Saturn Users Conference 2012: Portfolio Hedging and Optimization An Electric Retailer's Perspective

1Choosing the Right Energy Supplier for Your Business Hess Energy · 2011 All Rights Reserved · Confidential for Internal Use Only

Portfolio Hedging and Optimization: An Electric Retailer’s Perspective

Eric MeerdinkDirector, Structuring & Analytics

Electric OperationsHess Corporation

November 14, 2012


Background on Hess Corporation


Hess: Who We are Today

EXPLORATION Discovering oil

and gas

PRODUCTION & DEVELOPMENT

Getting crude oil out of the ground

SUPPLY, TRADING &TRANSPORTATIONBuying, selling and

transporting crude oil and finished products

REFINING Processing the crude oil into

finished products

ENERGY TRADINGHess Energy Trading

Company, a joint venture buying and

selling energy financial instruments

TERMINALSStoring products and

distributing fuels to our customers

RETAIL MARKETINGSelling motor fuels and

convenience products at retail stores

ENERGY MARKETING

Marketing petroleum products, natural gas

and electricity to commercial,

industrial and utility customers

A Totally Integrated Energy Company


One of the Largest Energy Suppliers on the East Coast


Hess Energy: Robust Product Suite

Fuel Oil

Delivery to Commercial & Industrial customers

Distributor sales from Hess terminals

110K BPD

Natural Gas

Marketing to Commercial &

Industrial customers

Wholesale to LDCs

1.5 BCF/day

Electricity

Marketing to Commercial &

Industrial customers

4,500 MWs (RTC ) (enough electricity to

power 4 million average homes)

Green Suite

Reducing electric usage during times of

peak demand

Support renewable energy sources, such

as wind, solar, biomass and hydropower

Balance your carbon impact from oil and

natural gas with carbon offsets


Bayonne Energy Center

• 500 MW natural gas powered electric generating station serving New York City.

• Jointly owned by Hess Corporation and ArcLight Capital Partners.

• Located in Bayonne NJ and supplying power through a 6.5 mile 345 kV submarine cable under NYC harbor to Con Ed’s Gowanus substation in Brooklyn.

• Began operation in June 2012.

• 8 Rolls Royce Trent 60 turbines.

• Direct connection to Transco natural gas pipeline.

• Duel fuel plant that can run on ULSD.

• ULSD supplied by Hess from terminals located next to plant.


Hess Solar Energy

• Hess Solar Field.

• Began operation in summer 2012.

• 1.1MW of renewable energy located in Woodbridge, NJ on 6 acres of land adjacent to our NJ headquarters.

• Supplies 22% of our electricity requirements.

• Annual environmental impact is equivalent to 250 cars of the road.


Portfolio Management


How SATURN will assist our business

• Get a clearer picture of our overall risk (GM@R, stress testing, scenario analysis).

• Estimate our swing risk with greater precision (geographic, customer type).

• Evaluate alternative hedge structures to reduce our swing risk and reduce GM@R; provide more competitive pricing.

• Value complex and non-standard hedge structures.

• Weather derivatives.

• Value tolling deals and other generation assets in a portfolio of retail load contracts. What is the portfolio value of a tolling deal?

• Modeling and planning for Bayonne Energy Center and future generation.

• Energy efficiency and demand response modeling.

• How does generation compare to financial derivatives in reducing swing risk and minimizing GM@R?


Our Risks

• As a retailer of electricity Hess is subject to four types of risk in serving our retail and wholesale load:

○ Market Price Risk

○ Volumetric Risk (swing risk)

○ Shaping Risk (correlation risk)

○ Migration risk (wholesale)

• Market price risk is hedged using standard forward contracts.

• Volumetric risk (also called swing risk) arises from the positive correlation between market prices and usage. The main causes of swing risk are weather and economic conditions. How do we hedge this risk?

• Shaping risk arises from the hourly correlation between market prices and usage. This causes the cost to serve to be greater than the average block cost. How do we hedge this risk?


Long-Run Correlation Between Price and Load

12-Month Rolling Average of Load and Price in PSE&G Zone

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

$80.00

$90.00

4,800

4,900

5,000

5,100

5,200

5,300

5,400

5,500

Dec-04

Mar-05

Jun-05

Sep-05

Dec-05

Mar-06

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

$/M

WH

RT

C

Ave

rag

e M

W

Month - YR

Average MW

$/MWH RTC


Short Retail Sale and Long Hedge

Long Hedge

Short Sale

$/MWH

Short Retail Sale

-

$

Net: Swing Risk “Gamma”

+


Simulated Swing (Gamma) Position

($1,600,000)

($1,400,000)

($1,200,000)

($1,000,000)

($800,000)

($600,000)

($400,000)

($200,000)

$0

$200,000

$400,000

$0 $50 $100 $150 $200 $250 $300 $350

Average On-Peak LMP

To

tal P

&L

Example uses NJ BGS CIEP Load for July.Approximately 80 MWs average load on-peak.


Short-Run Correlation Between Price and Load

$0.00

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

$140.00

$160.00

$180.00

$200.00

07/12/10 07/13/10 07/14/10 07/15/10 07/16/10 07/17/10

$/M

WH

0

2,000

4,000

6,000

8,000

10,000

12,000

MW

Hourly Load and Price in PSE&G Zone 7/12/10 to 7/17/10

Load (MW)

Price ($/MWH)


What we know today

What we know:

1. MTM2. 2 Stress Events3. Daily VAR

MTM

High StressTest

Low StressTest

BudgetBusiness Plan

(illustrative)

-$10.0 -$5.0 $0.0 $5.0 $10.0 $15.0 $20.0 $25.0 $30.0 $35.0 $40.0 $45.0 $50.0 $60.0 $65.0 PNL


What we gain:

1. PnL Distribution

2. GM@R

3. Swing Risk

4. Better understanding of stress events.

5. Understand the impact of hedge policies.

Where we want to be

5th

Percentile

GM@R

Swing Risk

High StressTest

Low StressTest

MTMBudget

Probability ofachieving business plan

(illustrative)

-$10.0 -$5.0 $0.0 $5.0 $15.0 $20.0 $25.0 $30.0 $35.0 $45.0 $50.0 $60.0 $65.0 PNL


Benefit of generation as a hedge for load

Reduction in GM@R

Net distribution of PNL has a lowerupper tail on PNL, but has a reducedvariance and a lower GM@R.

This value in reduced GM@R andhedging of swing costs can be calculatedand used in pricing.

Matching Load and GenerationReduction in GM@R

-$10.0 $0.0 $10.0 $20.0 $30.0 $40.0 $50.0 $60.0 $70.0 $80.0 PNL


Additional benefits

• Will provide a common uniform platform for valuation across all departments using the same valuation methodology for front office, market risk and enterprise risk.

• Advantages for our risk groups:

○ Same technology for toll valuation

○ Running independent stress tests

○ Scenario analysis by counterparty for credit review (MTM impact, limit exposure)

○ Independently value the portfolio, MTM, PnL.

• Business planning

• The systems are scalable and configurable to include the natural gas and fuel oil business.

• Can view the entire energy marketing portfolio.