Sequent Energy: Going To the Next Level

1. Sequent Energy:Going To the Next Level Douglas N. SchantzPresident, Sequent Energy Management

2. What We Promised for 2003 • Deliver EBIT target of $15 MM • Projected 2003 EBIT of $23-25 MM • Land third party asset management deal • Executed four asset management/ peaking transactions • Develop new business systems and controls • Openlink Endur System has been selected • Build a deeper bench of key commercial and support personnel • Office move in mid-2003; IT depth and execution • Hired 20 experienced people over the year 2003 Analyst/Investor Conference

3. 2002/2003 Comparison 2002 2003 Volumes through Q3 (Bcf/day) 1.29 1.72 $ 9.1M $ 23-25 M Full year EBIT (2003 projected) Number of counterparties, end of Q3 94 157 Number of employees, end of Q3 42 62

4. Focus Territory Detroit New York Chicago Atlanta Henry Hub Katy 2003 Analyst/Investor Conference

5. 2003 Price History 2003 Analyst/Investor Conference

6. Changes in Supply/Demand Balances U.S. Gas Balances 2003 Injection Season 2003 Analyst/Investor Conference

7. Sequent’s Opportunity Lies in AN Uncertain Future Source: National Petroleum Council September 2003 Report. 2003 Analyst/Investor Conference

8. Vanishing Industry Participants Top Marketers in 2002 Top Marketers in 2003 BP Mirant Sempra ConocoPhillips Coral (Shell) ChevronTexaco Cinergy Tenaska El Paso Nexen Encana Williams Oneok Reliant Aquila Anadarko Entergy-Koch Amerada Hess Western Gas Resources Enron BP Mirant Reliant Duke Dynegy Sempra Aquila El Paso AEP Coral Axia (Koch) Conoco Texaco Cook Inlet PG&E Williams Dominion Exxon Mobil 2003 Analyst/Investor Conference

9. Sequent Activities Production Area Storage Market Area Storage End Use Customers • Short- and Long-term • Time value arbitrage • Pipeline Segmentation • Locational arbitrage • Pipeline segmentation • Locational arbitrage • Asset management • Delivered” commodity • Producer Services Delivered Commodity Peaking Services Affiliated customer supply optimization Asset optimization Deal origination 2003 Analyst/Investor Conference

10. Producer Services - Overview • Provide basic production area services to small- and large-cap producers • Wellhead aggregation • Imbalance management • Pipeline management • Structured pricing products • Extract sustainable margin as credit worthy buyer 2003 Analyst/Investor Conference

11. Production Area Storage - Overview • Currently leasing 2 Bcf of high-deliverability storage in Southern Louisiana • Interconnected with 8 pipelines • Full capacity can be withdrawn in 10 days • Allows Sequent to arbitrage numerous time spreads available in the market • Cash market vs prompt futures • Balance of month cash vs prompt futures • Prompt futures vs forward futures • Pipe to pipe basis arbitrage • Peaking sales • Distress buys 2003 Analyst/Investor Conference

12. Landry Parish Allen Parish ANR Tennessee Texas Gas Columbia Gulf Lafayette Trunkline Parish Iberia Parish How Sequent Makes Money From Storage Parameters Louisiana Capacity: 2 Bcf Injection: 100,000/d Withdrawal: 200,000/d Term: thru 10/31/04 Acadia Parish Jefferson Davis Parish TETCO Florida Gas Conoco Arbitrage Types Vermilion Parish Cameron Parish • Cash market vs. prompt futures • Balance of month cash vs. prompt futures • Prompt futures vs. forward futures • Pipe to pipe basis arbitrage • Peaking sales • Distress buys Gulf of Mexico Example: Cash market to prompt month arbitrage Cash market = $4.00 Prompt month = $4.40 Sequent buys physical at $4.00 and injects Sequent sell futures at $4.40 .40 spread Injection & storage (.22) cost .18 margin 2003 Analyst/Investor Conference

13. Transportation Management - Overview • Currently managing about 1 Bcf/day of firm transportation • Contained in asset management agreements • Short-term capacity releases from pipelines • Allows Sequent to arbitrage many locational spreads available in the market • Excess transport • Pipeline segmentation • Create value through our understanding of the arbitrage opportunities available on the gas pipeline grid 2003 Analyst/Investor Conference

14. Transportation Management - Segmentation Understanding all capacity entitlements is a critical component to successful optimization efforts. Zone 6 Pipeline Transco Path South Texas to New York (Zone 1 to Zone 6) Zone 5 Zone 4 Zone 3 Zone 2 Zone 1 2003 Analyst/Investor Conference

15. Delivered Commodity - Overview Mid–marketing • Expanding standardized product offering to customer base Trading • Active day and intra-day trading • Larger bid-offer spreads • Focus is on portfolio optimization, not speculation 2003 Analyst/Investor Conference

16. Market Demand for Sequent’s Products and Services 2003 Analyst/Investor Conference

17. Asset Management - Overview • Currently have asset management agreements in place with four non-affiliated utilities • Some agreements include managing the supply • Value is created by monetizing storage and transport assets 2003 Analyst/Investor Conference

18. Gas Assets Managed* Transport MDQ Dth/Day Storage MSQ, Dth Cove Point 69,000 690,000 Sonat 142,000 6,200,000 ANR 170,000 11,300,000 Columbia Gas 229,000 5,050,000 Columbia Gulf 52,000 0 Dominion 114,000 3,500,000 Transco 67,000 11,670,000 Tennessee 40,000 2,900,000 East Tennessee 46,000 0 *Does not include assets managed for industrials and municipal utilities or assets acquired for Sequent’s own account 2003 Analyst/Investor Conference

19. Asset Management – Load Duration Curve Example Obligation Serve all load on a firm basis under any weather condition. Opportunity Monetize all upstream assets when not required to serve LDC load. 2003 Analyst/Investor Conference

20. Peaking Sales - Overview • Currently serving two peaking agreements that provide delivered commodity options • Demand charges paid • Sequent uses excess storage and transport available from utilities to back the service • Value is created when better sourcing alternatives are utilized 2003 Analyst/Investor Conference

21. New Origination - Overview • Embarking on strategy to accumulate earnings accretive products and services • Asset management agreements • Contract purchases from exiting merchants • Peaking transactions • Structured commodity sales • Transactions are valued intrinsically; extrinsic optionality is an upside • Expect to close 10-15 origination transactions per year 2003 Analyst/Investor Conference

22. New Origination - Intrinsic & Extrinsic Value Description Definitions: Intrinsic value is transportation and storage value that can be readily hedged in a forward market. Extrinsic Value is the transportation and storage value that cannot be readily hedged in a forward market. Forward market conditions and cash market conditions dictate these opportunities. Extrinsic Intrinsic 2003 Analyst/Investor Conference

23. Details Are Important to Our Customers and To Us Operational Expertise Flexible Product Offering Customer Relationships Credit Worthy Counterparty Risk Processes 2003 Analyst/Investor Conference

24. Sequent Energy Management Counterparty Exposures by S&P Equivalent Credit Rating S&P Equivalent 11/10/03 % Credit Rating AAA 9.90 4% AAA Group 9.90 4% AA+ 3.90 2% AA 2.46 1% AA- 17.97 7% AA Group 24.33 10% A+ 12.15 5% A 31.41 12% A- 39.69 16% A Group 83.25 33% BBB+ 47.05 19% BBB 67.75 26% BBB- 15.56 6% BBB Group 130.36 51% BB+ 0.96 0% BB 4.70 2% BB Group 5.66 2% CCC+ 0.01 0% CCC Group 0.01 0% Total 253.51 100% • 111 Counterparties with $253.51 of exposure • Top 20 represent 61% of this exposure • Average portfolio credit rating is BBB 2003 Analyst/Investor Conference

25. Sequent Energy Management Counterparty Exposures by Industry Type 2003 Analyst/Investor Conference

26. Sequent Systems Initiative • Openlink ENDUR chosen for Sequent’s Energy Trading and Risk Management system after thorough evaluation process • Sapient engaged as project manager to assist Openlink in design and implementation • AGLR technology organization has been actively involved in this process • Extensive contractual provisions negotiated with both vendors (Openlink and Sapient) • Go live date scheduled for summer 2004 2003 Analyst/Investor Conference

27. Sequent Energy ManagementRisk Control In order for Executive Management to effectively capture and monitor risks identified and quantitatively measured, a sound Risk Management framework is required. • Organization & People Well defined risk management organization structure • Methodologies Consistent and approved valuation and risk measurement methodologies • Limits & Controls Appropriate risk limits to communicate the Company’s • risk appetite • Reporting A comprehensive and consistent framework for • communicating risk taking activities across the • organization • Policies Comprehensive policies to communicate strategies, • approved activities, risk tolerances, and control • processes and procedures • Systems & Data integrated systems and consistent and reliable data are • the backbone of an effective risk management program 2003 Analyst/Investor Conference

28. Risk-Adjusted Performance Indicators Value at Risk * • VaR: Maximum expected variation in the portfolio's value within a given degree of confidence, over a specific holding period. • VaR Details: • 95% confidence interval • Sequent’s VaR model is based on weighted historical price changes 2003 Analyst/Investor Conference

29. Risk-Adjusted Performance Indicators Wholesale Services - Sharpe Ratio Summary of Results: The Sharpe Ratio for Sequent Wholesale Services is 2.12 for the 2003 year-to-date period ending September 2003. The decrease in the value is attributed primarily to lower profitability. The decreasing trend of this ratio is expected to reverse as we move out of the shoulder/fall season and into the winter season when we usually see increased profitability. • The Sharpe Ratio is the difference between the return to an investment and a benchmark return, divided by the standard deviation of that difference. • Inputs to the Sharp Ratio: • Operating Income: Wholesale Services • Average Monthly Capital Deployed: Wholesale Services • 90-Day Treasury Bill Rates Sharpe Ratio - Benchmarks Mutual Funds: Trading Systems Sharpe > 0 Sharpe > 0 Sharpe > 1 “Pretty Good” Sharpe > 2 “Very Good” Sharpe >2 “Outstanding” Sharpe >3 “Outstanding” 2003 Analyst/Investor Conference

30. Risk-Adjusted Performance Indicators Risk Adjusted Return On Capital (RAROC) - Wholesale Services RAROC is a risk-adjusted performance measure. The metric measures the profitability of a firm based on economic capital. • Preliminary work on RAROC includes the following inputs & results: • Operating Income (Wholesale Services) • Market Risk (Average 10-day VaR x 4) • Credit Risk • Operational Risk (1/2 VaR x 4) • Results: 8-month average = 17.5% References: Keers, Greg. “Risk Adjusted Capital Allocation For Energy Project Appraisal.” 2002. Crouhy, Michel. Risk Management. 2001. Standard & Poor’s. “Debt Treatment of Contingent Capital for Energy Trading and . Marketing.” 20 March 2003. 2003 Analyst/Investor Conference

31. Sequent Energy Management Net Assets and Dividend History 2003 Analyst/Investor Conference

32. Sequent Energy Management Working Capital and NYMEX Settled Prices 2003 Analyst/Investor Conference

33. 2004 Outlook • Sequent will move to the next level • Significant increase in activity • Geographical diversity across the eastern half of the United States • Expand into additional service activities • Implement new end-to-end business system • Leverage the current Sequent infrastructure • Develop a higher sustainability of margins • Less driven by weather events • Origination activities will be a significant contributor 2003 Analyst/Investor Conference

34. 2004 Plan Projected Gross Margin Contribution Projected Volumetric Share by Pipeline 2003 Analyst/Investor Conference