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

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

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

3. Fuel Supply Risk Management

4. Market Fundamentals Cash Flow Sensitivity Volatility Weather Point of View Interest Coverage Forward Curve Market Point of View Risk Profile RISK MANAGEMENT PROGRAM Introduction to Commodity Risk Management Risk Management Framework 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. 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. Introduction to Commodity Risk Management Risk Management Objectives Short-Term Tactical Longer-Term Strategic Competitive Advantage • Marketing Advantage Through Pricing Alternatives • Offer Physical Contracts With Embedded Hedges (Tailored Contracts) • Manage Customers’ Price Exposures • 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 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) • Upfront cash payment (premium) • Complete protection if prices fall (if long) • Buyer retains benefit if prices rise Combinations • Participating Swaps • Collars 6

10. Coal Risk Management

11. 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 Risk Management Trading Coal Scope of Services Coal and Emissions Trading Capabilities • 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. 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

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. 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