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									                                                           JANUARY 19, 2007




                      URGENT ISSUES IN ENERGY FINANCINGS


                      Presented by Paul Neuhedel
C O N FI D EN TI AL
AN D
P R I VAT E
ST R I C T LY
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.
                                       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.
                  F I N AN C I N G S




                                       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
                  E N E R G Y




                                       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.
                  I N




                                       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,
                  I S S U E S




                                       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
                  UR G E N T




                                       credit or to provide any other services.



                                                                                                                                                                                               IPED
                     JPMorgan is the market leader in public power


                      Ranked #1 in Public Power             Tax-Exempt Public Power Underwriting 2002 to 2006 ($ billion)

                       JPMorgan led the largest                18.5
                         public power transactions in:                                                                              JPMorgan is the #1 senior
                          2002: JPMorgan led the                                                                                      manager of public power
                            largest public power                                                                                       financings since 2002 with
                            financing ever – $11.3                             13.3
                                                                                                                                       over 25% of the public
                            billion for the State of                                         12.0
                                                                                                                                       power market share
                            California DWR
F I N AN C I N G S




                          2003: $1.4 billion
                            transaction for Memphis                                                         7.1
                            Light, Gas and Water                                                                         5.9
                                                                                                 JPMorgan is a leading public power underwriter
                                                                                                                                    4.8
                          2005: $2.5 billion California                                                                                        4.1
                            Department of Water
E N E R G Y




                            Resources and $1 billion                                                                                                     1.6
                            Puerto Rico Electric Power                                                                                                              0.7     0.6

                            Authority
                                                             JPMorgan Goldman             Citigroup        Bear        Lehman        UBS      Morgan    Merrill   Banc of   RBC
I N




                                                                       Sachs                              Stearns      Brothers   Financial   Stanley   Lynch     America
I S S U E S




                                                           Source: Securities Data Corporation as of January 7, 2007
UR G E N T




                                                                                                                                                                    IPED    1
                     Agenda

                                                           Page

                              Issues in Energy Financing     2


                              Financing Products             9
F I N AN C I N G S
E N E R G Y
I N
I S S U E S
UR G E N T




                                                                  IPED   2
                  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
FI N AN C I N G
E N E R G Y
I N
IS SU ES




                                                                                                          IPED   3
                  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

                     Credit considerations
FI N AN C I N G




                            Ability and willingness to pass on          Liquidity levels during construction
                             costs – automatic pass through
                                                                         Use of proven technology
                            Contracts with members – length and
                                                                         Potential environmental issues
                             step-up provisions
E N E R G Y




                                                                         Recovery of capital costs
                            Offsets to construction risks
                                                                         Address transmission issues
                            Maintenance of competitive position
I N
IS SU ES




                                                                                                                       IPED   4
                  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



                        4
FI N AN C I N G




                        2
E N E R G Y




                        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

                   1 Costs measured in 106 Btu
                    Source: Electric Power Monthly. November 2006. Available http://www.eia.doe.gov
I N
IS SU ES




                                                                                                                                               IPED     5
                  Energy consumption and demand are on the rise

                     Energy consumption by fuel, 1980-2030 (quadrillion Btu)

                      60
                                                    Liquids         Natural Gas   Coal   Nuclear   Hydropower     Renewable excluding Hydro


                                                                History                                            Projections
                      50



                      40




                      30



                      20
FI N AN C I N G




                      10



                       0
E N E R G Y




                        1980            1985            1990              1995    2000     2005     2010        2015        2020        2025   2030
                     Source: Annual Energy Outlook 2007 (Early Release)
I N
IS SU ES




                                                                                                                                               IPED   6
                  What is the current environment for financing power projects?

                     Positive                                           Negative
                      Demand for high quality paper remains strong      Investors are requiring a premium for non-
                       although credit spreads have narrowed as           recourse energy projects
                       investors seek yield
                                                                         Rating agencies are applying greater levels of
                      Issuers implementing ―full disclosure‖ are         scrutiny, particularly to
                       rewarded by investors                               Liquidity levels

                      Historically low interest rate environment and      Fuel sources
                       current yield curve make both short and long-       Competitive position
                       term debt financing attractive                      Rate setting mechanisms (ability and
                                                                             willingness)
                      Relative to IOUs and independent producers,
                                                                           Counterparty risk
                       public power utilities and cooperatives are
                       viewed more favorably and are able to attract       Ability of customer base to absorb higher
                       capital at a lower cost                               prices without material increase in
FI N AN C I N G




                                                                             delinquency rates
                      Given the recent volatility in oil and gas,
                       investors are more receptive to coal-fired        Concerns over potential changes in transmission
                       projects                                           protocol and grid operations by FERC
E N E R G Y




                      Investors like proven technologies                Investors are beginning to focus on financial
                                                                          risks associated with environmental issues
I N
IS SU ES




                                                                                                                       IPED   7
                  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 Authority‘s Magnolia project
                        Vernon‘s Malburg Generating Station
FI N AN C I N G




                      Risks associated with building
                        Cost overruns
                        Schedule delays
E N E R G Y




                        New environmental regulations
                        Cost inflation
I N




                        Use of unproven technologies
IS SU ES




                                                                                                           IPED   8
                     Agenda

                                                           Page

                              Issues in Energy Financing     2


                              Financing Products             9
F I N AN C I N G S
E N E R G Y
I N
I S S U E S
UR G E N T




                                                                  IPED   9
                  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
PR O D U C T S




                        Energy Prepayments
FI N AN C I N G




                                                                                                                  IPED   10
                  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
                         JPMorgan was ranked as the ―Best Credit House‖ of 2006 by Credit Magazine
PR O D U C T S
FI N AN C I N G




                                                                                                               IPED   11
                  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         CPI +
                         a fixed spread                                                                                       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
                        their investment portfolio
PR O D U C T S




                      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
FI N AN C I N G




                         Treasury Inflation Protected Securities (TIPS) principal accretion structure generates ―phantom‖ income and
                            therefore have adverse tax implications

                                                                                                                                        IPED     12
                  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          Issuer
                              swap rate (i.e., 5 or 10 year CMS rate)

                       Interest Paid Quarterly, with an Actual/Actual day count convention
                                                                                                                                % of LIBOR
                             Could be structured to pay with a different frequency or day count basis                           + Spread
                       May give Issuer a call option in 5 to 10 years
                                                                                                                                        % of LIBOR
                       Investors do not have a put to the Issuer
                                                                                                                                           Bonds
                       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

                   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
PR O D U C T S




                          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
FI N AN C I N G




                    % 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


                                                                                                                                                 IPED     13
                  Financial hedging products
                      Hedging products


                             Less liquidity /                                               Greater liquidity /
                             More expensive                                                  Less expensive




                           Issuer trading
                             spread vs.
                            muni market

                          Muni bonds vs.         Muni bonds vs.
                         BMA/LIBOR swaps        BMA/LIBOR swaps

                            Tax reform            Tax reform      Tax reform
                               risk                  risk            risk

                               Credit                Credit         Credit        Credit
                              spreads               spreads        spreads       spreads



                              Treasury              Treasury       Treasury      Treasury           Treasury
                                rates                 rates          rates         rates              rates
PR O D U C T S




                          Tax-Exempt            MMD Rate Lock     BMA Swap     LIBOR Swap     U.S. Treasury Lock
                         Forward Bond
FI N AN C I N G




                                                                                                                  IPED   14
                  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


                        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
PR O D U C T S
FI N AN C I N G




                                                                                                            IPED   15
                  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:
PR O D U C T S




                         Banks, Hedge Funds, Utilities, Municipalities
FI N AN C I N G




                                                                                                                       IPED   16
                  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
PR O D U C T S




                          Historically done as a like-kind exchange. Recently the ability of these transactions to
                            achieve this tax benefit has been disputed.

                        Emission Lending Arrangements
FI N AN C I N G




                          Natural longs can earn a small rate of interest on idle allowances in their EPA accounts or
                            borrow allowances to meet compliance obligation.


                                                                                                                         IPED   17
                  Renewed interest in energy prepayment projects
                   Selected tax-exempt commodity prepayment transactions ($ millions)

                                                                           PEAK                                                                         LMGA         TX MGAS
                                                                          $199.8                                                                        $223.7       $2,336.4
                                                      MGAG
                                                      $178.2                FGU                                                                          PEAK         MEAC
                                      MGAG                                 $115.6                                                   MLGW                $1,030.7      $649.0
                   MGAG                                MGAG                               APEA
                                      $57.5                                   MGAM                                                 $1,400.0              NGAC        Main St.
                   $68.1                               $115.9                            $294.7
                                      $57.3                                   $72.9                                                                      $240.0      $1,055.9
                                                                                                  Treasury Review
                                                                                                  No transactions
                  1995         1996           1997            1998            1999      2000      2001      2002       2003            2004   2005       2006            2007
                                                                                                     completed
                                                                                                                                                          Tennergy
                                      MGAG           MGAG              TEAC           MEAC                                                                 $746.0
                                      $59.3          $104.3           $174.6          $130.7                                   APEA            MGAM
                                                                                                                              $306.0                             FGU
                                                                                                                                               $425.0
                                                                      APEA            Tennergy                                                                  $694.2
                                                                     $185.9            $234.2                                                                  TEAC
                                                                                                                                                              $1,994.5


                   Prior to Treasury Review                                                           Benefits of commodity prepayments

                    Prior to Treasury review, energy prepayment transactions                          Long term, reliable gas supply
                         were well received in the market
                                                                                                       Discounted price to index
                    There were over 20 municipal transactions completed with
                                                                                                       Take-and-pay gas contract
                         a total par amount of over $2 billion
PR O D U C T S




                                                                                                       Standard NAESB based terms
                    JPMorgan was involved in 9 gas prepayments prior to the
                         Treasury review process                                                       Firm deliveries with attractive force majeure provisions
                    Since the new regulations, JPMorgan has led 5 energy                              No bond or other financial obligations under non-recourse
                         prepayments totaling over $4.0 billion                                          structures
FI N AN C I N G




                    There continues to be strong interest in prepayment                               Key drivers: interest rates, credit spreads, tenor, natural gas
                         transactions from municipal utilities                                           prices, prepayment volumes, contract terms

                                                                                                                                                            IPED     18
                  How does the basic prepayment structure work?

                                                                                                    Municipal
                                                                                                   Bondholders




                                                                                                    Debt Service

                                                                                                                    Proceeds
                                                                                               1
                                                                                        2                                             3
                                                  5                                  Gas                                            Gas
                        JPMorgan                                JPMorgan
                                                                                                              Issuer                               Participant(s)
                       Chase & Co.            Guaranty       Ventures Energy      Prepayment                                       Floating
                                                                                                                                   Payment

                                                                                    4


                       Issuer issues tax-exempt debt secured by                                                    Issuer and JPMVEC execute matched commodity
                   1   revenues from the project, which includes                                   4               swaps with AA/Aa category counterparty to convert
                       gas sales and swap receipts                                Swap                             pricing from fixed to a floating Index
PR O D U C T S




                                                                               Counterparty
                       Issuer prepays JPMVEC for a 10/12/15/20                                                     JPMorgan Chase & Co. (Aa3/A+) guarantees JPMVEC
                   2                                                                               5               delivery obligation to the Issuer
                       year supply of firm natural gas

                       Issuer delivers daily gas volumes to
                   3   Participant(s) in exchange for a floating Index
FI N AN C I N G




                       price less a discount




                                                                                                                                                          IPED    19

								
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