Poors' % Dow Jones Industrials % NASDAQ Composite %

5 Daily Energy Trading Profile Energy Conglomerates Energy Conglomerates:Latest 10/15/01 Delta % CMS Energy % Dominion Resources % Duke Energy % Dynegy % El Paso % Kinder Morgan % Williams % Average % Enron %

6 Daily Energy Trading Profile Merchant Power Independent Power Producers:Latest 10/15/01Delta % AES Corp % Calpine % Dynegy % NRG % Mirant Energy % Reliant Resources % Average %

7 “Markets Can Remain Irrational Longer Than You Can Remain Solvent.” John Maynard Keynes

8 “The Efficient Market Hypothesis is the Most Remarkable Error In the History of Economic Theory.” Lawrence Summers Secretary of Treasury President, Harvard College

9 HUB Trading Volumes (MMCFD) Henry HubChicago SoCal Gas Border April5,5602,7501,850 May5,8502,2001,420 June3,7001, July2,7801, Source: Gas Daily

10 The Energy Marketing Industry Dec. Dec E Sales/Trading 4,000 – 5,000 1,500 – 2,000 Accounting/Systems 6,000 – 7,000 2,000 – 3,000 Specialists (T&E, Etc.) 2,000 – 3, – 1,500 Total 12,000 – 15,000 4,000 – 6,500 Source: Ben Schlesinger Associates (2001)

11 “ 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 Conference Thursday, July 25, 2002

12 “The Capitalists Are So Hungry For Profits That They Will Sell Us The Rope to Hang Them With.” V.I. Lenin (1920)

13 “ They have failed miserably in their strategy… The Rope we gave them the first time doesn’t have much left to it. Many firms have actually turned it into a noose…. We are not company advocates. We are indifferent.” Standard & Poors Spokesman Thursday, August 1, 2002 Your Friendly Rating Agency

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15 LJM Cayman LP GP LJM Swap Sub LP UBS Enron Interest In $100 Interest In $15,000,000 3,377,697 ENE Shares Shares $3,750, MM ENE Put Options 5 Yrs Consent to Transfer Shares Value ($100 – 140 MM) Value ($170 – 223 MM) $64 MM Note LJM/Rhythms Transaction Structure

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22 Revenues ($ Billion) Duke Energy Dynegy El Paso Enron Reliant Resources Total Totals ex Enron Marketing & Trading Results Annual Revenue Trends 1998 – 2002E

23 Marketing & Trading Results 2002 Gross Margins by Quarter 2002 Gross Margin ($mm)Q1Q2 Duke Energy Dynegy107(67) El Paso Energy Reliant Energy327150E Williams Energy355(279) Total2,171317

24 Marketing & Trading Results 2002 EBIT by Quarter 2002 EBIT ($mm)Q1Q2 Duke Energy Dynegy107(67) El Paso Energy72(85) Reliant Energy114(50)E Williams Energy283(349) Total1,036(355)

25 Williams Companies Energy Marketing & Trading Second Quarter Results Marketing Volumes % Gas (bcf/d) Crude & Product (00 B/D) Power (GWH) Equivalents (GWH) %

26 The Williams Companies Second Quarter Results Net Trading Revenues: Gas & Power(81)343 Crude & Product(74)(5) NGL’s183 Other(143)(3) Total Net Revenues(279)338 Operating Expenses21975 EBIT – Reported(498)262 EBIT - Recurring(349)262

27 ONEOK Marketing EBIT E $ MM%

28 The Issues - I Accounting Mark to Market Accounting Mark to Model Fair Value Accounting Finance Special Purpose Vehicles/Recourse Issues Phantom Equity Performance Bonuses Structured Finance

29 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

30 El Paso Energy Valuation Matrix – Normal Market Conditions Imputed P/Es:2002E2003E2004E2005E2006E Pipelines13.0 Merchant Energy10.0 Production15.0 Field Services14.0 Other10.0 Total Current P/E’s Delta76%70%77%92%104% Imputed Market Values: Pipelines Merchant Energy Production Field Services Other Total Current Stock Price15.35 % Upside75.9%70.0%77.5%92.1%104.5% % Yield5.7%5.9%6.1%6.4%6.6% % Expected Return81.5%75.9%83.6%98.5%111.1%

31 El Paso Energy Valuation Matrix – Zero Value to EPME Imputed P/Es:132002E2003E2004E2005E2006E Pipelines13.0 Merchant Energy0.0 Production15.0 Field Services14.0 Other10.0 Total Current P/E’s Delta47%50%59%73%85% Imputed Market Values: Pipelines Merchant Energy0.00 Production Field Services Other Total Current Stock Price15.35 % Upside46.7%50.5%58.9%73.4%85.4% % Yield5.7%5.9%6.1%6.4%6.6% % Expected Return52.4%56.4%65.0%79.8%92.0%

32 El Paso Energy Valuation Matrix – Marking EPME to Market Imputed P/Es:2002E2003E2004E2005E2006E Pipelines13.0 Merchant Energy-16.0 Production15.0 Field Services14.0 Other10.0 Total Current P/E’s Delta0%19%29%44%55% Imputed Market Values: Pipelines Merchant Energy Production Field Services Other Total Current Stock Price15.35 % Upside0.1%19.2%29.1%43.5%54.8% % Yield5.7%5.9%6.1%6.4%6.6% % Expected Return5.8%25.1%35.2%49.9%61.5%

33 El Paso Energy Imputed Profitability Profile (December, 2001) Imputed ROEs (%): E2003E2004E2005E2006E Pipelines Merchant Energy Field Services Production Other Composite ROEs % Leverage

34 El Paso Energy Imputed Profitability Profile (August, 2002) Imputed ROEs (%): E2003E2004E2005E2006E 2002E- 2006E Pipelines Merchant Energy Field Services Production Other Composite ROEs Forecast ROE’s (Per SIP) Debt Leverage Preferreds Leverage Total Leverage

35 Duke Energy Imputed Profitability Profile (%) (December, 2001) E2002E2003E2004E Electric Operations Gas Transmission Field Services DENA Global Asset Dev Other Energy Services Real Estate Operations Other Operations Eliminations & Minority Total Consolidated % Leverage

36 Duke Energy Imputed Profitability Profile (%) (August, 2002) E2003E2004E Electric Operations Gas Transmission Field Services DENA Global Asset Dev Other Energy Services Real Estate Operations Other Operations Eliminations & Minority Total Consolidated % Leverage

37 The Williams Companies Imputed ROEs by Business (%) Imputed Average ROEs: E2003E2004E2005E2006E Energy Marketing & Trading Gas Pipeline Energy Services Other Total cf SIP Profile

38 Projected Gas Production Needs 2001A – 2005E (Billion Cubic Feet Daily) Year Industry Total Our Total 2001A E E E E Total (BCF/D) Current Production (August, 2002)52.7 Imputed Five Year Growth43%27% Average Annual Growth Rate8.5%5.4%

39 Natural Gas Production Average Annual Growth Rates: Annual Change (%) Year70’s80’s90’s00’s Average-0.3%-0.9%0.8%1.0%

40 US Natural Gas Production (mmcfd) SMH Tally of Top U.S. Producers % Change 2Q011Q022Q022Q02/1Q02 2Q02/2Q01 ExxonMobil % -9.3% BP Amoco % 0.4% Shell % 3.8% Burlington Resources % -15.9% ChevronTexaco % -10.0% Unocal % -19.5% Phillips % -4.0% Conoco % -13.7% USX-Marathon % -5.1% Occidental Petroleum % -6.9% El Paso % -5.1% Anadarko Petroleum % -13.1% Apache Corp % -14.9% Amerada Hess % -11.0% Kerr McGee % -5.5% Noble Affiliates % -12.7% Ocean Energy % -13.5% SMH Tally of Top U.S. Producers % -7.6% Total U.S. Production reported by EIA % -1.3%

41 Natural Gas Futures

42 Crude Oil Futures

43 Domestic Wellhead Revenues 1970 – 2005E ($ Billions) Year70’s80’s90’s00’s Average

44 Natural Gas Industry Asset Base Yearend, 1994 Data ($ Million)

45 Natural Gas Industry Asset Base March 2002 Data ($ Million)

46 Pipeline MLP Asset Growth Total Assets ($ Million) % Change Buckeye Pipeline Partners El Paso Energy Partners5842, Enbridge Energy Partners1,4141,74123 Enterprise Products Pipeline1,4952,76985 Kinder Morgan Energy Partners3,2297, Northern Border Partners1,8632,69545 Plains All American Pipeline Partners1,2231,3389 Teppco Partners1,0412, Williams Energy Partners Totals11,80622,63992

47 Pipeline MLP Asset Growth 2002 Estimates ($ Million) 2002E Earnings 2002E Cash Flow Maintenance CapexDistribution CFFO Balance Buckeye Pipeline Partners El Paso Energy Partners Enbridge Energy Partners Enterprise Products Pipeline Kinder Morgan Energy Partners Northern Border Partners Plains All American Pipeline Ptnrs Teppco Partners Williams Energy Partners Totals8981, ,489-46


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