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AGENDA. Separation of Reliant Energy and Formation of CenterPoint Energy Corporate Strategy Review Current Environment and Strategy Validation Houston Electric Gas Distribution and Sales Local Distribution Companies (LDC) Competitive Gas Sales & Service Pipeline Group
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AGENDA • Separation of Reliant Energy and Formation of CenterPoint Energy • Corporate Strategy Review • Current Environment and Strategy Validation • Houston Electric • Gas Distribution and Sales • Local Distribution Companies (LDC) • Competitive Gas Sales & Service • Pipeline Group • Consolidated Financial Picture • Obtain Board Approval of Plans • Meeting Closure
6% 22% 69% 2% The Pipeline Group consists of four distinct business segments that operate in the central and south central regions of the United States Products & Services ($MM) 2002 2003 2004F CAGR Revenues 389.4 398.1 450.8 7.6% • Interstate Pipelines • Firm & interruptible gas transportation • Firm gas storage services • Short-term gas balancing services • Perryville Hub services Op Income 153.4 158.4 174.3 6.6% Cap Ex 70.5 67.3 78.6 5.6% Cash Flow* 81.0 107.0 58.3 -15.2% • Pipeline Services • Project services • O&M services • Pipeline integrity Revenue Op Income 2% 27% 69% 2% • Gathering • Gathering • Treating • Processing 2004 Cap Ex Cash Flow* 34% • Service Star • Monitoring service • Wellhead • Compression • Artificial lift 3% 15% 85% 9% 53% * Net income plus depreciation and changes in working capital less capital expenditures 2 2
Interstate Pipelines - Geographic Footprint • Over 8,200 Miles of Pipe • 224 Compressor Units • 315,097 Certificated HP • 7 Storage Fields • 1,535 mmcf Maximum Daily Deliverability • 68,633 mmcf Maximum Working Gas Inventory
Pipeline Group 2004 Strategic PlanReview The 2004 Strategy Message and Emphasis • Interstate Pipelines to become a growth vehicle through system expansions, capacity builds into new markets and supply basins and complimentary acquisitions • Gathering & Processing to more aggressively pursue on and off system asset growth opportunities & complimentary acquisitions • Lowered expectations for Pipeline Services growth and recognized the need for in depth business plan review • Slight reduction in early year growth targets for ServiceStar, retained overall strong outlook for the business but planned to revisit our business plan to confirm business direction
Pipeline Group 2004 Strategic PlanReview Projects completed / underway Accomplishments • Gathering • N. Russellville Expansion • Elm Grove Expansion • Sligo Plant Upgrade • Chismville Field Expansion • Hinkle Expansion • Wilburton Amine Unit • Waskom Plant Header Expansion • Compression Optimization • Asset Rationalization • Pipelines • Quad Expansion • Ameren Expansion • Cross Haul Expansion • Chiles Dome Expansion • Ada Rehab/Expansion Pipeline Services-Completed New Business Plan ServiceStar-Completed New Business Plan Other-Completed Major Supply Demand Study for North America Surprises Degree of competition for asset acquisitions from non-traditional industry players and MLP’s Basis blow-out in the fourth quarter
Pipeline Group - State of the Business • Business has effectively managed costs over last several years through ongoing absorption of O&M increases & inflation increases. Pipeline integrity and other regulatory mandates will require increased capital and O&M investments. • M&A opportunities limited due to competitor financial structure advantage • We are currently reviewing potential MLP strategy for Gathering and Processing businesses • Changing gas supply landscape provides opportunities and challenges • Complex & uncertain future North America production and import capability • Expected domestic supply shift (basins & non-conventional resources) • Footprint contains some mature fields but overall flat to potential increase in production • On-system basis differentials susceptible to supply volatility and change over time • Viable growth opportunities have been identified • Gathering and Service Star have proven unregulated growth components • Near term on-system pipeline growth is viable but has longer term economic expansion limitations • Off-system opportunities are available for additional growth • U.S. pipeline infrastructure needs through 2025 estimated to be $35 billion • Pipeline Services growth potential severely impacted by power industry downturn
The Pipeline Group strategy can be summarized in these statements. Pipeline Group Strategy Grow earnings by linking gas supply with markets, providing reliable & flexible services for our customers and aggressively pursuing investment opportunities • Manage our Base • Secure our core business by managing current relationships • Maintain access to sufficient natural gas reserves • Active participation and support of process improvement, resulting in productivity gains to offset a portion of increasing operating cost • Manage Regulatory Process • Active participation in regulatory process • Grow • Attract and maintain customers by being service focused • Providing value-added services tailored to customer needs • Expand capability to access incremental markets & supply basins through system expansions & development projects • Pursue acquisition opportunities outside of the context of base plan
Pipeline Group Industry Drivers and Trends Pipeline Services Field Services Pipelines • Tighter environmental, safety and regulatory rules have increased time factor for implementation of capital projects and may increase costs • Continued volatility of gas prices drives transportation spreads and PALS rates • Worst case scenario has mid-continent production projected to remain flat over the next 15 years • In the near term, high gas and liquids prices lead to expanded drilling activity for CEFS • LNG is projected to grow about 36% from 2005-2010. • Northeast US maintains attractive basis play from the Gulf Coast area • In ~2007-2008, gas prices reduce to the $3.00 - $5.00 level • Increase in gas fired power plant demand pushes prices back up from 2008-2014 • Producer consolidations • Continued consolidation of midstream players (in the form of MLP’s) and interstate pipelines (Loews, Southern Union, El Paso) • Post Merchant Energy: Asset owners beginning to consider O&M outsourcing as a viable option
The Interstate Pipelines strategy Key Business Drivers • Gas prices and volatility • Gas supply status • Regulation • High unit cost of incremental capacity (post 2005) • Demand Dynamics • Competition • Resources • Asset rationalization and aging infrastructure Interstate Pipeline Strategy Grow earnings by securing current business, optimizing commercial operations and investing in value creating assets that access and link gas supplies and markets • Manage our Base • Secure our core business through contract renewals and strong customer relationships • Maintain access to sufficient natural gas supplies • Actively support process improvement resulting in productivity gains to offset a portion of increasing operating cost • Manage Regulatory Process • Obtain regulatory relief on treatment of pipeline integrity costs • Develop better intelligence on upcoming regulatory developments thought enhanced relationships with regulators • Grow • Expand access to incremental supply & markets • Underwrite expansion capacity via long-term contracts • Develop innovative services that optimize asset utilization • Grow earnings via new asset development • Pursue acquisition opportunities outside of context of base plan
Interstate Pipelines Key Initiatives • Growth Initiatives • Crosshaul expansion to increase capacity by 112,900 Dth/day through additional compression • Build line to support Ameren contract for 30,000 Dth/day • Storage modernization generates $1.5 million incremental revenue in 2005 and $1.7 million on 2006 • Storage expansion generates incremental operating income of $6 million in 2007 • Expansion project to increase capacity from Carthage to Perryville • Complete off-system capacity enhancement related to compression • Leadership Development Program • Part of overall Workforce Planning project • Pilot program designed to prepare new people for potential leadership positions within the Organization • 12-month program providing multiple development opportunities: • classroom instruction • job shadowing • project work • mentoring
Potential Major Impact Events • Second phase of pipeline integrity regulations from DOT • Renewal of Arkla contracts contract in early 2005 • Renewal of Laclede contract in 2007 • FERC requirement for rate cases on MRT and CEGT • Level of LNG imports in 2008 and beyond
Pipeline Services Evolution:Our current business context is the result of a proven capacity to adapt to changing market conditions Merchant Energy Boom: Rapid construction of gas fired power plants Post Merchant Energy: Asset owners begin to consider outsourcing as a viable option EPNG rupture prompts an immediate regulatory response from DOT and FERC FERC Order 636: Unbundling leads to market reorganization and enhanced cost competitive pressures on the gas grid Industry Events: DOT Pipeline Integrity regulations -- final rules’ scope was 40% of original expectations 1998 1999 2000 2001 2003 2004 1995 1996 2005 2002 1997 Ground-up organization rationalization and service enhancement are key objectives that lead to: 1) Self-directed teams 2) Outsourcing of tasks deemed as not required core competencies CEPS capitalizes on physical location of existing assets, a low-cost structure and an availability of existing personnel to successfully enter the pipeline E&C market Early development of the EWebOQ software system provides CEPS with a marketable tool and establishes their credentials as a bona fide expert in pipeline operations. 2002: CEPS leverages it cost savings O&M contract for Genco’s pipeline and terminal assets to secure the MOPS system O&M contract for NNG Pipeline Services Focus: CEPS continues to focus on third-party O&M opportunities
Pipeline Services leverages its efficient operations platform to develop and pursue opportunities In-house Provided O&M Services CEPS has focused it’s in-house capabilities set on only those tasks required to maintain top quartile strategic investor O&M capabilities.
Pipeline Services strategy Key Business Drivers • Changing competitive /market structure • Employee skills and demographics • Increasing role of regulation • Third party outsourcing • Declining and shifting gas supply • Increase industry demand in engineering services and expertise Pipeline Services Strategy Grow third party earnings by capitalizing on our technical and operating expertise while delivering reliable, safe and cost effective pipeline services to CNP • Manage our Base • Secure our core business by managing current relationships • Maintain and strengthen operational and regulatory excellence around CNP assets • Lead process improvement resulting in productivity gains to offset a portion of increasing operating cost • Manage Regulatory Process • Maintain strong regulatory relationships • Grow • Provide a “full-suite” of solutions around operations and maintenance of pipeline related assets • Leverage skills and capabilities with external customers • Leverage 3rd Party operating contracts into other technical services • Pursue acquisition opportunities outside of context of base plan
The Gathering strategy Key Business Drivers • Drilling activity • Gas/NGL’s prices / volatility • Shifting gas supply • Customer relationships • M&A activity Gathering Strategy Grow earnings through on-system expansion, leveraging our skill set & customer relationships to capture off-system opportunities, marketing new services, and pursuing mergers & acquisitions • Manage our Base • Secure core business • Maintain strong customer relationships • Focus on creating customer friendly solutions (convenience, simplicity, reliability) Manage Regulatory Process • Grow • Expand positions in growing supply basins • Leverage customer relationships, core strength and assets for on and off-system opportunities • Explore opportunities via acquisition and /or partnership • Focus on new service offerings
Gathering Key Initiatives Increase Throughput Greenfields New Products & Services Asset Rationalization • Aggressively pursue new well connects, exploit competitor’s weaknesses, target coal bed methane (CBM) opportunities in the Arkoma Basin, and favorably renegotiate contracts • Capture both on-system and off-system opportunities through leveraging customer relationships • Capitalize on the Downstream Transmission Pipelines’ trend of enforcing gas quality specifications by offering treating services (CO2 & H2S) and fixed-rate processing/blending services • Continue efforts in gathering systems review and compressor optimization for revenue enhancements/cost savings and fuel efficiencies
ServiceStar - Gas Measurement and Field Automation Huge growth potential due to low degree of saturation. • In 10 years, EFM’s with Communication will replace the market share held by Charts: • 1) Chart “Attrition” • 32,000 new wells/year -- mostly EFM’s • 6,500 wells shut-in -- mostly charts • 2)Low-cost EFM “Retrofits” • $4,000 EFM. Communication/Data management retrofit = $50/Month EFM’s -- no Communication EFM’s -- no Communication Charts Charts 23 % 29% 32 % 53 % 15 % 48 % EFM’s -- w/ Communication EFM’s -- w/ Communication 633,000 total gas measurement points 950,000 total gas measurement points (custody transfer + wellheads) (custody transfer + wellheads)
ServiceStar - Interoperability Expands the Potential Market • ServiceStar only interfaces with Bristol EFM’s • Precluded from large market segment • Limiting factor to leveraging our extensive communication infrastructure EFM METER MARKET SHARE
ServiceStar: Unbundling to Expand Potential Market Many Producers don’t need ServiceStar’s bundled, full service offering as they have already invested in some component of the service. However, most producers need some component of ServiceStar’s product offering. Wellhead Measurement Communication Data Management • 15% already have communications • 47% already have EFM’s Communication $30 / mo Data Mgmt. $30 / mo Communication/Data Management $60 / mo Full Service $125 / mo
ServiceStar - UCI has created a huge opportunity to branch out of the CNP Gathering footprint UCI Communications Infrastructure – 10/2003 UCI Communications Infrastructure – Today ServiceStar Communications Coverage Pre-UCI = 30,000 sq. miles Post UCI (Phase I) = 151,000 sq. miles Strategy Follow UCI roll-out with local marketing effort
The ServiceStar strategy can be summarized in these statements. Key Business Drivers • Industry shifting from charts to EFM (electronic flow meters) • Different customers require different service levels and products • Several dominant meter manufacturers share the market - SS communications must integrate with all of them • Robust communications infrastructure is one key to gaining market share Service Star Strategy Grow earnings through increased market access by 1)enhanced product flexibility, 2) developing new products and services, 3) expanding geographic exposure and 4) providing an unbundled portfolio of service offerings • Manage our Base • Be a leader in software solutions for remote monitoring and control in the energy sector • Provide highly reliable and accurate service • Provide a mix of services to meet the varying needs of the market Manage Regulatory Process • Grow • Develop communications capabilities in all major energy-producing regions • Unbundled portfolio of product offerings • Increased product flexibility (interoperability) • Develop new products / services • Enhance geographic market exposure
ServiceStar Key Initiatives • Improve product flexibility and increase market exposure by allowing ServiceStar technology to integrate with more measurement devices • Provide a menu of products and services to customers that are appropriate for their needs • Negotiate Phase II of service star unit deployment across UCI assets • Increase geographic exposure to new regions • Improve programming, back-office and field location technical capabilities • Exploit ServiceStar’s huge communications infrastructure Solve for Interoperability Contract Unbundling Universal Compression (UCI) Realign Sales Efforts Strengthen Technical Services Communication Services
Pipeline Group 2005 Strategy Message and Emphasis • Continued capital investments into our asset businesses is the fundamental emphasis of the plan • Acquisition opportunities will be pursued outside of the context of base plan • Expanding our services companies is an integral component for reaching our growth objectives • Modified Pipeline Services focus based on a new business plan • Basic focus of ServiceStar is unchanged but new business plan revealed opportunities to enlarge our market potential • Post-2009 potential impact of LNG imports may require strategic and/or plan initiative modifications in years 2007 through 2009
Pipeline Group 2005 Plan Operating Income Note: Operating Income includes earnings from Wascom partnership
Appendix December 14, 2004
Interstate Pipelines will pursue these initiatives in 2005 to address performance gaps.
Pipeline Services will pursue these initiatives in 2005 to address performance gaps.
Gathering will pursue these initiatives in 2005 to address performance gaps..
ServiceStar will pursue these initiatives in 2005 to address performance gaps.
Interstate Pipelines & Pipeline Services 2005 Plan Operating Income
Interstate Pipelines & Pipeline Services 2005 Plan Capital Expenditures
Interstate Pipelines & Pipeline Services 2005 Plan Free Cash Flow
Informational: Pipeline Services Third Party Operating Income
Interstate Pipelines & Pipeline Services: 2004 Plan vs. 2005 Plan Op Income
Interstate Pipelines & Pipeline Services: 2004 Plan vs. 2005 Plan CapEx
Interstate Pipelines & Pipeline Services: 2004 Plan vs. 2005 Plan Free Cash Flow