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Coal Price Risk Management

*Regulated by The Financial Services AuthorityNew Delhi, October 2009

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PagePage

What this presentation is aboutWhat this presentation is about 33

Risk Management MethodologyRisk Management Methodology 4 4

Components of a Hedging ProgrammeComponents of a Hedging Programme 55

Optimum Hedging StrategyOptimum Hedging Strategy 66

Key Aspects of a Risk Management ApproachKey Aspects of a Risk Management Approach 77

MitsuiMitsui’’s Roles Role 88

Risk Management Products Risk Management Products –– Coal Coal 1111

Evolution of Coal Swaps Trading Evolution of Coal Swaps Trading 1111

Swaps and OptionsSwaps and Options 1313

What What ““OpportunitiesOpportunities”” emergeemerge 1717

Major Current Issues Major Current Issues 1414

SwapsSwaps 1919

Contact DetailsContact Details 2020

Attached Product AppendixAttached Product Appendix 2121--2727

IntroductionIntroduction

3The Executive Summary!The Executive Summary!

! The Risk management discipline and process!A clear methodology in place to support transaction decisions

! Identifying your exposure!Full understanding of the business dynamic is essential

!Financial horizons must match market horizon

! Some contract examples!A walk through some building blocks of derivatives

! Derivatives bring a new perspective, why “Opportunities” exist!Taking a deeper look at the forward curve

! Some comments and conclusions on recent experience!Economic shocks

!Supply and Demand shocks

!Credit and cash management

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Risk Management Methodology

5Components of a Hedging ProgrammeComponents of a Hedging Programme

A wellA well--designed hedging programme reduces the variability of costsdesigned hedging programme reduces the variability of costs

• In order to stabilise cash flow and earnings volatility, IndiaCorp can manage risk via “hedging”

• Hedging is an action of transferring risk to energy prices to a counterparty

• A well-designed hedging strategy can:

– Facilitate earnings predictability and stability and enable management planning and negotiation

– Reduce cost of capital or release capital held against commodity price shocks

• Hedging does not necessarily make energy costs “cheaper” at any point in time

• Hedging a particular exposure should be considered as part of an overall hedging strategy because currency risk may remain

Short-Term Exposure Management

Flexible Application, Timing, and Execution

Long–Term Exposure Management

Balance Sheet and Revenue Management

Hedging Programme

6Optimum Hedging StrategyOptimum Hedging Strategy

Evaluate Acceptable Risk

Levels

Determine Best

StrategyExecute Hedge

Analyse Position (re- evaluate

regularly)

Identify Risk

Hedging Program*

* A clear, written, hedging policy should be the foundation of any hedging decision

• The first step in any hedging decision is to identify the risk(s) that you are looking to mitigate. In the case of IndiaCorp the risk is Coal costs will rise in the future

• The second step in a hedging policy is to evaluate acceptable risk levels that the program can take

• A number of diverse hedging instruments are available to mitigate the risks of high prices efficiently

• Hedging is an ongoing programme – regular adjustments to reflect forecasted fuel oil expenditures and anticipated market conditions must be made

Evaluate Exposure

7Key Aspects of a Risk Management ApproachKey Aspects of a Risk Management Approach

ExecutionAt any time prices are below At any time prices are below

budget levelsbudget levelsAt any time structures are below At any time structures are below

budget levelsbudget levelsWork orders to closely mirror the Work orders to closely mirror the

movement in the markets by movement in the markets by taking advantage of dips in taking advantage of dips in pricesprices

PolicyHedging fuel exposure consumed Hedging fuel exposure consumed

on the open market (outside of on the open market (outside of domestic market)domestic market)

Locking fuel costs out to 3 yearsLocking fuel costs out to 3 yearsLooking at Swaps, Capped Looking at Swaps, Capped

Swaps, and other combinationsSwaps, and other combinations

Strategy

Risk Management

Risk ManagementPolicy

StrategyTiming

Execution

To take advantage of dips in the To take advantage of dips in the market by keeping abreast of market by keeping abreast of fundamentals and trading fundamentals and trading activityactivity

To fix a certain quantity To fix a certain quantity immediately after setting immediately after setting budget and costsbudget and costs

To successfully manage a hedge To successfully manage a hedge portfolio on an international portfolio on an international market, while bearing in mind market, while bearing in mind market economicsmarket economics

TimingClosely monitor the market on a Closely monitor the market on a

regular basisregular basisTake out protection soon after Take out protection soon after

budget is setbudget is set

8Identifying your exposureIdentifying your exposure

A wellA well--designed hedging programme reduces the variability of costsdesigned hedging programme reduces the variability of costs

•Start with the invoices at the purchasing department•Floating or fixed price terms •Taxation and duty calculations•Price risk sharing in rebates or discounts

•Consider the flexible element of overhead or revenues•Does this correlate to commodity prices?

•Work with CFO to understand shareholders’ outlook and expectation

•Consider capital requirements and credit facility capacity

•Look for regulatory support (RBI approval)

•Currency implications of settlements and collateral

9MitsuiMitsui’’s Roles Role

If instructed, to enter into hedge positions at

target / ‘stop’ levels

To provide you with superior market analysis on an ongoing basis including presentations at

regular hedge meetings

To review hedges taken over previous

month

To review portfolio of hedges each month and review effectiveness of

policy

To discuss targets and ‘loss’ levels based on our

perception of market outlook and hedge policy

set by IndiaCorp

To discuss adjustments to min / max hedge levels that

we feel appropriate

To monitor targets and ‘stop’ levels and advise Financial Managers if

targets are close

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Structures

! Swaps, Caps, Floors & Collars

! Cracks

! Ratio strategies

! 3-way collars

! Call spreads

! Put spreads

! Straddle & Strangles

! Extendibles swaps & Collars

! Full array of exotic OPTIONS

! Spread & compound option

! Digital & barrier options

Strategy Development and Support

Quantitative Analytics

! Historical price distribution

! Correlation

! Sensitivity

! Strategy identification

! Tailored hedging strategies

! Regular marked-to-market (MTM) reports

Research Products

! Daily Petroleum Price Reports

! Weekly Natural Gas Report

! Special Oil & Gas Impact Reports

! “Quick” technical & fundamental updates

! Client specific hedging presentations

Our Capabilities and ServicesOur Capabilities and Services

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Risk Management Products

Coal

12Actively Quoted Coal IndicesActively Quoted Coal Indices

EuropeAPI 2

Arab Gulf / AsiaglobalCoal Newcastle

South AfricaAPI 4

• The index chosen as the underlying pricing reference for your hedge depends on the particular exposure you have to physical fuel prices

• The following are the fuel oil indices that MERM is actively quoting and trading swaps on

USNYMEX Coal

13SwapsSwaps

• A swap is a financial instrument (no physical delivery) whereby one party (the buyer) agrees to pay the other a fixed price for an underlying product (Fuel Oil, Crude Oil, or any other commodity) in exchange for a floating price for the same underling.

• An example of which is a swap between MERM and IndiaCorp whereby IndiaCorp agrees to pay MERM a fixed price for its fuel consumption and MERM agrees to pay IndiaCorp a floating price for the same product – IndiaCorp thus fixes the price at which it buys its fuel (see below illustration)

• The swap protects against adverse movements in energy prices by fixing the price you would pay for your fuel with a cash flow that compensates you should prices rise.

Physical Coal Supplier

Fixed Price

Floating Price Floating Price

Physical Fuel

Financial Transaction

Physical Transaction

IndiaCorp

14Swap Term SheetSwap Term Sheet

Swap Buyer: IndiaCorp

Swap Seller: Mitsui & Co. Energy Risk Management Ltd (“MERM”)

Reference: globalCoal Newcastle Index

Swap Price: 50 $/mt*

Start Date: 1st July 2010

End Date: 31st December 2011

Volume: 25,000 mt / month (450,000 mt total)

Settlement: Monthly ,5 business days after the end of the month

(Note that this settlement period can be adjusted to match the payment patterns of the counterpart)

* Prices are constantly changing as markets move, we would be happy to show you firm offers via telephone, subject to credit and legal requirements

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-60.00

-40.00

-20.00

0.00

20.00

40.00

60.00

6.00

12.0

0

18.0

0

24.0

0

30.0

0

36.0

0

42.0

0

48.0

0

54.0

0

60.0

0

66.0

0

72.0

0

78.0

0

84.0

0

90.0

0

96.0

0

Average Settlement Price for NEWC ($/mt)

Swap

Pay

out (

$/m

t)

Swap MechanicsSwap Mechanics

• To give you an idea of where the market is currently trading, the globalCoal Newcastle swap for July 2010 – December 2011 is currently at $90/mt (5th October 2009)

• The vanilla swap fixes the maximum price you would have to pay for your fuel, offering you immediate certainty of expenses

• As the upside is uncapped, you have unlimited up-side protection

• The swap has no entry costs

Swap Price $50/mtBelow the swap

price, your payments to

Mitsui increase as the price of

coal falls

Above the swap price, Mitsui’s

payments to you increases as the price of coal rise

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" A call option grants you the right but not the obligation to buy at an agreed price in return for paying a premium.

" Options are effectively an insurance policy – once the premium is paid there are no further outward payments.

" A number of factors affect how the premium of an option is determined. " These are: Strike Price / Price of Underlying Fuel / Duration of the

Option / Volatility of Underlying Fuel

" A Call for Apr 10 – Mar 11 NEWc with a strike at $85 costs $10/mt.

" A Call for Apr 10 – Mar 11 NEWc with a strike at $100 costs $5/mt.

Call Option (also known as a Cap)Call Option (also known as a Cap)

17Why opportunities existWhy opportunities exist

02/01/2009

22/01/2009

10/02/2009

02/03/2009

19/03/2009

07/04/2009

24/04/2009

13/05/2009

02/06/2009

19/06/2009

08/07/2009

27/07/2009

13/08/2009

01/09/2009

25/09/2009

Jan

-10

Sep

-10

May

-11

Jan

-12

Sep

-12

$50

$60

$70

$80

$90

$100

$110

10-11-12 forward curve

100-11090-10080-9070-8060-7050-60

Market low of $71 for Cal’12 March 2009

Economic outlook improves sharply May 09

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Weekly RB

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

Jun-

01Sep

-01

Dec-0

1Mar

-02

Jun-

02Sep

-02

Dec-0

2Mar

-03

Jun-

03Se

p-03

Dec-0

3Mar

-04

Jun-

04Sep

-04

Dec-0

4Mar

-05

Jun-

05Sep

-05

Dec-0

5Mar

-06

Jun-

06Se

p-06

Dec-0

6Mar

-07

Jun-

07Sep

-07

Dec-0

7Mar

-08

Jun-

08Sep

-08

Dec-0

8Mar

-09

Jun-

09Sep

-09

API4 CAL10 Swap

$50

$55

$60

$65

$70

$75

$80

$85

$90

Jan-

09

Jan-

09

Jan-

09

Feb-

09

Feb-

09

Mar

-09

Mar

-09

Apr-0

9

Apr-0

9

May

-09

May

-09

Jun-

09

Jun-

09

Jul-0

9

Jul-0

9

Jul-0

9

Aug-

09

Aug-

09

Sep-

09

Sep-

09

Chinese coal consumption growth

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Why we are looking for opportunitiesWhy we are looking for opportunities

McCloskey/MERM

globalCoalBP Statistical Review

19The main issues of the dayThe main issues of the day

• The Coal Market

– Dark Spreads in Europe

– Liquidity concentrations

– New Indices and Platforms

– Freight Market development

– Carbon Management

• Tax?

• Cap and Trade?

• Clean Coal

– 10 or 20 year hedges

• The Global Market

– V or W recession?

– Regulation of OTC markets

– Availablilty of Credit

• Cash Management

• Credit Default Risk

– Our Financial Horizon

– Technology

– Climate Change

– Role of Financial institutions

20Contact DetailsContact DetailsLondon Desk:• Jack Kellett +44.20.7489.6748

» Jack.kellett@mitenergy.com

• We employ a team of 25 professionals in London dedicated to derivatives and are part of a global trading organisation with offices throughout the world.

This communication is for informational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. All market prices, data, and other information are not warranted as to completeness or accuracy and are subject to change without notice. Any price information is not warranted as to completeness or accuracy and is subject to change without notice. Any price statements made herein do not necessarily reflect those of Mitsui & Co., Ltd, its subsidiaries or affiliates. Accordingly, Mitsui & Co., Ltd., its subsidiaries or affiliates shall have no liability to you whether such liability arises in contract, tort or statute for any costs, losses, expenses, damages whether arising or incurred directly or indirectly by you placing reliance on any information contained within this communication.

2 Shenton Way#08-03 SGX Centre 1

068804SingaporeSingapore

5th FloorSt. Martins Court

10 Paternoster RowEC4M 7BB

LondonUK

31st Floor200 Park Avenue

New YorkNY 10166

USA

Mitsui & Co. Building2-1 Ohtemachi 1-Chome

Chiyoda-kuTokyo 100-0004

Japan

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Risk Management Products

Appendix

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Capped SwapCapped Swap

Operates as a normal swap, with the upside limited to a specified amount

If IndiaCorp buys the capped swap:IndiaCorp pays Mitsui if the mean price for the relevant period falls below the swap level (IndiaCorp pays Swap Price minus Mean Price)

Mitsui pays IndiaCorp if the mean price for the relevant period is greater than the swap level (Mitsui pays Mean Price minus Swap Price)

The amount Mitsui will pay IndiaCorp will be limited to a specified maximum amount

Because the upside is limited, the capped swap can be purchased at a level lower than the normal swap

Therefore the structure is useful if you expect prices to increase, but only up to certain levels

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KnockKnock--out Structureout Structure

Operates in a similar way to a conventional swap, but if prices exceed a specified level, the purchaser receives No payment

If IndiaCorp buys the knock-out swap:IndiaCorp pays Mitsui if the mean price for the relevant period falls below the swap level (IndiaCorp pays Swap Price minus Mean Price)

Mitsui pays IndiaCorp if the mean price for the relevant period is greater than the swap level (Mitsui pays Mean Price minus Swap Price)

If the mean price exceeds a certain threshold, Mitsui pays Nothing to IndiaCorp

Because IndiaCorp has a risk of receiving nothing, if prices rise beyond a certain threshold:

IndiaCorp will receive a very favourable swap level, lower than a conventional swap

Such a structure would be suitable if you expect prices to rise, but are confident they will not rise beyond a certain level

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Zero Cost CollarZero Cost Collar

Conventionally, IndiaCorp may purchase a call option by paying a premium

The call may be purchased for zero cost, by selling a put

Thus IndiaCorp does not need to pay anything for this structure

If mean prices exceed the call strike level, IndiaCorp will receive an amount equivalent to the excess from Mitsui

If mean prices fall below the put strike level, IndiaCorp must pay Mitsui the amount by which the put strike level exceeds the mean price

If the mean price is between the call and put strike levels, there is no payment between the parties

Such a structure would be suitable if you expect prices will stay above the put strike level, and are likely to be higher than the call level

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Zero Cost Collar with a KnockoutZero Cost Collar with a Knockout

Works as a conventional zero cost collar

If mean prices exceed the call strike level, by more than a specified threshold, IndiaCorp receives No pay out

Therefore:If mean price > knock out level, IndiaCorp receives No payment

If knock out level > mean price > call strike, IndiaCorp receives a payment from Mitsui, equivalent to the Mean Price minus Call Strike Level

If mean prices < put strike, IndiaCorp must pay Mitsui an amount equivalent to the Put Strike Level – Mean Price

The knock out allows us to offer lower price levels for the put and/or the call

This structure would be suitable if you expect prices will stay above the put level, and are likely to be higher than the call strike level while also staying below the knock-out level

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3 Way Structure3 Way Structure

IndiaCorp can get upside protection at zero cost

IndiaCorp buys a call, sells a call at a higher strike level and sells a put

The cost of the call purchased by IndiaCorp is subsidised by selling a call and put

This gives upside protection which is limited to the difference between the call strike levels

IndiaCorp will pay Mitsui if the mean price falls below the put level

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3 Way Extendible Structure3 Way Extendible Structure

The 3 way structure may be extendible into the following period, at Mitsui’s discretion

For Example, a structure for Q1 08 may be extended into Q2 08, at Mitsui’s discretion

By giving Mitsui the choice of whether or not to extend the period:

IndiaCorp may be able to sell a lower put level

IndiaCorp may purchase a more attractive call level

IndiaCorp may purchase a wider call spread

The 3 Way and 3 Way Extendible may be suitable if you expect prices will remain above the put level, and are likely to be within the range outlined by the call spread for the full term of the transaction