PRIMAP - Price Risk Management and Procurement Program

Do you have a game plan?

Imagine the head coach for a team deciding that there will be no formal preparation for the upcoming season. The coach has decided that he will formulate each "game plan" based on reactions and on-the-fly adjustments predicated upon how the opposing team executes their game. No in-depth understanding of the team's strengths and weaknesses, no analysis of the competition, and no consideration of travel, weather, and other external factors? How do you think that this team will fare? Is "reacting" and "adjusting" the new coaching philosophy for the 21st Century?

Do you have a game plan? I. What is a PRIMAP

At Gelber & Associates, we believe there is no substitute for planning and preparation prior to the season. Our perspective regarding the energy industry is crystal clear:

These important considerations are identified and analyzed in our PRIMAP documents, Gelber's energy business plan development methodology .

Gelber & Associates' Price Risk Management and Procurement Program (PRIMAP) provides the mandatory framework for any successful energy procurement risk management program. PRIMAP is formulated based on defined corporate governances, management objectives, and comprehensive market analysis. Additionally, PRIMAP serves as the 'game plan' for optimizing energy procurements by factoring in:

• client asset and profile determinates
• risk/reward assessments
• corporate energy policies and procedures
• regulatory considerations
• client expectations and desired outcomes

Do you have a game plan? I. What is a PRIMAP II. Natural Gas Price Volatility

The natural gas market witnessed dramatic price volatility during the calendar years 2000-2001. During this period, NYMEX prices reached a high of $10.10 (December 2000) and then moved down to a low of $1.78 (September 2001).

Natural gas is the most volatile commodity traded on the New York Mercantile Exchange (NYMEX). However, the price increase experienced in the winter of 2000-2001 was far greater than anticipated and this highlights just how volatile natural gas pricing can be.

Many companies have recently exited the merchant trading business and the resulting reduction in "liquidity" has caused the market to be even more volatile. Due to natural gas' intense volatility, it requires special tools and risk management approaches, including greater analysis and planning than is required for other less volatile commodities. Utilities, their respective state commissions, and industrial consumers recognize more than ever a need for new tools that better manage volatility in the natural gas market. State Utility Commissions have already moved away from index-based pricing as the primary method for achieving "prudence." Newer criteria focus on price stability, price 'certainty,' and price volatility mitigation.

The PRIMAP program is structured to minimize the Utility's exposure to the volatility of natural gas prices. This is accomplished by having a disciplined approach towards energy procurement that also incorporates the flexibility to make informed decisions based on market intelligence.

Do you have a game plan? I. What is a PRIMAP II. Natural Gas Price Volatility III. A Look Inside a PRIMAP

The PRIMAP sets forth a disciplined and objective process for managing natural gas price and volume procurement decisions. The process is intended to provide Senior Management with sufficient information to make informed decisions regarding hedging and position management.

The program includes protocols for managing a portfolio of various hedging positions against future natural gas requirements. Not unlike an investment portfolio with a diverse mix of stocks, bonds and cash positions, PRIMAP will set forth a diversified hedge strategy.

Do you have a game plan? I. What is a PRIMAP II. Natural Gas Price Volatility III. A Look Inside a PRIMAP A. PRIMAP sets goals for the client:

• Formalizes a corporation's energy procurement risk management program, factoring in corporate governance considerations, management objectives, and market analyses.
• Enhance an Industrial's long-term margin potential or Utility's Gas Supply Incentive Program and regulatory obligations by consistently purchasing natural gas under favorable conditions.
• Properly memorializes policies and transactions, ensuring prudence and compliance with current corporate governance practices and state commission policies.

Do you have a game plan? I. What is a PRIMAP II. Natural Gas Price Volatility III. A Look Inside a PRIMAP A. PRIMAP sets goals for the client: B. PRIMAP includes recommendations such as:

• Set-up of proper hedging limits
• Proper risk management products usage and policies
• Set-up of seasonal 'buy-windows'
• Proper mix of 'discretionary' and 'non-discretionary' hedge positions
• Set-up of 'minimum baseload positions' (auto-hedging mechanisms)
• Hedging authorities
• Internal governance procedures
• Program performance metrics
• Other hedging book strategy development that considers the following:

• dollar cost averaging
• market sensitive forecasting
• non-ratable Baseload
• ancillary considerations and factors

Do you have a game plan? I. What is a PRIMAP II. Natural Gas Price Volatility III. A Look Inside a PRIMAP A. PRIMAP sets goals for the client: B. PRIMAP includes recommendations such as: IV. How the PRIMAP is prepared

• Gelber interviews the Senior Management Team to identify the company's natural gas hedging objectives and needs.
• Gelber makes a determination as to what internal changes are necessary to align its hedge program with management objectives and new corporate governance norms. (For example, Gelber may recommend a more systematic approach to incorporate management's view of natural gas supply costs, operational costs and financial considerations.)
• Integrating Gelber's proprietary techniques, PRIMAP sets forth a hedge program designed to consistently purchase natural gas under favorable conditions. These conditions might include the following:

• price levels that support product manufacturing
• prices considered attractive relative to market norms
• within prudent risk tolerance limits

Do you have a game plan? I. What is a PRIMAP II. Natural Gas Price Volatility III. A Look Inside a PRIMAP A. PRIMAP sets goals for the client: B. PRIMAP includes recommendations such as: IV. How the PRIMAP is prepared V. Benchmarking and Performance Measurement

Benchmarking is a critical component of the PRIMAP. The PRIMAP incorporates pre-determined performance metrics that are compared against the actual results of the program.

Some common benchmarks are:

• First of the month index price for the appropriate market location
• Internally developed company budget price
• Rolling 12-month average price of NYMEX and associated basis. (This provides the Utility with a well-defined method of measuring the success of the PRIMAP program.)

Do you have a game plan? I. What is a PRIMAP II. Natural Gas Price Volatility III. A Look Inside a PRIMAP A. PRIMAP sets goals for the client: B. PRIMAP includes recommendations such as: IV. How the PRIMAP is prepared V. Benchmarking and Performance Measurement VI. The Importance of Documentation and Memorialization

Whether you are a manufacturing enterprise concerned with a Board of Directors inquiry or a local distribution company anticipating a future state commission prudency review, PRIMAP will provide you with the comfort of a fully documented trail regarding the execution of your disciplined and management-guided risk management program. Gelber & Associates will document all market conditions in place at the time the strategy was implanted, as well as any relevant market conditions that may have lead to modifications to the program execution based on dynamic market developments.

Do you have a game plan? I. What is a PRIMAP II. Natural Gas Price Volatility III. A Look Inside a PRIMAP A. PRIMAP sets goals for the client: B. PRIMAP includes recommendations such as: IV. How the PRIMAP is prepared V. Benchmarking and Performance Measurement VI. The Importance of Documentation and Memorialization VII. Is PRIMAP For You?

Whether a football coach who tirelessly reviews game films, or a fuel procurement manager struggling with the proper mix of baseload vs. swing supplies for the upcoming winter season, there is no substitute for evaluation, preparation and disciplined execution. A seasoned coach keeps an open mind in terms of what is in the best interest of the team. He surrounds himself with assistants willing to offer rational and objective advice, scouts who provide real time updates on opposing teams, trainers who shoot straight with him on the limitations of an injured player. Likewise, a fuel procurement manager is receptive to the ideas and perspectives of leading energy industry experts, willing to surround himself with objective voices who have his best interest in mind, and disciplined and measured in his purchasing responsibilities.

Here at Gelber & Associates, we provide clients with a customized and disciplined risk management approach, provide trading support and ongoing market analysis relating to market fundamentals, regulatory developments and dynamic price forecasting techniques.

Take the guesswork out of what to do next relating to your risk management program. Move away from the emotional rollercoaster of the daily market volatility, which most often pushes players into and out of the market on a reactionary basis. Align yourselves with the energy experts of Gelber & Associates, who will position you for a more rational, proactive approach to your energy procurement needs.

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