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J A N U A R Y   1 9 ,   2 0 0 7
U R G E N T   I S S U E S   I N   E N E R G Y 
 F I N A N C I N G S
Presented by Paul Neuhedel
S T R I C T L Y   P R I V A T E   A N D 
 C O N F I D E N T I A L
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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 clients 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. 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. JPMorgans
opinions and estimates constitute JPMorgans
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. JPMorgans 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.
U R G E N T   I S S U E S   I N   E N E R G Y 
 F I N A N C I N G S
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JPMorgan is the market leader in public power
Tax-Exempt Public Power Underwriting 2002 to 2006
( billion)
Ranked 1 in Public Power

• JPMorgan led the largest public power
  transactions in
• 2002 JPMorgan led the largest public power
  financing ever 11.3 billion for the State of
  California DWR
• 2003 1.4 billion transaction for Memphis Light,
  Gas and Water
• 2005 2.5 billion California Department of Water
  Resources and 1 billion Puerto Rico Electric
  Power Authority

• JPMorgan is the 1 senior manager of public power
  financings since 2002 with over 25 of the public
  power market share

JPMorgan is a leading public power underwriter
U R G E N T   I S S U E S   I N   E N E R G Y 
 F I N A N C I N G S
Source Securities Data Corporation as of January
7, 2007
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Issues in Energy Financing
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Financing Products
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U R G E N T   I S S U E S   I N   E N E R G Y 
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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
• A 20 reduction in CO2 emissions for a single 460
  MW PC plant could cost 32 million per year

I S S U E S   I N   E N E R G Y 
 F I N A N C I N G
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Credit perspectives
Industry Outlook

• Moodys
• Moodys 2006-2007 Public Power Outlook projects
  continued credit stability through 2007
• Median public rating for public power issuers is
  an A2
• SP
• SPs 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
• Fitchs 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

Credit considerations
I S S U E S   I N   E N E R G Y 
 F I N A N C I N G

• 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
I S S U E S   I N   E N E R G Y 
 F I N A N C I N G
1 Costs measured in 106 Btu
Source Electric Power Monthly. November 2006.
Available http//www.eia.doe.gov
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Energy consumption and demand are on the rise
Energy consumption by fuel, 1980-2030
(quadrillion Btu)
History
Projections
I S S U E S   I N   E N E R G Y 
 F I N A N C I N G
Source Annual Energy Outlook 2007 (Early Release)
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What is the current environment for financing
power projects?
Positive
Negative

• 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

• 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 long-term
  debt financing attractive
• Relative to IOUs and independent producers,
  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

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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
• Southern California Public Power Authoritys
  Magnolia project
• Vernons Malburg Generating Station
• Risks associated with building
• Cost overruns
• Schedule delays
• New environmental regulations
• Cost inflation
• Use of unproven technologies

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Financing Products
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
• Commodities
• Energy Prepayments

F I N A N C I N G   P R O D U C T S
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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 Moodys,
  SP, 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
• JPMorgan was ranked as the Best Credit House of
  2006 by Credit Magazine

F I N A N C I N G   P R O D U C T S
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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 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
• 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 insured
  CPI bonds in the 8 to 20 year maturity range

Issuer
CPI Spread
CPI Bonds
What drives investor demand for municipal CPI
bonds?
F I N A N C I N G   P R O D U C T S

• 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 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
• Can be incorporated into multi-modal documents
  similar to VRDBs, if requested

Issuer
of LIBOR Spread
of LIBOR Bonds
F I N A N C I N G   P R O D U C T S
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
  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
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Energy risk management is a high priority

• Utilities should work to institutionalize energy
  risk management as part of the utilitys 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
• An energy hedging program can help reduce price
  volatility, decreasing exposure to prices through
  periods of extreme price increases and reducing
  impact on a utilitys 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
• 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.
• 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.

F I N A N C I N G   P R O D U C T S
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Renewed interest in energy prepayment projects
Selected tax-exempt commodity prepayment
transactions ( millions)
Prior to Treasury Review
Benefits of commodity prepayments

• Prior to Treasury review, energy prepayment
  transactions were well received in the market
• There were over 20 municipal transactions
  completed with 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

• Long term, reliable gas supply
• 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?
Municipal Bondholders
Debt Service
Proceeds
Gas
Gas
JPMorgan Ventures Energy
Issuer
Participant(s)
JPMorgan Chase Co.
Guaranty
Prepayment
Floating Payment
Fixed Payment
Fixed Payment
Floating Payment
Floating Payment
F I N A N C I N G   P R O D U C T S
Issuer issues tax-exempt debt secured by revenues
from the project, which includes gas sales and
swap receipts
Issuer and JPMVEC execute matched commodity swaps
with AA/Aa category counterparty to convert
pricing from fixed to a floating Index
Swap Counterparty
JPMorgan Chase Co. (Aa3/A) guarantees JPMVEC
delivery obligation to the Issuer
Issuer prepays JPMVEC for a 10/12/15/20 year
supply of firm natural gas
Issuer delivers daily gas volumes to
Participant(s) in exchange for a floating Index
price less a discount
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