Minnesota Natural Gas 2011-2012 Winter Outlook

November 10, 2011

2011-2012 Winter Outlook

• Agenda

– Prices

• Bruce Coogler, Division Vice President—Gas Supply, CenterPoint Energy Resources Corp.

– Supply and Demand

• Shawn Gillespie, Manager, Gas Supply, Minnesota Energy Resources Corp.

– Shale gas supplies and impacts

• Tim Carter, Director, Gas Supply, Xcel Energy

– Individual LDC portfolios

2

Natural Gas Pricing

• Drivers for higher prices: Supply

Production losses from hurricane damage or freeze-offs

Low winter storage inventories

Demand Increased usage for fuel switching/emissions control

Economic recovery

Weather – Cold winter

– Hot summer

3

Natural Gas Pricing

• Drivers for lower prices:

Supply

Increased shale production

Adequate storage inventories

Demand

Greater energy efficiency

Economic down-turn

Weather – Warm winter

– Cool summer

4

Natural Gas Pricing

• Other factors influencing price

Pricing of crude oil & other energy sources (fuel switching)

Liquefied Natural Gas (LNG)

Value of the dollar (global commodity)

Speculators trading in market (i.e., Natural Gas Fund, derivatives, etc.)

World unrest

5

2011-2012 Winter Outlook

6

2011-2012 Winter Outlook

7

2011-2012 Winter Outlook

8

EIA Short-Term and Winter Fuels Outlook

• EIA expects higher fuel bills this winter heating season for heating oil, propane and natural gas

• Little change in electricity bills

• Higher fuel prices are main driver

– 10% higher heating oil prices (than last winter)

– 7% higher propane prices

– 4 % higher residential natural gas prices (National Average)

• 1% higher for Midwest Region

– 1% higher electricity prices

• Projected average expenditures for heating oil user are at highest level ever

Source: http://www.eia.gov/emeu/steo/pub/special/2011_winter_fuels.pdf

9

Regional Dynamics

10

Regional Price Reference

Ventura

2008-09

Ventura

2009-10

Ventura

2010-11

Ventura

2011-12*

% Change from

2010-11

November $6.08 $4.81 $3.51 $3.78 8%

December $6.68 $4.92 $4.47 $4.04 -10%

January $6.17 $6.19 $4.25 $4.17 -2%

Febuary $4.86 $5.86 $4.50 $4.18 -7%

March $3.96 $5.00 $3.88 $4.08 5%

Average $5.55 $5.36 $4.12 $4.05 -2%

11

* October 24, 2011 NYMEX and Basis

2011-2012 Winter Outlook

• Supply and Demand—Where are we headed in the medium to long-term?

12

US Rigs vs. Henry Hub vs. Daily Production

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

55.00

60.00

65.00

70.00

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

Bcfd & $US/MMBtuRigs

US Production

US Rig Counts

Henry Hub LDS

Source: Energy Information Administration (EIA) and Baker Hughes

65.83

874 Rigs

$4.370

13

Growth of Daily Natural Gas Demand Short Term

14

Makeup of Annual U.S. Gas Supply Source: Energy Information Administration – Table 13

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Tc

f

LNG

Imports

Wellhead/Drilling

http://www.eia.gov/oiaf/aeo/pdf/aeotab_13.pdf 15

Makeup of U.S. Annual Natural Gas Demand Source: Energy Information Administration – Table 13

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

20.0

22.5

25.0

27.5

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Tcf

Other

Power

Industrial

Commercial

Residential

http://www.eia.gov/oiaf/aeo/pdf/aeotab_13.pdf

16

U.S Annual Natural Gas Supply/Demand Correlation

22.5

23.0

23.5

24.0

24.5

25.0

25.5

26.0

26.5

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Tc

f

Supply Demand

17 Source: derived from data on http://www.eia.gov/oiaf/aeo/pdf/aeotab_13.pdf

Shale Gas

• What is the impact on supplies?

• What uncertainties exist today?

– Production Cost

– Environmental

– Infrastructure impacts

– Regulatory policy

18

Page 19

Natural Gas Market Game Changer

Unconventional Natural Gas Supply: Shale Gas

Source : http://www.capp.ca/canadaIndustry/naturalGas/ShaleGas/Pages/default.aspx (August 11, 2011)

Composition of Annual Gas Supplies

0

5

10

15

20

25

30

35

40

45

2000

2003

2006

2009

2012

2015

2018

2021

2024

2027

2030

bc

fd

Barnett Fayetteville Woodford Haynesville Marcellus Eagle Ford Horn River Montney Duvernay

Source: Wood Mackenzie LTV April 2011

North American Shale Gas Production

20

Shale Gas Uncertainties Competitive Breakeven Cost

Wood Mackenzie April 2011

Update 8/10/11

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

0 1 2 3 4 5 6 7 8 9

bcfd

2010 $

/mm

btu

2011

Eagle Ford

Marcellus

Fayetteville

Barnett Haynesville

Pinedale

tight gas

Lower

Bossier

tight gas

Cotton Valley

tight gas

U.S. Lower-48 Development Breakeven Costs @10% IRR

21

Shale Gas Uncertainties

• Environmental—water acquisition, contamination, and disposal; access to and emissions from production sites

• Infrastructure

– Changing flows on interstate pipelines leading to rate impacts

– Construction of new pipelines

– LNG Import/Export facilities

• Federal & State Regulatory Policy

22

2011-2012 Winter Outlook

• Individual Company Portfolios

– Xcel Energy (NSP)

– CenterPoint Energy (CPE)

– Minnesota Energy Resources (MERC)

23

NSP Winter 2011-2012 Supply Portfolio

• Winter Pricing

– 50% Hedged • 25% Financial

• 25% Storage

– 50% Market • Monthly Index

• Daily Spot

24

25%

32%

12%

31%

Design Day Supply 785,892 Dth/day

Base Storage Spot LNG/LPG

CPE Winter 2011-2012 Supply Portfolio

• Winter Pricing

– 41% Hedged • 21% Financial

• 20% Storage

– 59% Market • Monthly Index

• Daily Spot

25

46%

26%

14%

14%

Design Day Supply 1,218,000 Dth/day

Base Storage Spot LNG/LPG

MERC Winter 2011-2012 Supply Portfolio

• Winter Pricing

– 70% Hedged • 45% Financial

• 25% Storage

– 30% Market • Monthly Index

• Daily Spot

26

44%

37%

19%

0%

Design Day Supply 285,326 Dth/day

Base Storage Spot LNG/LPG

Questions and Discussion

27