1. Managing Fuel Supply CONFIDENTIAL DRAFT Chris Fink
Managing Director and Head of Public Utilities Group
Merrill Lynch & Co., Inc.
January 19, 2006
CONFIDENTIAL
DRAFT

2. Managing Fuel Supply Table of Contents
1. Fuel Supply Risk Management 1
2. Coal Risk Management 7
3. Natural Gas Prepayment Financings 10

3. Fuel Supply Risk Management

4. Introduction to Commodity Risk Management
Risk Management Framework
Market
Fundamentals
RISK MANAGEMENT
PROGRAM
Point of View
Volatility
Forward
Curve
Weather
Cash Flow
Sensitivity
Interest
Coverage
Risk
Profile 1

5. Introduction to Commodity Risk Management
Risk Management Framework
Changes in market fundamentals (supply and demand factors) drive price changes
Natural gas and power prices exhibit high volatility because of frequent changes to market fundamentals
Price volatility creates earnings risk (revenue or operating cost exposure)
Earnings risk potentially results in shareholder/banker concerns which may inhibit growth and may result in increased cost-of-capital
A risk management program addresses the impact of commodity price volatility in the context of corporate objectives and seeks to mitigate earnings volatility within acceptable bounds 2

6. NYMEX / Basis (Index / Volatility)
Introduction to Commodity Risk Management
Risk Management Framework
Identify Risk
Exposures
NYMEX / Basis (Index / Volatility)
Budgeted Energy Costs
Return-On-Investment
Swaps / Options / Combinations
FAS-133 Hedge Effectiveness
Set Objectives /
Price Targets
Choose Hedge
Instruments
Check Accounting
Impact 3

7. Short-Term Tactical Longer-Term Strategic Competitive Advantage
Introduction to Commodity Risk Management
Risk Management Objectives
Short-Term
Tactical
Longer-Term
Strategic
Competitive
Advantage
Corporate Budgeting
Control Variable Costs
Hedge Physical Transactions
Reduce Cash Flow and Earnings Volatility
Allow Greater Leverage
Reduce Cost of Capital
Hedge Against Industry Downturns
Evaluate Marginal Investments
Protect Return-on-Investment
Marketing Advantage Through Pricing Alternatives
Offer Physical Contracts With Embedded Hedges (Tailored Contracts)
Manage Customers’ Price Exposures 4

8. Introduction to Commodity Risk Management
Types of Supply Risk
Market Risk
Price – absolute value of a commodity
Forward Curve – difference between prompt and future delivery prices
Basis – difference between two price indices
Volatility – variability of prices over time
Liquidity – difference between bid and offer prices across the forward curve
Counterparty Risk
Credit – ability of a counterparty to meet financial obligations
Performance – willingness of a counterparty to meet financial obligations
Documentation – ability of a counterparty to properly record and settle transactions 5

9. Introduction to Commodity Risk Management
Financial Hedge Building Blocks
Swaps
No initial cash payment
Complete protection of prices rise (if long) or fall (if short)
Opportunity loss if prices fall (if long) or rise (if short)
Caps (Call Options)
Upfront cash payment (premium)
Complete protection if prices rise (if long)
Buyer retains benefit if prices fall
Floors (Put Options)
Complete protection if prices fall (if long)
Buyer retains benefit if prices rise
Combinations
Participating Swaps
Collars 6

10. Coal Risk Management

11. Coal and Emissions Trading Capabilities
Coal Risk Management
Trading Coal
Energy Trading Companies provide us with a unique insight into the coal market including its opportunities and potential pitfalls. These companies trade physically and financially with utilities, producers, municipals, hedge funds, and investment banks
Coal and Emissions Trading Capabilities
Scope of Services
Established trading presence for physical and financial coal products
Markets include US (East and West) and International (Physical, Financial and Freight)
Product offerings for Eastern, Western and import coal markets: Physical hedging and delivery, financial hedging, portfolio optimization, and producer financing
Coal trading instruments include OTC forwards and options as well as NYMEX cleared contracts for Eastern and Western coals
Emissions trading instruments for SO2 and NOx include OTC forward and financial products (NYMEX, Chicago Climate Exchange)
Coal position management: Purchasing, optimization, origination, analysis, and trading
Emissions position management: analysis, structuring, origination and trading
Transportation management: Negotiate rail, barge, and terminal agreements
Scheduling and logistics management: Provide rail, terminal, vessel and barge transportation 7

12. Coal Risk Management Trading Coal
Coal and Emissions Trading Capabilities Overview
Proprietary Trading
Trading of standardized contracts in the OTC and Futures/NYMEX markets and U.S. emissions markets
Integrate market knowledge into power, natural gas, and international coal trading businesses
Coal Portfolio Optimization
Additional service offering to clients
Increase opportunities for physical arbitrage by utilizing trading and origination capability
Structured Products
Coal tolling
Producer financing
Long term coal hedging for development of new power plants
Financial hedging of non-coal products; synfuel/crude oil, ammonia nitrate, diesel 8

13. Coal Asset Optimization Overview
Benefits
Increased credit leverage against coal suppliers from aggregate portfolio
Utilize market analytics to develop a long term strategic procurement plan for coal procurement
Hedging strategy recommendations built on market analytics on the global coal marketplace
Lower cost of hedging the coal portfolio
Optimize the value of coal portfolio and plant combustion and storage flexibility
Expanded market coverage and market intelligence (utility direct, producer direct, and OTC)
Participation in optimization profits
Anonymity to the marketplace 9

14. Natural Gas Prepayment Financings

15. Natural Gas Prepayment Financing
Executive Summary
Take advantage of favorable IRS regulations to reduce natural gas costs
The IRS has enacted very favorable final regulations which allow municipal utilities to use tax-exempt bond proceeds to purchase a future supply of natural gas or electricity
The Municipal Utility could take advantage of these regulations by structuring pre-paid natural gas transactions to reduce the net cost of electricity funded with tax-exempt bond proceeds
In today’s interest rate environment, Municipal Utilities can prepay for natural gas or electricity using tax-exempt bonds and lock-in savings below index gas
Under federal tax law, Municipal Utilities can contract for an amount of gas up to the level which is used to create electricity provided to both residential as well as commercial and industrial users
These transactions can be structured so that the Municipal Utility deliveries are sculpted to match projected demand (i.e., no gas delivered in months in which gas-fired facilities are not expected to be used) 10

16. Energy Trading Company Performance Surety Provider
Natural Gas Prepayment Financing
Fixed Volume Prepayment Structure
Highly Rated
Commodity
Swap
Provider
Index Gas
Pmt.
Index Gas
Pmt.
Fixed Gas
Pmt.
Fixed Gas
Pmt.
Monthly Flows
Scheduled Gas at Index minus predetermined discount
Prepayment
Energy Trading Company
Municipal
Utility
Issuer
Scheduled Gas
Payments (equal to a ratable percentage of fixed debt service plus or minus adjustment)
Bond Proceeds
Principal + Interest
Performance Surety Provider
Security
Interest
Investors
Security
Interest 11

17. Prepayment Transactions for Coal?
Why not?
Why prepayment transactions have yet to be structured for coal?
The current Treasury Regulations and Internal Revenue Code only allow for two specified commodities – natural gas and electricity
However, under the Treasury Regulations, the Commissioner of the IRS may, by published guidance, set forth additional circumstances in which a prepayment can be made for other types of fuel
Query: Can these rules be extended to coal supply? 12