1. Strictly Confidential – for BP client use only Marty Melchi June 15, 2006 IMGA Price Risk Management Discussion

2. What is Risk Management Risk Management- is the process of measuring, or assessing exposures to potential loss and uncertainty, and developing strategies to manage the risk. The probability of loss and the severity of a potential loss are key components in understanding risk and developing an appropriate risk management strategy.

3. Why the Need for Risk Management? How does natural gas price volatility affect cash flow, budget and margin? How sensitive is bottom line to natural gas/energy costs? How difficult is it to pass on cost increases? What options for risk mitigation and associated cost of risk management? What are peers or competition doing?

4. Different Risk Management Philosophies Take the market -ie Inside FERC/Gas Daily Beat market -ie less than Inside FERC/Gas Daily Insurance against Disaster Manage around fixed price budget targets Manage margins/profitability Portfolio Diversification Competitive Advantage

5. Energy Price Risk Management Hedging Considerations Discernible Market Considerations Less Obvious Considerations (Forward Implied Volatility) Useful Structures

6. Considerations for Price Risk Management Price Risk Management is executed to accomplish established and changing objectives: –Pragmatically to eliminate cost/budget volatility –Strategically to meet budget and cost objective –Tactically for balance sheet adjustments and changes such as cashflow, operational change, etc.

7. Market Considerations for Price Risk Management Market knowledge can be generally categorized into Price assessment and Volatility expectations: –Price - the fair market value reflected in the current forward price curve: All relevant information is factored-in by the market Current forward price relative to historical distribution Fundamentals/Technicals –Volatility - measure of expected value movement over time : Volatility is price distribution over a defined period of time Historical vs. Forward Implied Forward Implied Volatility is key input component to Options valuation High Forward Implied Volatility creates upside potential distribution bias (“skew”) which is less favorable for consumers

8. Natural Gas: Implied Volatility vs. Price Volatility has little correlation to absolute price level Volatility has little correlation to price direction Volatility increases sharply with technical breakouts (in either direction) and tends to decrease with stagnation within a technical range. Rolling Average (mo 7 to mo 18)

9. Price and Volatility can guide decisions as to which hedge product to apply. Strategy assumes an ongoing price risk management program and a market that has a mean-reverting nature: Hedge Product Decision Matrix Increasing Price Increasing Volatility BUY SWAPS BUY COLLARS BUY BASIS BUY SWAPS or ENHANCED COLLARS BUY CAPS BALANCE PORTFOLIO: Execute underweighted Floor, Swap or Collar

10. Strategy for Execution Develop strategy in a non crisis mode if possible, documenting strategy for rational. While your philosophy will remain constant, keep a flexible strategy as market conditions and fundamentals shift. Once the philosophy has been set, a strategy for execution must be agreed upon.

11. Hedge Example: 3-Year Rolling Purchase Plan % Hedged Cal 2007Cal 2008Cal 2009Cal 2010Cal 2011 By End of Month: Dec-2006100%50%25%0% Dec-2007 100%50%25%0% Dec-2008 100%50%25%

12. MonthNYMEX Dec-31-02 $4.03 Apr-30-03 $4.71 Aug-30-03 $4.93 Dec-31-03 $5.06 Apr-30-04 $5.63 Aug-30-04 $6.42 Dec-31-04 $6.90 Apr-30-05 $7.84 Aug-31-05 $10.33 Average $6.21 Price Stability Three Year Pricing Plan

13. Physical supply of natural gas Counterpart pays based on an index, e.g. NGI Chicago BP pays IMGA the NGI Chicago IMGA pays $9.50/MMBtu u NGI Chicago Index for Nov 06 is $9.75 /MMBtu u IMGA pays supplier $9.75 X 30,000 = $292,500 u BP pays IMGA $0.25/MMBtu or $7,500 u IMGA spends $285,000 on NG - its price is fixed at $9.50/MMBtu u NGI Chicago Index for Nov 06 is $9.25/MMBtu u IMGA pays supplier $9.25 X 30,000 = $277,500 u IMGA pays BP $0.25/MMBtu or $7,500 u IMGA spends $285,000 on NG - its price is fixed at $9.50/MMBtu u IMGA’s price is fixed at $9.50 /MMBtu, regardless of market conditions Prices are illustrative only Scenario 1: Scenario 2: Example: Natural Gas Fixed Price Swap for 5 months at $9.50/MMBtu for 30,000 MMBtu/month (Nov 06 - Mar 07) IMGA Fixed Price/Swap

14. Caps/Call Options Trade IdeasStrictly Confidential – for BP client use only Objective  End user limits their upside price exposure  Commonly structured as value neutral. Cap Mechanics Buy Cap  A $10.00/MMBtu Call for Nov 06- Mar 07 Natural Gas – this is the maximum you will pay and you benefit from all the downside price movement  The protection has a cost, for example; for Nov ‘06 – Mar ’07 with the underlying at $9.75/MMbtu the cost would be $1.50/MMBtu for this insurance Scenarios  If market price price is above $10.00, end user pays $10.00  If market price below $10.00, end user pays market $10.00/MMBtu Time

15. Consumer Costless Collar Trade IdeasStrictly Confidential – for BP client use only Objective  End user limits their upside price exposure  Commonly structured as value neutral Collar Mechanics Buy Cap / Sell Floor  End user chooses a range: opportunity given on the downside is used to fund the cost of the upside price protection Scenarios  If market price price is above $12.00, end user pays $12.00  If market price is between $12.00 and $9.00, end user pays market  If market price is below $9.00, end user pays $9.00

16. Enhanced Collar Objective  End user limits their upside price exposure below a Costless Collar  End user participates in a range of downward price movements.  End user gives up protection in well above-market prices to gain a lower initial upside price protection  Structured as value neutral. End user Collar Mechanics: Sell Cap 1/ Buy Cap 2 / Sell Floor  End user receives additional premium for selling a call which creates better initial range economics vs the costless collar Trade Ideas Scenarios  If market price is above $13.00, end user price is market price minus $3.00  If market price is between $10.00 and $13.00 end user pays $10.00  If market price is between $8.50 and $10.00, end user pays market price  If market price is below $8.50, end user pays $8.50 Strictly Confidential – for BP client use only

17. 50% Participating Swap Trade Ideas Scenarios  If market price is above $11.00, end user price is $11.00  If market price falls below $11.00, 50% of volume is priced at $11.00 and remaining 50% priced at market Strictly Confidential – for BP client use only  Provides price protection from rising prices while offering flexibility to participate in downside movements  No upfront or limited upfront cost Pros/Cons  Pros: Maximum cost of gas known today  Costless structure  Ability to participate if market fundamentals change  Cons: Only receive 50% of downward market move Market Price $11.00/MMBtu Price Your Price 50% volume Time

18. Summary Price Risk Management should meet objectives and be applied consistently Forward Price and Implied Volatility can offer risk product guidance at execution – Decision Matrix Risk Products can be combined and tailored for your most applicable hedge structure (location, term, settlement, etc…) The physical, financial and technical (credit, contracts, etc) nature of your relationship with BP can enhance your Risk Management program