JANUARY 19, 2007
S T R I C T LY
P R I VAT E
AN D
C O N FI D EN TI AL
URGENT ISSUES IN ENERGY FINANCINGS
Presented by Paul Neuhedel
English_General
This presentation was prepared exclusively for the benefit and internal use of the JPMorgan client to whom it is directly addressed and delivered (including
such client’s subsidiaries, the “Company”) in order to assist the Company in evaluating, on a preliminary basis, the feasibility of a possible transaction or
transactions and does not carry any right of publication or disclosure, in whole or in part, to any other party. This presentation is for discussion purposes
only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by JPMorgan. Neither this
presentation nor any of its contents may be disclosed or used for any other purpose without the prior written consent of JPMorgan.
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I S S U E S
I N
E N E R G Y
F I N AN C I N G S
The information in this presentation is based upon any management forecasts supplied to us and reflects prevailing conditions and our views as of this date,
all of which are accordingly subject to change. JPMorgan’s opinions and estimates constitute JPMorgan’s judgment and should be regarded as indicative,
preliminary and for illustrative purposes only. In preparing this presentation, we have relied upon and assumed, without independent verification, the
accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the Company or which was
otherwise reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the assets, stock, or business of the Company or any
other entity. JPMorgan makes no representations as to the actual value which may be received in connection with a transaction nor the legal, tax or
accounting effects of consummating a transaction. Unless expressly contemplated hereby, the information in this presentation does not take into account
the effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and other
effects.
Notwithstanding anything herein to the contrary, the Company and each of its employees, representatives or other agents may disclose to any and all
persons, without limitation of any kind, the U.S. federal and state income tax treatment and the U.S. federal and state income tax structure of the
transactions contemplated hereby and all materials of any kind (including opinions or other tax analyses) that are provided to the Company relating to such
tax treatment and tax structure insofar as such treatment and/or structure relates to a U.S. federal or state income tax strategy provided to the Company
by JPMorgan.
JPMorgan’s policies prohibit employees from offering, directly or indirectly, a favorable research rating or specific price target, or offering to change a
rating or price target, to a subject company as consideration or inducement for the receipt of business or for compensation. JPMorgan also prohibits its
research analysts from being compensated for involvement in investment banking transactions except to the extent that such participation is intended to
benefit investors.
IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters included
herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or
recommendation by anyone not affiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related
penalties.
JPMorgan is a marketing name for investment banking businesses of JPMorgan Chase & Co. and its subsidiaries worldwide. Securities, syndicated loan
arranging, financial advisory and other investment banking activities are performed by a combination of J.P. Morgan Securities Inc., J.P. Morgan plc,
J.P. Morgan Securities Ltd. and the appropriately licensed subsidiaries of JPMorgan Chase & Co. in Asia-Pacific, and lending, derivatives and other
commercial banking activities are performed by JPMorgan Chase Bank, N.A. JPMorgan deal team members may be employees of any of the foregoing
entities.
This presentation does not constitute a commitment by any JPMorgan entity to underwrite, subscribe for or place any securities or to extend or arrange
credit or to provide any other services.
IPED
JPMorgan is the market leader in public power
Ranked #1 in Public Power
 JPMorgan led the largest
Tax-Exempt Public Power Underwriting 2002 to 2006 ($ billion)
18.5
public power transactions in:
 JPMorgan is the #1 senior
manager of public power
financings since 2002 with
over 25% of the public
power market share
 2002: JPMorgan led the
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F I N AN C I N G S
largest public power
financing ever – $11.3
billion for the State of
California DWR
13.3
12.0
 2003: $1.4 billion
transaction for Memphis
Light, Gas and Water
7.1
5.9
JPMorgan is a leading public power underwriter
4.8
 2005: $2.5 billion California
4.1
Department of Water
Resources and $1 billion
Puerto Rico Electric Power
Authority
1.6
JPMorgan Goldman
Sachs
Citigroup
Bear
Stearns
Lehman
Brothers
UBS
Financial
Morgan
Stanley
Merrill
Lynch
0.7
0.6
Banc of
America
RBC
Source: Securities Data Corporation as of January 7, 2007
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1
Agenda
Page
2
Financing Products
9
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F I N AN C I N G S
Issues in Energy Financing
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Environmental legislation has costly implications for utilities
The U.S. is taking a hard look at global warming legislation
 Utilities are likely targets when the newly-elected Congress takes on energy issues
 Congress plans to establish a fund to finance alternative energy sources – using
money from oil companies
 The new Speaker of the House has demonstrated global warming concerns –
sponsor of the Safe Climate Act of 2006
 Over 20 states have renewable energy mandates and almost 30 states have
climate action plans to limit greenhouse gas emissions
million per year
I S SU ES
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FI N AN C I N G
 A 20% reduction in CO2 emissions for a single 460 MW PC plant could cost $32
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Credit perspectives
Industry Outlook
 Moody’s
 Moody’s 2006-2007 Public Power Outlook projects “continued credit stability” through 2007
 Median public rating for public power issuers is an A2
 S&P
 S&P’s Public Power Report Card similarly cites the overall credit stability of the industry
 Only one non-investment grade rated utility, with 84% of all credits rated at least ‘A-’
 Fitch
 Fitch’s “U.S. Power and Gas 2007” claims public power continues to be a “solid and
predictable sector”
 Ratings of ‘A’ for wholesale power system and ‘A+’ for retail systems remain the norm
I S SU ES
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FI N AN C I N G
Credit considerations
 Ability and willingness to pass on
costs – automatic pass through
 Contracts with members – length and
step-up provisions
 Offsets to construction risks
 Maintenance of competitive position
 Liquidity levels during construction
 Use of proven technology
 Potential environmental issues
 Recovery of capital costs
 Address transmission issues
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Natural gas and petroleum prices have risen dramatically in
recent years
Average costs of fossil fuels ($)1
Natural Gas
Petroleum
Coal
12
10
8
6
I S SU ES
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FI N AN C I N G
4
2
0
Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06
Costs measured in 106 Btu
Source: Electric Power Monthly. November 2006. Available http://www.eia.doe.gov
1
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Energy consumption and demand are on the rise
Energy consumption by fuel, 1980-2030 (quadrillion Btu)
60
Liquids
Natural Gas
Coal
Nuclear
Hydropower
History
50
Renewable excluding Hydro
Projections
40
30
10
0
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
Source: Annual Energy Outlook 2007 (Early Release)
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FI N AN C I N G
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What is the current environment for financing power projects?
Positive
 Demand for high quality paper remains strong
although credit spreads have narrowed as
investors seek yield
 Issuers implementing “full disclosure” are
rewarded by investors
 Historically low interest rate environment and
current yield curve make both short and longterm debt financing attractive
public power utilities and cooperatives are
viewed more favorably and are able to attract
capital at a lower cost
 Given the recent volatility in oil and gas,
investors are more receptive to coal-fired
projects
 Investors like proven technologies
 Investors are requiring a premium for non-
recourse energy projects
 Rating agencies are applying greater levels of
scrutiny, particularly to
 Liquidity levels
 Fuel sources
 Competitive position
 Rate setting mechanisms (ability and
willingness)
 Counterparty risk
 Ability of customer base to absorb higher
prices without material increase in
delinquency rates
 Concerns over potential changes in transmission
protocol and grid operations by FERC
 Investors are beginning to focus on financial
risks associated with environmental issues
I S SU ES
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FI N AN C I N G
 Relative to IOUs and independent producers,
Negative
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Next wave of generation projects
 Coal-fired baseload plants
 Oklahoma Municipal Power Authority: 950 MW Red Rock Generation Facility
 Wisconsin Public Power Inc.: 300 MW baseload plant in Escanaba
 Illinois Municipal Power Agency/Indiana Municipal Power Agency: partners in Trimble
County Unit No. 2, a 732 MW facility
 Intermountain Power Agency: 2 unit, 1,650 MW Intermountain Power Project
 Orlando Utilities Commission: 285 MW “clean” coal gasification plant at Stanton
Energy Center
 Gas-fired projects
I S SU ES
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FI N AN C I N G
 Southern California Public Power Authority’s Magnolia project
 Vernon’s Malburg Generating Station
 Risks associated with building
 Cost overruns
 Schedule delays
 New environmental regulations
 Cost inflation
 Use of unproven technologies
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Agenda
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Financing Products
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F I N AN C I N G S
Issues in Energy Financing
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Options for long-lead time financings
 Long Term Debt
 The cash market is an attractive option in the current low interest rate environment
 Short Term Debt
 Auction Rate Securities (ARS)
 Variable Rate Demand Bonds (VRDBs)
 Syndicated Loans
 Index Bonds
 CPI Bonds
 % Libor Bonds
 Hedging/Derivative products
 Finance
F I N AN C I N G
PR O D U C T S
 Commodities
 Energy Prepayments
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Syndicated loans can help meet utilities’ liquidity needs
 Wide product spectrum in credit services
 Letters of Credit
 Liquidity Facilities
 Loans
— Term Loans
— Revolving Lines of Credit
— Bridge Financing
 JPMorgan Chase Bank, N.A. can provide credit solutions
 Strong ratings of Aa2/P-1 (stable), AA-/A-1+ (stable), and A+/F-1+ (positive) from
Moody’s, S&P, and Fitch, respectively
 Renown credit analysis and innovation
 Innovative solutions for clients that blend derivatives and credit products
 Strong record of agenting multi-bank deals fairly and smoothly
F I N AN C I N G
PR O D U C T S
 JPMorgan was ranked as the “Best Credit House” of 2006 by Credit Magazine
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What are CPI bonds?
CPI bonds overview
 In the current market there is significant demand for Municipal CPI Bonds, especially from
institutional investors looking for inflation hedging investments
 Municipal CPI Bonds are floating rate bonds that pay a fixed spread over the trailing
Issuer
percentage change in the Consumer Price Index (CPI)
 To date, issuers of Municipal CPI bonds have swapped them either to a fixed rate or BMA plus
a fixed spread
CPI +
Spread
 In the current market, the Issuer can take advantage of this market opportunity and save 10 or
more basis points relative to traditional fixed rate bonds in selected maturities
 Discussions with investors, as well as recent CPI Bond issues, indicate demand for “AAA”
CPI Bonds
insured CPI bonds in the 8 to 20 year maturity range
What drives investor demand for municipal CPI bonds?
 The prospects for inflation have generated increased investor interest in inflation-linked products
 Buyers of Municipal CPI bonds may be looking to express a view on inflation, fix a real rate of return and/or diversify
F I N AN C I N G
PR O D U C T S
their investment portfolio
 Municipal CPI bonds offer a number of advantages relative to alternative investments
 Commodities and stocks generally increase in value with rising inflation. However they do not provide direct or
explicit inflation hedges, and are taxable
 Tax-exempt money market funds are exempt but do not explicitly provide an inflation hedge
 Treasury Inflation Protected Securities (TIPS) principal accretion structure generates “phantom” income and
therefore have adverse tax implications
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What are % of LIBOR bonds?
Typical Bond Structure

Maturities range 10-30 years and can be bullets or amortizing structures

Interest based upon 67% of 3 month LIBOR plus a fixed spread


Could be structured using a different reference rate, such as 1 month LIBOR or a constant maturity
swap rate (i.e., 5 or 10 year CMS rate)
Interest Paid Quarterly, with an Actual/Actual day count convention

Could be structured to pay with a different frequency or day count basis

May give Issuer a call option in 5 to 10 years

Investors do not have a put to the Issuer

Bonds are insured or highly rated (AA- or above)

Issuer sells bonds through a public offering to investors

Issuer
% of LIBOR
+ Spread
% of LIBOR
Bonds
Can be incorporated into multi-modal documents similar to VRDBs, if requested
Why are % of LIBOR bonds so desirable to investors?
 Certain investors evaluate the % of LIBOR Bonds by comparing the % of LIBOR bonds swapped-to-fixed basis versus traditional fixed
F I N AN C I N G
PR O D U C T S
rate bonds
 When compared to 20 year fixed rate bonds, the % of LIBOR bonds swapped-to-fixed would carry a lower all-in yield in the current
market
 Given the 5 year call on the bonds, a % of LIBOR bonds swapped-to-fixed would have a higher all-in yield in the current market
 In addition, the current yield of the % of LIBOR bond is much higher than can be achieved in the current market on a long dated fixed
rate bond due to the flatness of the yield curve
 % of LIBOR bonds are a good diversification tool for this class of investor
 If rates increase, fixed rate bonds will depreciate but the % of LIBOR bonds outperform, offering an attractive hedge
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Financial hedging products
Hedging products
Less liquidity /
More expensive
Greater liquidity /
Less expensive
F I N AN C I N G
PR O D U C T S
Issuer trading
spread vs.
muni market
Muni bonds vs.
BMA/LIBOR swaps
Muni bonds vs.
BMA/LIBOR swaps
Tax reform
risk
Tax reform
risk
Tax reform
risk
Credit
spreads
Credit
spreads
Credit
spreads
Credit
spreads
Treasury
rates
Treasury
rates
Treasury
rates
Treasury
rates
Treasury
rates
BMA Swap
LIBOR Swap
U.S. Treasury Lock
Tax-Exempt
Forward Bond
MMD Rate Lock
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Energy risk management is a high priority
 Utilities should work to institutionalize energy risk management as part of the
utility’s overall risk management program
 Natural gas and electricity risk can be bifurcated between physical and financial
risks
 Price and supply can be managed separately
 Systematic price hedging can be advantageous
 Structured transactions can offer significant value
 Emissions markets continue to develop with much more active interest from
Institutional Investors
F I N AN C I N G
PR O D U C T S
An energy hedging program can help reduce price volatility, decreasing exposure
to prices through periods of extreme price increases and reducing impact on a
utility’s budget
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Emissions markets
The market
 US SO2 market is illiquid and challenged by highly inelastic supply/demand side
 The nature of the market creates natural longs and shorts who are compelled to buy or sell
with little sensitivity to price
 The vast majority of S02 allowances trade through the OTC Broker Market. Other sources of
liquidity include:
 Direct bilateral deals
 OTC via Intercontinental Exchange (ICE)
 NYMEX Futures (Clearport only)
 Chicago Climate Exchange Futures
 Prices are highly volatile and depend heavily on current supply and demand
 Natural Shorts:
 Large coal intensive generators
F I N AN C I N G
PR O D U C T S
 Market makers, Suppliers:
 Banks, Hedge Funds, Utilities, Municipalities
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Emissions markets hedging transactions
The market
 Spot Market Purchases / Sales
 Transactions are settled via electronic transfer between buyers/sellers EPA allowance
accounts.
 Physically Settled Options
 Typically trade in larger volumes than the market for spot purchases/sales
 Forward Market Purchases / Sales
 Allows customers to lock in current allowances prices while delaying the settlement and
associated cash flows until a future date
 Customers generally execute these transactions only with highly rated counter parties.
 Financially Settled Swaps & Options
 Used when customer has exposure to price fluctuations in the emissions markets but does not
have a need for the actual physical allowances.
F I N AN C I N G
PR O D U C T S
 Vintage Swaps
 Allows naturals to manage their allowance position across the different vintage years
 Historically done as a like-kind exchange. Recently the ability of these transactions to
achieve this tax benefit has been disputed.
 Emission Lending Arrangements
 Natural longs can earn a small rate of interest on idle allowances in their EPA accounts or
borrow allowances to meet compliance obligation.
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Renewed interest in energy prepayment projects
Selected tax-exempt commodity prepayment transactions ($ millions)
PEAK
$199.8
FGU
$115.6
MGAG
$178.2
MGAG
$57.5
$57.3
MGAG
$68.1
1995
1996
MGAG
$115.9
1997
MGAG
$59.3
MGAM
$72.9
1998
1999
MGAG
$104.3
TEAC
$174.6
APEA
$185.9
APEA
$294.7
2000
2003
2004
APEA
$306.0
Tennergy
$234.2
Prior to Treasury Review
Benefits of commodity prepayments
 Prior to Treasury review, energy prepayment transactions
 Long term, reliable gas supply
 There were over 20 municipal transactions completed with
PR O D U C T S
Treasury Review
No transactions
2001
2002
completed
MEAC
$130.7
were well received in the market
F I N AN C I N G
MLGW
$1,400.0
a total par amount of over $2 billion
 JPMorgan was involved in 9 gas prepayments prior to the
Treasury review process
 Since the new regulations, JPMorgan has led 5 energy
prepayments totaling over $4.0 billion
 There continues to be strong interest in prepayment
transactions from municipal utilities
2005
LMGA
$223.7
TX MGAS
$2,336.4
PEAK
$1,030.7
NGAC
$240.0
MEAC
$649.0
Main St.
$1,055.9
2006
2007
Tennergy
$746.0
MGAM
$425.0
FGU
$694.2
TEAC
$1,994.5
 Discounted price to index
 Take-and-pay gas contract
 Standard NAESB based terms
 Firm deliveries with attractive force majeure provisions
 No bond or other financial obligations under non-recourse
structures
 Key drivers: interest rates, credit spreads, tenor, natural gas
prices, prepayment volumes, contract terms
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How does the basic prepayment structure work?
2
5
JPMorgan
Chase & Co.
Guaranty
Gas
JPMorgan
Ventures Energy
Proceeds
1
Debt Service
Municipal
Bondholders
3
Gas
Issuer
Prepayment
Floating
Payment
Participant(s)
4
F I N AN C I N G
PR O D U C T S
1
Issuer issues tax-exempt debt secured by
revenues from the project, which includes
gas sales and swap receipts
2
Issuer prepays JPMVEC for a 10/12/15/20
year supply of firm natural gas
3
Issuer delivers daily gas volumes to
Participant(s) in exchange for a floating Index
price less a discount
Swap
Counterparty
4
Issuer and JPMVEC execute matched commodity
swaps with AA/Aa category counterparty to convert
pricing from fixed to a floating Index
5
JPMorgan Chase & Co. (Aa3/A+) guarantees JPMVEC
delivery obligation to the Issuer
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