Mirant Expects to Double Participation in Gas Market in 4 Years

Despite the sharp downturn in natural gas prices, Mirant CFO Raymond D. Hill said his company is on a substantial gas expansion program. Mirant expects to double its participation in the gas market over the next four years.

Speaking during a Banc of America Securities web cast, Hill said the company is preparing to double its gas production, marketed volumes, transportation and storage utilization. The company's gas sales volumes already have doubled since 1998.

"By the year 2004, we expect to double again," said Hill. Mirant expects to increase its gas production to more than 8 Bcf/d from 3.8 Bcf/d, grow its marketing volumes to 20-25 Bcf/d from 12.3 Bcf/d, increase its transportation volumes to 4-6 Bcf/d from 2.1 Bcf/d and increase its storage capacity utilization to 60-90 Bcf from 41 Bcf. Mirant already has the most power generation among the top 10 largest energy marketers in North America.

"To have a sustainable profitable and growing energy business in North America you need a sophisticated power and gas marketing capability and risk management, a diversified [generation] portfolio since not all regions of the U.S. will be in supply-demand equilibrium of the United States at the same time, a strategically located portfolio in the sense that it is within the transmission constraints and on the right side of the transmission constraints," said Hill. "And finally access to natural gas production is an important part. It's more than having access to gas in the ground; you have to have access to transportation to bring it to your plant because that has been the bottleneck -- for instance in California in the last year and in the Northeast at various times. Access to storage is important as well."

Risk management will continue to be a major part of Mirant's portfolio, said Hill, because despite the decline in prices, gas price volatility is expected to remain high. "Using Black Shoals option pricing methodology, I can strip out how the market is valuing volatility going forward and the interesting story this is telling us is that volatility is dropping but still should remain at historically high levels," he said. "More important, looking back through 1999, I see that the market view of volatility in the gas business has been increasing steadily. Even as we've seen the price of natural gas drop during the summer, the market's implied future volatility has continued to climb. The highest curve on our chart is actually measured as of August."

And around Transco Zone 6, volatility is expected to be particularly high going forward, he said. "It's an order of magnitude higher than at Henry Hub, so that the mean of recent volatility is 600% on this graph... What you have is a market that is still expecting a lot of volatility in gas, and I think in terms of the relationship of new [power plants] being gas-fired that will translate into volatility in electric pricing. And that is what a risk management, trading and marketing organization like ours profits from."

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