June 2007 Capital Adequacy Extension © Copyright 2007, CCRO. All rights reserved. Page 83 of 92 • Update expected future sales volumes • Execute hedging strategies to manage exposures • Settle current contracts and determine fair value (mark-to-market “MtM”) • Evaluate the potential for operative risk • Perform collateral calculations to determine capital/cash requirements and utilize lines of credit if necessary • Reassess counterparty credit rating to determine credit losses • Calculate end of period financial measures, e.g. net income, free cash flow, etc. • Determine if any financial events are triggered • Determine the solvency of company Certain members of the Committee were from the Finance Department and provided a list of issues that would need to be included in the model in order to understand the creation of financial trigger events. These “rules” and their consequential actions are as follows: • Default occurs if Debt Equity • If Debt/Equity Ratio 0.55, then o Post $200MM in assurances o Letter of credit threshold goes from $50MM to $0 o Interest rate increases 200 basis points • If Debt/Equity Ratio 0.60 (non-investment grade), then o No credit with any counterparty o Interest rate increases an additional 200 basis points • If Cash 0, then o Drawn down entire $200MM line of credit o Monetize $100MM in pre-tax MtM 10.2.5. Equity at Risk Methodology The Committee chose to use the equity at risk methodology to simulate the capital and liquidity requirements of the firm. By simulating the company’s functions in respect to the risks faced by the organization as described above, both equity and financial liquidity can be tracked over the time horizon. While other modeling applications focus on measuring risk or economic capital over the entire time horizon and comparing this to the firm’s current equity, the equity at risk methodology introduces more dynamics