Geneva December, 2007

1. World Meteorological OrganizationSimpleHeating Degree Day Program GenevaDecember, 2007

2. Weather and Natural Gas Distribution Temperature and Gas Utilization are tightly correlated

3. Weather and Natural Gas Distribution Weather Risk for Gas Utilities Gas Distribution companies have weather risk: • warm winters, which reduce volumes of gas utilized • residential and light commercial (e.g. shops, office buildings) customers There are two components in managing the gas distributor’s weather risk: 1. Weather • Protection in US usually based on Heating Degree Days (ºF) 2.Company Commercial Economics

4. Example Weather Temperature and HDDs Weather Station: City in Northeastern U. S. HDDs = max([65ºF – {Daily Tmax + Daily Tmin}/2],0)

5. Example Weather Purpose of Weather Analysis • Understanding of weather environment in which company operates • Quantification of weather risk • Stochastic modeling for risk analysis and pricing purposes

6. Example Weather Weather Factors City in Northeastern U. S. – Oct/Sept HDD Norms • 30 Year Norm 1951-1980 4,179.0 HDDs 1961-1990 4,112.4 HDDs 1971-2000 3,994.2 HDDs • Trailing Decade 1981-1990 4,043.2 HDDs 1991-2000 4,042.8 HDDs 2001-2006 3,984.8 HDDs

7. Example Weather Weather Factors City in Northeast U. S. – HDD Trends

8. Example Weather Weather Factors Other factors to establish a data series: • Changes in instrumentation • Changes in location • Changes in reporting procedures

9. Commercial Considerations Sensitivity to Weather - Volume How does a change in temperature affect changes in volume of consumption? • Segmentation of customer base. • Patterns of gas usage: • Equipment (age, technology, efficiency) • Building practices (insulation, windows, etc.) • Local customs • Local topography • Geographical relationship of customers in relation to the weather station Result: establish change in volume of gas consumed per unit of change in temperature

10. Commercial Considerations Sensitivity to Weather - Cost What is the economic impact of changes in temperature (i.e. of changes in volumes)? • Cost of natural gas to distributor • Contracted supply • Anticipated open market (spot) supply • Price of sale to customer • Regulated: rate structure • Unregulated: contracted and market price Result: Establish change in economics due to change per unit of temperature

11. Commercial Considerations Sensitivity to Weather – Critical Level of Risk What is the critical point at which weather adversely affects company economics? • Volume and price • Cost of gas • Operating costs • Financial obligations • Regulatory constraints Result: Determine trigger point for HDD program payments

12. Commercial Considerations Commercial Conclusions • Critical Point: 3,750 HDDs (Oct/Sept) • Value of Change in HDDs: $mm,mmm/HDD at critical point • Risk Coverage: to no more than 100 year return period

13. Example Program Weather Probabilities Combining Enterprise Factors and Weather Factors 1.30%tile 36.5%tile

14. Example Program Outline Example Program Buyer Natural Gas Distribution Utility Coverage Loss of Revenue resulting from adversely warm weather. Weather Risk Total aggregate HDDs calculated during the Period Weather Station City Airport WBAN _____ Period 1 October 200Q – 30 September 200R HDD Limit US$mm,mmm Attachment 3,750 HDDs Exit 3,100 HDDs Payment US$mm,mmm for every total aggregate HDD less than the Attachment, subject to a maximum payment of (650 x US$mm,mmm) Premium US$x,xxx,xxx

15. Example Program Hypothetical Outcome Example Program

16. Example Program Weather Probabilities Program Impact

17. Commercial Considerations Final Commercial Point Settlement: Rapid settlement: within x days (usually 5 days) of publication of preliminary data, subject to revision within 95 days (final data)

18. Conclusions • Access to historical data • Identification of station(s) • Validation of data • Missing data • Validation of analysis • Fallback stations • Data about stations • Instrumentation history • Location history • Recording procedures • Access to current data • Monitor weather status • Efficient, effective settlement • Fallback as needed • More extensive requirements for Portfolio Management

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