“Natural Gas Price Hedging and Supply Acquisition Options” Discussion Forum APPA – National Conference Tuesday, June 21, 2005 From 1:30 – 2:30 PM

2 The Presenter Roger Fontes General Manager & CEO Florida Municipal Power Agency

3 Hedging Natural Gas Price Risk  Why manage risk?  FMPA’s situation  Hedge products pros and cons  Product mix

4 Why Manage Risk?  The electric generation business has many inherent risks  Some of these risks bear significant financial impacts  Develop a program to “manage” or mitigate these risks  Avoid bad outcomes

5 FMPA’s Precipitating Event Prompt Month Settlement

6 Other Precipitating Events  Catastrophic failure of generation  Fuel supplier insolvency  Loss of transmission or fuel transportation  Non-performance under long-term commitment

7 FMPA’s Response  Identified major risk – i.e. natural gas prices  Educated staff  Hired expertise, staff or consulting  Drafted energy risk management policy  Started slowly

8 Natural Gas Price Risks  Fixed price imbedded in rate structure  Market price exposure  Two different approaches  FMPA falls into the former category

9 How Much to Hedge?  Varies depending on risk appetite  FMPA started with a:  33% fixed price, 33% first-of-month index price, 33% daily spot price mixture  Didn’t provide sufficient protection  Added more fixed price protection

10 How Long to Hedge?  Began with hedging the near-term period  Evidence suggests a month hedge horizon most successful  Moved to a longer-term program  Hedge % weighted toward near-term

11 What Products to Use?  Experimentation with a variety of products  Over time optimal mix will become evident  FMPA started with fixed price physical and futures  Current program has mixture of many products

12 Hedge Products  Futures  Swaps  Options  Collars  Spreads  Physical Purchases  Basis Swaps

13 How Much Does It Cost?  Hire some expertise, staff or consultant  Exchange broker fees are minimal  Option premiums can add up but can help avoid embarrassing outcomes  FMPA has allocated $2 million/year  Costs have run less than half of this

14 The Ongoing Problem NYMEX Prompt Month Historical Mean 1996 Forward Mean

15 Final Comments  Determine where your exposures lie  Start slowly and educate staff and board  Hire expertise  Find the optimal product mix  Set expenditure limits and stay within them

16 Hedging Natural Gas Price Risk Questions?