John E. Olson, CFASVP & Chief Investment OfficerSanders Morris HarrisHouston, TX713/220-5151

December 12, 2002

Energy Markets At a Crossroads:Has Deregulation Failed?

International Association For Energy Economics

The Houston Club

Market Trading ProfileSince 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%

Daily Energy Trading ProfileEnergy 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)%

Daily Energy Trading ProfileMerchant 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%

“The Efficient Market Hypothesis is the Most Remarkable Error In the History of Economic Theory.”

Lawrence SummersSecretary of TreasuryPresident, Harvard College

LJM CaymanLP

GP

LJM Swap Sub

LP

UBS

EnronIn

tere

st

In

$1 00

Interest In

$15,000,000

3,377,697 ENE Shares

Shares

$3,750,000

1.6 MM

E

NE

Put Options Rhythms @$56.125/sh 5 Yrs

Con

sent

to

Tra

nsfe

r S

hare

s

Value ($100 – 140 MM)

Value ($170 – 223 MM)

$64 MM Note

LJM/Rhythms Transaction Structure

The Issues - I

• Fair Value Accounting Mark to Market Accounting Mark to Model

• FinanceSpecial Purpose Vehicles/Recourse IssuesPhantom EquityPerformance BonusesStructured Finance

The Issues - II

• DisclosuresGains on Asset SalesOff Balance Sheet Asset and Capital StructuresCash vs. Paper EarningsDerivative Positions/Recourse

• Wall StreetInvestment Banking vs. Securities ResearchStock Options

“The Capitalists Are So Hungry For Profits That They Will Sell Us The Rope to Hang Them With.”

V.I. Lenin (1920)

“ 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 SpokesmanThursday, August 1, 2002

Your Friendly Rating Agency

“ 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

Maoist Self Criticism?

“ Who Were The Idiots Who Passed (California’s) AB 1890 to Deregulate Only Half The Ledger?”

State Rep Jim CuneenDem. San JoseNovember, 2002

Market Trading LiquidityHenry Hub

MMCFD

September 2002 700

September 2001 1,900

September 2000 2,900

September 1999 3,270

September 1998 4,210

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 (T&E, Etc.) 2,000 – 3,000 500 – 1,500

Total 12,000 – 15,000 4,000 – 6,500

Source: Ben Schlesinger Associates (2001)

“Markets Can Remain Irrational Longer Than You Can Remain Solvent.”

John Maynard Keynes

ONEOKMarketing EBIT

1999-2002E

$ MM %

1998 17

1999 24 +41

2000 51 +113

2001 109 +114

2002E 180 +65

Investing CredentialsCorporate America

Last Ten Years

EPSGrowth

%ROE

TotalLeverage

%Payout

1992 12.7 10.3 54.6 68

1993 15.1 12.4 55.6 60

1994 49.7 17.8 51.6 40

1995 8.0 17.5 51.8 39

1996 16.1 18.6 51.1 38

1997 2.4 17.9 51.5 40

1998 -8.9 16.0 52.7 45

1999 31.0 18.9 50.5 35

2000 7.2 17.3 47.9 31

2001 -31.3 11.0 48.5 43

Last Ten Years 10.2% 15.8% 51.6% 44%

EPSGrowth

%ROE

TotalLeverage

%Payout

2002E 18.9 12.4 50.0 382003E 20.5 13.8 50.0 32

2004E 7.5 13.6 50.0 31

2005E 7.9 13.4 50.0 29

2006E 7.3 13.2 50.0 28Next Five Years 12.4% 13.3% 50.0% 32%

Investing CredentialsCorporate America

Next Five Years

Pipeline ROE’s(%)

Year Allowed Realized Spread

1996 12.6 14.6 2.0

1997 12.3 14.7 2.4

1998 12.3 15.0 2.7

1999 12.3 15.1 2.8

2000 12.2 14.4 2.2

Average 12.3 14.7 2.4

Sources: NGSA Data

Allowed (%)SoCalGas

San DiegoG&E

1997 11.6 11.6

1998 11.6 11.6

1999 11.6 11.1

2000 11.6 10.6

2001 11.6 10.6

% Change 11.6% 11.1%

Realized (%)

1997 16.7 16.3

1998 14.1 17.5

1999 15.2 15.8

2000 16.0 12.2

2001 16.0 16.5

Average 15.6 15.6

Premium 4.0% 4.5%

CaliforniaRetail Energy ROE’s

Sources: Sempra Energy

Major Producer Profitability

LatestBook Value 2003E

%ROE

%Leverage

BP Amoco 17.97 2.73 15.2 24

Chevron Texaco 31.60 5.15 16.3 33

Conoco Phillips 44.99 4.45 9.9 38

Exxon Mobil 11.12 1.96 17.6 13

Royal Dutch Shell 17.55 2.99 17.8 23

Sources: First Call, Zacks, Sanders Morris

El Paso Energy Imputed Profitability Profile

(December, 2001)

Imputed ROEs (%): 1999 2000 2001 2002E 2003E 2004E 2005E 2006E

Pipelines 21.8 23.1 25.2 23.7 21.6 19.6 17.8 15.9

Merchant Energy 4.0 14.5 13.7 16.1 17.9 19.6 21.3 22.8

Field Services 13.0 18.0 15.3 20.7 26.1 32.2 39.5 47.7

Production 9.9 31.2 57.7 52.7 47.4 43.5 40.6 37.8

Other -7.1 -18.3 -27.9 -26.0 -25.0 -23.0 -21.0 -18.3

Composite ROEs 12.3 17.6 20.3 21.0 21.1 21.1 21.4 21.6

% Leverage 67.2 68.9 68.8 67.2 64.5 61.2 57.5 53.3

El Paso Energy Imputed Profitability Profile

(November, 2002)

Imputed ROEs (%): 1999 2000 2001 2002E 2003E 2004E 2005E 2006E2002E-2006E

Pipelines 30.3 23.9 33.2 26.4 21.1 22.5 20.2 18.9 21.8

Merchant Energy 5.6 15.0 19.1 -5.0 -3.2 -2.2 -1.4 -1.5 -2.7

Production 13.7 32.2 71.9 35.6 22.6 23.3 22.1 20.7 24.9

Field Services 18.0 18.6 19.3 6.0 3.2 0.5 -0.9 -1.1 1.6

Other -9.8 -18.9 -30.1 -9.2 -10.6 -12.1 -12.0 -11.8 -11.1

Composite ROEs 17.0 18.1 27.0 11.6 9.3 11.1 11.2 11.0 10.8

Forecast ROE’s (Per SIP)

12.2 17.0 19.1 9.0 9.1 10.9 11.1 10.9 10.2

Duke EnergyImputed Profitability Profile (%)

(December, 2001)

1999 2000 2001E 2002E 2003E 2004E

Electric Operations 22.5 22.3 21.0 22.5 21.8 20.9

Gas Transmission 25.6 22.5 22.0 23.4 22.6 21.5

Field Services 6.2 10.7 12.2 10.9 11.4 12.4

DENA 7.2 22.0 42.9 34.8 42.3 48.3

Global Asset Dev. -3.3 1.9 -0.9 1.2 1.5 2.1

Other Energy Services -47.3 -28.6 1.6 5.1 5.2 6.3

Real Estate Operations 36.4 23.3 18.2 19.7 17.3 16.2

Other Operations -4.5 -8.4 -29.4 -3.6 -2.5 -1.5

Eliminations & Minority -38.9 -75.5 -125.1 -84.4 -88.7 -93.7

Total Consolidated 15.4 16.6 17.4 17.0 17.0 16.9

% Leverage 55.3 59.8 57.5 56.8 55.9 53.5

Duke EnergyImputed Profitability Profile (%)

(September, 2002)

1999 2000 2001 2002E 2003E 2004E 2005E

Electric Operations 24.7 36.7 32.6 28.3 29.1 32.0 31.2

Gas Transmission 27.9 32.4 31.1 25.7 16.3 17.1 17.5

Field Services 7.7 12.1 9.5 0.8 2.1 6.3 7.7

DENA 4.1 0.9 14.1 2.8 3.6 7.8 8.2

Global Asset Dev. -1.4 16.6 12.6 8.1 7.7 8.5 8.0

Other Energy Services -44.0 -38.7 -65.4 167.4 82.8 41.6 40.7

Real Estate Operations 34.8 26.5 22.8 20.1 18.6 16.7 14.7

Other Operations -35.6 -37.1 -47.1 -53.7 -55.5 -56.8 -56.0

Eliminations & Minority -39.3 -35.4 -32.6 -65.0 -69.3 -77.6 -83.4

Total Consolidated 16.0 17.5 18.5 13.0 11.7 14.0 14.0

% Leverage 16.0 16.3 17.9 12.7 11.4 14.4 14.5

The Williams CompaniesImputed ROEs (%)

Imputed Average ROEs: 2000 2001 2002E 2003E 2004E 2005E 2006E

Energy Marketing & Trading 22.4 23.1 29.4 32.0 33.5 34.3 34.5

Gas Pipeline 29.1 21.4 26.2 22.6 20.4 18.3 16.6

Energy Services 16.4 9.3 10.2 10.4 9.9 9.6 9.4

Other -7.5 -6.4 -6.9 -5.8 -4.7 -3.8 -3.0

Total 17.2 14.0 17.0 17.3 17.3 17.0 16.7

cf SIP Profile 8.7 17.4 17.7 17.5 17.1 16.6

(December, 2001)

The Williams CompaniesImputed ROEs (%)

Imputed Average ROEs: 2000 2001 2002E 2003E 2004E 2005E 2006E

Energy Marketing & Trading 22.4 24.8 -18.3 -8.4 -6.0 -4.6 -3.5

Gas Pipeline 29.1 29.3 32.2 29.4 28.2 27.6 27.0

Energy Services 16.4 9.4 14.2 7.5 8.8 9.8 10.4

Other -7.5 -6.8 -13.6 -12.1 -9.5 -8.1 -6.9

Total 17.2 15.9 3.3 4.5 6.0 7.0 7.8

cf SIP Profile 18.8 2.0 3.6 5.0 5.9 6.7

% Total Leverage (Pfds as Equity) 56.2 64.6 55.9 57.1 53.1 54.0 50.9

% Total Leverage (Pfds as Debt) 62.9 69.5 68.7 69.2 65.8 65.8 62.8

(September, 2002)

30 TCFGas Market

in 2012?

• Gas Wells: 10,000/year to 20-25,000/year

• 10 Year Spending Needs: $B

Gas Gathering 10Pipelines 45-50Domestic E&P 645

Source: National Petroleum Council

EIA 2003 ForecastsGas Supply – (TCF)

2001 2015 2025

Dry Gas Production 19.5 23.8 26.8Net Imports

Canada 3.6 4.4 5.3Mexico -0.1 -0.2 -0.3LNG 0.2 1.0 2.1 Subtotal 3.7 5.2 7.7

Total Gas Supply 23.2 29.0 34.5

2001 2015 2025

Deepwater 5.0 5.5 6.0

Coal Bed Methane 1.6 3.0 3.5

Other – USA 12.9 15.3 17.3

Total Supply 19.5 23.8 26.8

EIA 2003 ForecastsDomestic Production

Drilling ScenariosGas Well Drilling & Reserve Replacement Trends

2002-2011E

YearsProduction

(TCF)

Reserve Adds

(Bcf/Well)

% Reserve

ReplacementGas Wells

Needed

%Reserve

ReplacementGas Wells

Needed

1992-2001 186 1.02 68 136,000 68 136,000

2002E-2011E

1% Growth 209 1.00 70 146,000 100 209,000

2% Growth 221 0.90 80 196,000 100 245,000

3% Growth 234 0.80 85 249,000 100 275,000

Natural Gas ProductionAverage Annual Growth Rates: 1970 - 2000

Annual Change (%)

Year 70’s 80’s 90’s 00’s

0 5.9 1.3 2.9 0.8

1 2.8 -1.1 -0.6 2.4

2 0.0 -7.1 0.8 -4.0

3 0.6 -9.7 1.4 1.5

4 -4.7 8.5 4.0 1.5

5 -7.1 -5.8 -1.2 1.5

6 -0.7 -2.4 1.4 1.5

7 0.3 3.5 0.3 1.5

8 -0.2 2.9 -1.0 1.5

9 0.2 1.2 -0.3 1.5

Average -0.3% -0.9% 0.8% 1.0%

E&Ps 1Q02 2Q02 3Q02 4Q02E 1Q03E 2Q03E 3Q03E 4Q03EAPC -6% -13% -12% -7% 0% 2% 3% 4%BR -24% -27% -29% -33% -18% 2% 4% 4%EOG -10% -8% -9% 2% 3% 3% 3% 3%APA -15% -15% -16% -12% 3% 4% 4% 4%XTO 21% 25% 20% 14% 15% 15% 15% 15%PXD 1% -2% 41% 58% 79% 88% 38% 30%NBL -9% -13% -11% -7% 1% 1% 1% 1%NFX 10% 3% 2% 18% 10% 10% 10% 10%OEI -15% -19% -1% 15% 10% 10% 10% 10%SKE -22% -31% -7% 22% 59% 62% 23% 3%

Integrated 1Q02 2Q02 3Q02 4Q02E 1Q03E 2Q03E 3Q03E 4Q03EXOM -10% -8% -3% -5% -4% -6% -6% -8%BP 3% 0% 2% 2% 5% 1% 1% 1%Shell -1% 4% 2% 1% 4% 2% 2% 4%CVX -12% -9% -10% -10% -11% -10% -10% -6%MRO 0% -5% -5% -15% -8% -5% -5% -5%COP -5% -1% -1% -1% 3% -1% -1% 1%UCL -16% -19% -18% -10% -10% -10% -10% -11%

Inte+E&P 1Q02 2Q02 3Q02 4Q02E 1Q03E 2Q03E 3Q03E 4Q03EInte+E&P (mmcf/d) 18932 18854 18827 19024 18924 18884 18809 19094Seq. 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%

U.S. Natural Gas Production: Steep Declines in 2002, Even with More Spending, Might not See Growth in 2003

Production Decline Rate of Base:

16% 17% 15% 17% 19% 22% 23% 25%19% 20% 22%

U.S. Natural Gas Production History*Indicates 29% 2002 Decline Rate

0

10

20

30

40

50

60

Bcf

d

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

Pre-1990

Drilling Year:

26% 29%

1990 1991 1992 1993 1995 1997 1998 20001994 1996 1999 2001E 2002E

* Representing 94% of Total U.S. Natural Gas ProductionIncludes Data Supplied by Petroleum Information Corporation; Copyright 1990-2002 Petroleum Information CorporationChart Prepared by and Property of EOG Resources Inc.; Copyright 2002

Natural Gas Futures

$1.00

$3.00

$5.00

$7.00

$9.00

$11.00

J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N

1/2/01 12/10/02

2001 2002 2003 2004 2005

Crude Oil Futures

$10.00

$20.00

$30.00

$40.00

J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N

1/2/01 12/10/02

2001 2002 2003 2004 2005

Domestic Wellhead Revenues1970 – 2006E ($ Billions)

Year 70’s 80’s 90’s 00’s

0 15.8 107.7 93.8 150.1

1 16.7 151.0 82.3 137.6

2 16.9 145.8 81.5 118.4

3 19.6 136.5 80.3 134.5

4 31.2 142.4 74.2 129.3

5 35.1 131.4 69.9 125.2

6 38.8 76.6 99.9 120.9

7 44.6 82.1 95.2 0.0

8 49.8 72.5 68.9 0.0

9 68.0 81.1 82.8 0.0

Average 33.6 112.7 82.9 130.9