SEM Executive Board Meeting

1. SEM Executive Board Meeting Fred Fastiggi, CEM Vice President – Energy Services Tom Brys, CEP Director – Technical Services

2. Today’s Agenda Refresher on components of Gas Service What are we talking about buying with the auction? Current Market Conditions General Observations on Current and Future Pricing Levels Projection on Price to City Gate Don’t forget LDC costs in your budget! What budget number would look like at today’s future levels and projected Basis plus back end fee Review of what the Back End Fee is Logical Options Today

3. Dekatherm – 10 therms NYMEX – New York Mercantile Exchange Liquid Clearinghouse for commodity trading Ability to hedge future prices Interstate Transportation (Basis) Cost to deliver gas from wellhead to city gate City Gate Delivery point of most natural gas contracts Metering station where interstate pipeline connects to LDC distribution system

4. Natural Gas System

5. Natural Gas System 3 main components Commodity (i.e. NYMEX) Interstate transportation Distribution Deregulated structure Commodity and interstate transportation made competitive, this is what you are buying through the auction! Distribution system still regulated by public utility commission, not included in the auction solicitation.

6. Electric and natural gas prices dropped significantly between 7/08 and 5/09 Relatively flat between 5/09 and early December 2009 but over the last few weeks have spiked up by 80 cents or so for the near term futures Range from $5-$6 per MMBTU (or decatherm) at Henry Hub Recent spike seems to be tied to weather, inventories still at record highs Oil prices currently at about $81/bbl Energy prices continue to be highly volatile This week alone, gas prices down 5 cents on Monday, down a quarter on Tuesday, up 37 cents on Wednesday, down 20 cents on Thursday Upward bias Greater reaction/movement associated with bullish news Recent spike seems to be weather driven, with inventories still at record highs most believe prices will retreat to pre-cold snap levels once temperatures return to seasonal levels

11. Natural Gas (Working Gas In Storage)

12. BCF of Natural Gas in Storage

13. Volatility will prevail Short term drivers Weather Natural gas storage Oil prices Economy Value of the dollar Upward bias long term Storage Approaching Historical High Levels In the absence of any type of “event”, with a slow economic recovery and given the continuing relatively high levels of gas storage, gas prices will likely retreat somewhat from current levels with a return to normal weather and temperatures

14. Don’t try to out guess the market, contract because you like the price, e.g.: “Compared to what I’ve paid recently, this is an OK price” “Compared to what I have in my budget, this price would give me favorable variance " “I like the fact that I can budget with confidence and not be subjected to wide cost swings outside of my control”

18. All in Cost of Natural Gas

19. What is the “Back End Fee”? This is a way of paying for the procurement services and auction costs without having to front the money An adder is included in the price to compare that is posted for suppliers to bid against (it is in our recommended Price to Compare) As gas is sold and paid for by the SEM members, at a price which is less than the price to compare, the back end fee is collected by the auctioneer and distributed to the SEM The SEM uses a portion of the backend fee to pay its operating expenses

20. How Much of the Back End Fee does the SEM Get ? Depends of Volume of Gas Contracted At 90% of expected volume there will be 360,000 dekatherms annually Over 2 years with a $0.25 back end fee, that generates $180,000 to be split between World Energy and the SEM Split being negotiated but right now, at worst SEM will get 40% but we will do better At 40% SEM would get $72,000 At 60% SEM would get $108,000 At 70% SEM would get $126,000 Back end fees generated with an electric auction are expected to be 5+ times the gas auction back end fees given historical conditions

21. What to do? Three basic options Go out for both commodity and interstate transportation (basis) Go out for interstate transportation (basis) only, let the commodity float until buying situation improves (risk it will go up as well as go down but assuming current conditions, most believe there will be a minor correction downward when cold snap subsides) Postpone the gas auction and wait for electric Downside of waiting is that a successful gas auction will probably encourage more members to join, increasing the fee potential with greater electric volume