Chris FinkManaging Director and Head of Public Utilities Group Merrill Lynch & Co., Inc.

January 19, 2006

Managing Fuel Supply

Table of Contents

Managing Fuel Supply

1. Fuel Supply Risk Management 1

2. Coal Risk Management 7

3. Natural Gas Prepayment Financings 10

Fuel Supply Risk Management

Market Fundamentals

Market Fundamentals

RISK MANAGEMENTPROGRAM

RISK MANAGEMENTPROGRAM

MarketPoint of View

MarketPoint of View

VolatilityVolatility

ForwardCurve

ForwardCurve

WeatherPoint of View

WeatherPoint of View

Cash FlowSensitivityCash FlowSensitivity

InterestCoverageInterest

Coverage

RiskProfileRisk

Profile

Introduction to Commodity Risk ManagementRisk Management Framework

1

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

Introduction to Commodity Risk Management

Risk Management Framework

NYMEX / Basis (Index / Volatility)

Budgeted Energy Costs

Return-On-Investment

Swaps / Options / Combinations

FAS-133 Hedge Effectiveness

Identify RiskExposures

Set Objectives / Price Targets

Choose HedgeInstruments

Check AccountingImpact

3

Introduction to Commodity Risk Management

Risk Management Objectives

Short-TermTactical

Longer-TermStrategic

CompetitiveAdvantage

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

Introduction to Commodity Risk Management

Introduction to Commodity Risk ManagementTypes 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

Introduction to Commodity Risk ManagementFinancial 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) Upfront cash payment (premium) Complete protection if prices fall (if long) Buyer retains benefit if prices rise

Combinations Participating Swaps Collars

6

Coal Risk Management

Coal Risk Management

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 banksCoal and Emissions Trading

Capabilities Scope of Services

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

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)

7

Trading Coal

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

Coal and Emissions Trading Capabilities Overview

Coal Risk Management

Trading Coal

Benefits

Coal Asset Optimization Overview

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

Natural Gas Prepayment Financings

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)

Take advantage of favorable IRS regulations to reduce natural gas costs

10

Natural Gas Prepayment FinancingExecutive Summary

11

Natural Gas Prepayment FinancingFixed Volume Prepayment Structure

Investors

Bond ProceedsPrincipal + Interest

Prepayment

Scheduled Gas

Monthly Flows

SecurityInterest

Issuer

Scheduled Gas at Index minus predetermined discount

MunicipalUtility

Payments (equal to a ratable percentage of fixed debt service plus or minus

adjustment)

SecurityInterest

Performance Surety

Provider

Highly RatedCommodity

SwapProvider

Fixed Gas Pmt.

Index Gas Pmt.

Fixed Gas Pmt.

Index Gas Pmt.

Energy Trading

Company

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?

Why prepayment transactions have yet to be structured for coal?

12

Prepayment Transactions for Coal?Why not?