WRMA 200 5 Asia-Pacific Meeting “Cross-Commodity Weather Options to Hedge Energy Market Risks”

1. WRMA 2005Asia-Pacific Meeting “Cross-Commodity Weather Options to Hedge Energy Market Risks” 7 March 2005 Masaaki Katsuyama Swiss Re Capital Markets (Japan) Corporation

2. Overview … • Core business involves distributing a commodity to mainly captive customers within a given service territory. • Universe has significant financial diversity as evidenced by credit ratings. • Business risk includes: regulatory environment, markets, competition, operations management and other activities. • Consistency and stability in operating results is what investors seek.

3. Increased Attention... • Both debt and equity analysts are examining the methods companies employ to manage risk against volatile demand and prices. • Increased attention paid to those companies who bolster credit measures and reduce their business risks. • Path to stability is predicated on continuing to buoy earnings quality and credit quality. “The way in which LDC’s deal with risk of unknown future price and demand is important to their financial stability and creditworthiness.” - Standard & Poor’s

4. Risk Management … Price x Volume*= Revenue Price x Volume* = Cost Weather Risk Management Price Risk Management Lower Earnings Volatility + = *By not hedging volumetric risk, earnings and cash flow remain exposed to significant volatility.

5. Risk Management... Risk of Price Price Combined Risks of Volume P1 and Price P0 Risk of Volume (Weather) Expected Total Cost V1 V0 Volume

6. Risk Management... Knowns … • Normal weather - Expected volume purchased at known price. • Colder weather - Demand increases at “known” rate. • Warmer weather - Demand falls off at “known” rate. • Very cold weather - May have to buy from market. • Very warm weather - May have to sell excess supply into market. Risks … • Very cold weather & market prices impacting sales margins • Very warm weather & market prices below purchase price Effective Risk Management Product Is One Which Pays When …. • Company expects to (1) purchase commodity in the market and (2) prices are above $X/MMBtu; and • Company expects to (1) sell commodity in the market and (2) prices are below purchase price.

7. Case Study1: Generic Financial Product: Temperature Contingent Gas Options Term: November to March Gas Price Index: Gas Daily and IFERC FOM Transco Z6 Weather Index: New York LGA (WBAN 14732) Weather Strikes: Nov: (a) Tavg < AoF or (b) Tavg > VoF Dec: (a) Tavg < BoF or (b) Tavg > WoF Jan: (a) Tavg < CoF or (b) Tavg > XoF Feb: (a) Tavg < DoF or (b) Tavg > YoF Mar: (a) Tavg < EoF or (b) Tavg > ZoF Volume: 10,000MMBtu/day Delivery: Financial Payouts: (a) On low temp days: 10,000 x max(0,GD-IFERC FOM) (b) On high temp days: 10,000 x max(0,IFERC FOM-GD) Premium: $______

8. Case Study 2: Physical Delivery Term: Dec 1 – Feb 28 Pipeline: Centerpoint Energy Gas Transmission (East) Delivery Point: North Pool Volume: 40,000 MMBtu/Day Reference Station: New Orleans (WBAN#12916) Index: IFGMR Reliant East (FOM) Option Premium: $ x Vol. x Days of the Month Strikes: CallPut Dec =<28oF L =>66oF H Jan =<26oF L =>64oF H Feb =<30oF L =>69oF H When day ahead forecast of low temperature or high temperature for New Orleans is at the above or below referenced strike temperatures, Buyer shall have the right to:  - call on Volume for that day. - put the Volume back to Seller.

9. Case Study 3:Inventory Management Because future temperatures and gas prices are unknown, the risk of exposure is difficult to determine … Problem: Southeast Energy purchases gas for the upcoming winter in advance at $6.85/MMBtu, locking in a sufficient quantity to cover a harsh winter season. The downside of this strategy is that if the winter proves to be mild, the LDC is left with a long gas position in a soft market. Solution: A cross-commodity product allows LDCs to hedge both price and volume risks simultaneously. The cash pay-out from a cross commodity option is based on an underlying weather variable and the difference between a market price of natural gas, and a contracted strike price for that commodity.

10. Case Study 3 (Continued)

11. Case Study 3 (Continued) Scenario Warm: Nov 04 HDDs = 200 Dec 04 IFERC SONAT = $5.00/MMBtu Pay-out = (520-200) HDDs *(6.85-5.00)$/MMBtu*70,000/(520-170)HDDs = $118,400 Scenario Normal: Nov 04 HDDs = 345 Dec 04 IFERC SONAT = $6.50/MMBtu Pay-out = (520-345) HDDs *(6.85-6.50)$/MMBtu*70,000/(520-170)HDDs = $12,250 Scenario Cold: Nov 04 HDDs = 500 Dec 04 IFERC SONAT = $7.50/MMBtu Pay-out = (520-500) HDDs *(6.85-7.50)$/MMBtu*70,000/(520-170)HDDs = $0

12. Case Study 4: Weather- linked Monthly Gas Calls Midwest Energy employs weather-linked fixed price physical, monthly gas calls to hedge against cold weather and the need for additional gas at potentially high prices. To minimize the cost of such physical, monthly call options, Midwest Energy sells monthly puts for the same volume. Physical delivery, if required, is into Trunkline Pipeline at East LA. The HDD values represent a 5% colder than normal strike through the strike date. The strike dates are the day prior to the close of the NYMEX gas contract.

13. Case Study 4 (Continued) SRFP has identified ABC Gas as a potential partner, with ABC providing the necessary physical gas capabilities. Wx Contingent Phys Gas Call SR sells Wx Contingent Fin Call Option Midwest Energy Swiss Re Financial Products (SRFP) ABC Gas Phys Gas Put SR buys Fin Call Option Net Option Premium Phys. Gas Net Option Premium Cost of Gas ABC transacts with Midwest under existing relationship. SRFP transacts with ABC under an ISDA and CSA.

14. Case Study 4 (Continued) 1 ABC Gas Swiss Re (SRFP) 2 3 1. SRFP purchases from ABC Gas financial gas calls . Assuming option premium of $.88/MMbtu, 205 contracts, 3 months -SRFP pays $5,400,000. 2. Wx contingent financial gas call for a 19 % discount to straight financial gas call due to weather contingency. SRFP receives $4,375,000. 3. Net Option Premium payable by SRFP to ABC Gas equals $1,025,000.

15. Case Study 5: Multi-year HDD Put with Moving Strike Nat Gat, Inc. (“NatGas), a Local Distribution Company, mostly services residential customers. With sales concentrated in the Northeastern United States, NatGas is heavily affected by winter temperatures. The number of MMBtu’s distributed is highly correlated with Heating Degree Days. With: • Sales distributed as follows: New York, NY – 57.20%, Boston, MA – 24.50%, Philadelphia, PA – 12.00%, and Washington, DC – 6.30%. • Internal analysis determines that the marginal impact of one MMBtu on Nat Gas, Inc.’s profit is $.25. • NatGas is willing to absorb the first 3% variation off of the 10-Year normal accumulation of HDD’s. NatGas seeks to put in place a multi-year program with “rolling strikes”,; whereby, each subsequent year is determined as 97% of the previous 10-Yr, HDD average. • Regression analysis indicates that, on average, one less HDD decreases sales in the region by 40,000 MMBtu’s during the period November – March. Therefore, the impact to Nat Gas, Inc. is $10,000/HDD.

16. Case Study 5 (Continued) Structure: Heating Degree Day (“HDD”) Floor (“Put”) Index: Cumulative HDDs Term: November 1, 2003 – March 31, 2004 November 1, 2004 – March 31, 2005 November 1, 2005– March 31, 2006 November 1, 2006 – March 31, 2007 November 1, 2007 – March 31, 2008 Stations: New York, LaGuardia – 57.20%, Boston, MA – 14.5%, Philadelphia, PA – 12.00% Baltimore, MD – 6.30%, Floor Strike: 97% of previous10 -Yr. HDD Average Payout: $10,000/HDD Limit: $10,000,000/ Annum

17. Case Study 5 (Continued)

18. Case Study 6: Compound Option Energy, Inc., would like to have the right but not the obligation to buy a winter Cumulative Average Temperature (CAT) call structure protecting its shortfall in sales volume during a mild winter. Further, its board of directors wishes to delay the purchasing decision to December 1st but requires that coverage is for the November to March period.

19. Case Study 6 (Continued) Type: Cumulative Average Temperature (CAT) Compound Option Exercise Date: December 1, 2004 Underlying: Tokyo, CAT Call (details see below) Option Premium: JPY 5,940,000 Type: CAT Call Risk Period: November 1, 2004 – March 31, 2005 Strike: 1,475 degree Celsius Notional: JPY 1,079,300 per degree Celsius Limit: JPY 107,930,000 Premium:  JPY 12,420,000

20. In Conclusion ... By proactively managing risk (both price and volume), companies can continue to bolster financial stability and deliver shareholder value via: • Focus on core business practices. • Maintenance of adequate liquidity via improved and predictable cash flow. • Continued earnings improvements. • Further strengthening of the balance sheet. • If you are not hedging … you are speculating.

21. Contact Information スイス・リー・キャピタルマーケッツ証券会社　東京支店〒１００－０００４ 　東京都千代田区大手町１－５－１ 大手町ファーストスクエア ウエスト９階商品開発営業部長　勝山正昭 Masaaki Katsuyama tel. 03 3217 3531 masaaki_katsuyama@swissre.com Swiss Re Financial Products in New York - Mark Tawney: tel.2124077316 mark_tawney@swissre.com - Bill Windle: tel.2124077317william_windle@swissre.com

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