SECURE TRADINGAND CLEARING

2

SECTION ONE: NGX BACKGROUND

3

Introduction to NGX

• Business Concept:– Provide electronic trading and clearing services to

North American energy market participants– NGX is a service provider and therefore does not

trade or take positions

• Headquartered in Calgary, Alberta, Canada

• Incorporated in 1993, began trading operations in Feb 1994

• Ownership History– Initial Ownership by Westcoast Energy Inc.– Acquired by OM on Jan 1, 2001– Acquired by TSX Group March 1, 2004

4

Ownership: Introduction to TSX

• TSX Group is a cornerstone of the Canadian financial system and is at the centre of Canada’s equity capital market

• TSX Group owns and operates Canada’s two national stock exchanges, the Toronto Stock Exchange, serving the senior equity market, and TSX Venture Exchange, serving the public venture equity market

• From its preeminent domestic base, TSX Group’s reach continues to extend internationally, through TSX Markets and TSX Datalinx which provide the trading and data to the global financial community who access Canada’s equity capital market

5

NGX Core Competencies

• Electronic Trading– Over 12 years of experience developing and operating

high-reliability, high-performance electronic trading systems

• Clearinghouse Operations– Physically and financially settled over 850,000 trades– Zero-default history

• Liquidity Development– Focus on customers and quality of service– Commitment to the reduction of trading impediments

6

Current NGX Product Locales

NGX Products & Services

Financial Products Physical Products

Upcoming Products

NGX INTRA-ALBERTAEMPRESS EMERSON/GREAT LAKES

FUTURES SWAPSHENRY SWING SWAPSLDS FOR GDD

PARKWAY

IROQUOIS

NIAGARA FALLSCHIPPAWA

DAWN

NBPL VENTURA CHICAGO SWAPSNICOR-NGPL

MICHCON SWAPS

ALBERTA POWER SWAPS

MALIN SWAPS

ROCKY MTN SWAPS

ATCO NORTHSTATION #2

TEP

PG&E CITYGATE

PG&E CITYGATE SWAPS

SOCAL GAS

SOCAL GAS SWAPS

MALINST. CLAIR

SUMAS SWAPS

ALBERTA SWAPS

HUNTINGDON

7

Available Forward Curves

$ Fixed-Price $ Monthly Index $ Daily Index $ Basis $ Transport Fixed $ Transport BasisC Intra-Alberta C Intra-Alberta C Intra-Alberta 2A US Intra-Alberta C Empress US NiagaraC ATCO North C Station #2 C Intra-Alberta 4A US Emerson US Niagara US IroquoisC Empress US Intra-Alberta C Intra-Alberta 5A US Niagara US Iroquois US ChippawaC Station #2 US Ventura C Station #2 US Iroquois US Chippawa US ParkwayC TEP US Malin C ATCO North US Chippawa US Parkway US St. Clair DawnUS Intra-Alberta C TEP US Parkway US St. Clair Dawn US AECO-DawnUS Emerson US Dawn US DawnUS Niagara US Malin US VenturaUS Iroquois US Nicor-NGPLUS Chippawa US St ClairUS Parkway US MalinUS DawnUS VenturaUS Nicor-NGPLUS St. ClairUS Malin

Physical Products

$ Fixed-for-Floating $ Basis $ Swing $ Floating-for-Floating $ Options $ Transport BasisC Alberta Fixed US Alberta C Alberta Flat Elec. US AECO Index Swap C Alberta Fixed US PGE Citygate Malin Basis SpreadUS Sumas Fixed US AECO Daily Basis C Alberta Peak Elec. US LDS for GDD US Malin AECO Basis SpreadUS Futures Swap US Sumas C Alberta Ext. Peak Elec. US Rockies US SoCal Rocky Mountains Basis SpreadUS Michcon US Chicago C Alberta Off-Peak Elec. US Malin US Sumas AECO Basis SpreadUS Socal Fixed US Rockies C Alberta Super-Peak Elec. US SumasUS PG&E Citygate Fixed US Malin C Alberta Swing US Michcon

US Michcon US Sumas US SocalUS Socal US Henry Hub US PG&E CitygateUS PG&E Citygate US Mid-Columbia PeakUS Malin Daily Basis US Mid-Columbia Off-PeakUS Rocky Mountains Daily Basis US RockiesUS SoCal Daily Basis US MalinUS PGE Citygate Daily Basis US MichconUS CIG Rockies Daily Basis US SocalUS EP San Juan Daily Basis US PG&E CitygateUS EP Permian Daily BasisUS Sumas Daily Basis

Financial Products

• Forward curves listed from intraday to five-year forward tenors

8

Current NGX Services

• Marketplace– Centralized electronic trading– Standardized contracts– Pipeline balancing instruments– Market advocacy (facilitating transactions)– Market agency (facilitating order entry)– Real-Time Price Index Generation

• Clearing House– Assured performance– Trade and counterparty netting– Centralized collateral management– Centralized risk management

9

Operational Statistics

• 134 NGX Contracting Parties– “Member” firms eligible to transact through the

Exchange

• List 102 physical and derivative products

• Average in Excess of 400 Traders Online Daily

• Approximately 100 View-Only Users Online Daily

• 2005 Trading Statistics:– Volume = 8.8 Tcf– Transactions = 185,878

• Average Daily Deliveries in Excess of 12.0 Bcf

10

NGX Trading Volume History

Historical NGX Trading Activityto December 31st, 2005

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Year

To

tal Q

uan

tity

Tra

ded

(P

J)

-

100

200

300

400

500

600

700

800

900

1,000

Mo

nth

ly A

vera

ge

Tra

ded

(P

J)

# of Days 324 365 365 365 365 365 366 365 365 365 366 365

Electricity (PJ) - - - - - - - - - 18 20 4

US Swaps - - - - - - - - 12 58 58 93

CDN Swaps - - - - - - - - 260 1,130 1,458 412

OTC Clearing (PJ) - - - - - - - - 84 351 236 449

U.S. (PJ) - - - - - - - - 1 6 - 1

Eastern Canada (PJ) - - - - - - 152 389 581 999 1,132 927

Western Canada (PJ) 23 59 427 938 1,379 2,349 2,353 2,756 3,617 3,901 4,513 6,936

Percentage Growth 0% 161% 621% 119% 47% 70% 7% 26% 44% 41% 15% 20%

Monthly Average Traded (PJ) 2 5 36 78 115 196 209 262 378 534 613 735

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

11

NGX Product Dispersion

2005 Trading Turnover by Product Type

Eastern Canada Physical (PJ)

10.5%

OTC Clearing (PJ)5.1%

Western Canada Physical (PJ)

78.6%

U.S. Physical (PJ)0.0%

US Swaps (PJ)1.1%

CDN Swaps (PJ)4.7%

Electricity (PJ)0.0%

Western Canada Physical (PJ)

Eastern Canada Physical (PJ)

OTC Clearing (PJ)

CDN Swaps (PJ)

US Swaps (PJ)

Electricity (PJ)

U.S. Physical (PJ)

12

SECTION TWO : CLEARING STRUCTURE

13

NGX Clearing Operations

• NGX Intermediation– NGX acts as buyer to every seller, and seller to every

buyer, for the purpose of facilitating anonymous trading and clearing

• Private Clearing Operation– Contracting Parties are not mutually exposed to

another Contracting Party’s default

$

$ or Natural Gas

CPABuyerBuyer SellerSeller

$

$ or Natural Gas

CPA

14

How is Counterparty Risk Mitigated?

• Standard Rules– All Contracting Parties are subject to the same rules and

regulations as set forth in the CPA– Contracting Parties must meet minimum creditworthiness

test and meet credit requirements on an ongoing basis

• Collateral Provisions– The requirement for liquid collateral to be placed on

deposit with NGX in advance and in excess of margin requirements provides the security against default

• Liquidation Rights– NGX has a number of rights if a Contracting Party default

occurs, including the ability to close-out (or accelerate) all forward positions for the defaulting party

– Collateral is utilized to cover any liquidated damages

15

How is Counterparty Risk Mitigated?• Backstopping

– Delivery risks are mitigated through the use of backstopping services provided by various market participants, including storage facilities, large shippers, and pipeline operators

– Backstopping is typically an arrangement for immediate provision of supply/market at a pre-determined price (usually based on index)

• Settlement Bank– The settlement bank daylight and overdraft facilities

provide for clearing operation liquidity during a default situation and assist in managing timing issues on settlement day

• Emergency Fund– NGX provides a trust fund for Contracting Parties to

access in the event of an exchange default, backed by a parental guarantee from TSX

16

Clearing Structure

Physical Backstopping (storage)

Settlement Banking Credit Facility

Defaulting Party Collateral (100% Coverage Under NGX Exposure Model)

NGX Cash Reserves

NGX Emergency Fund ($30MM CIBC Mellon Trust)

Deposit Agreement

Deposit Agreement

$

$ or Natural Gas

PayerPayer PayeePayee

$

$ or Natural Gas

17

Collateral Makeup

• Collateral on deposit in excess of CAD $2.8 Billion

• Approx. CAD $2.4 Billion LC’s, CAD $0.49 Billion Cash

NGX Margin Dispersion February 14, 2006

AR Margin, $1,502

Variation Margin, $88

Initial Margin, $503

Cushion Collateral, $523

Surplus Collateral, $263

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

Collateral Posted

CA

D $

MM

18

NGX Central Clearing Benefits

• Neutral, Independent Risk Management– NGX is impartial and the nature of the clearing

business provides a strong incentive to maintain a default-free clearing operation

– NGX is not a market participant, does not take a market view and earnings are not directed by commodity prices

• Centralized Collateral Requirements– Concentration of capital affords most efficient use

across all other contracting parties

19

NGX Central Clearing Benefits

• Counterparty Netting Facilities– Central clearing operator and standardized netting

rules create an environment to net physical and financial exposures across multiple counter parties and locations

• Acceleration, Liquidation, Close-Out Procedure– NGX has embedded, and has enforced, rights of

acceleration for all contracts traded through the Exchange to mitigate risks to all Contracting Parties

20

Value Proposition of Clearing

• Risk Mitigation “Trade-Off”– When a Contracting Party introduces risk to the clearing

operation (ex. Receivable exposure or Mark-to-Market losses) they must provide collateral to support the risk

– In return, all Contracting Parties that are exposed to the clearing operation due to the introduction of risk (ex. Payable positions and Mark-to-Market gains) are secured against defaults

Cost of Collateral • Is the risk reduction worth the cost?

Value of ReducedExposure • Will I get paid?• Will my gas get delivered?

21

Collateral Concentration

NGX (centralized)

$3MM

$20MM

Access to choose bids/offers from 100+ other market participants under the same collateral umbrella

$30MM$7MM

OTC Bilateral

$10MM

$10MM

$10MM

BuyerBuyer SellerSeller

A

A

A

B

C

D

SellerSeller

B

C

D

BuyerBuyer

A

22

Exchange NettingOTC Bilateral

5 Units

5 Units

10 Units

BuyerBuyer SellerSeller

A

A

D

B

C

A

NGX (net effect)

5 Units

10 Units Netted 10 10 Units

10 Units 5 Units

SellerSeller

A

B

C

BuyerBuyer

A

D

23

Clearing Statistics

• Cleared Transactions – 180,000+ transactions cleared annually– Notional value of transactions consummated through

NGX is in excess of CAD $60 Billion annually

• Margin– Over 130 corporate margin accounts held by NGX– Manage margin accounts in excess of CAD $4.0

Billion in cash and letters of credit

• Settlement– Settlement of $US and $CAD cash streams– Monthly settlement values over CAD $2 Billion

processed by the clearing house

24

Oversight

• Regulatory – ASC – Exemption order, compliance with operating

principles– CFTC – 2(h)(iii) exemption, “Eligible Commercial

Market” status

• Clearing Bank– TD Bank, NGX’s Clearing Bank, maintains oversight of

NGX clearing operations to support credit facility, $300MM daylight, $30MM LC, $20MM demand

– Clearing Bank controls segregated collateral accounts– Clearing Bank authorizes movement of funds from

collateral accounts– Clearing Bank has full access to NGX trade/clearing

data and reporting, ensures collateral accounts are sufficient to manage Contracting Party margin requirements

25

SECTION THREE: RISK MANAGEMENT

26

Performance Risks

• Failure to Make/Take Delivery– NGX is exposed to the price at which an alternative

supply/market can be found – Risk is managed with backstopping contracts, penalty

mechanisms, collateral requirements and credit policy

• Failure to Pay– NGX is exposed to receivables risk on settlement

dates– Risk is managed with penalty mechanisms, collateral

requirements and credit policy

• Failure to Provide Collateral– NGX is exposed to the risk that Contracting Parties

will not provide sufficient collateral to manage their risks

– Risk is managed with liquidation provisions

27

Margin Requirements

• Risk Measurement– Performance risks are quantified through NGX’s

margining methodology, which attempts to estimate probable worst-case portfolio value

• Collateral– NGX collects collateral from Contracting Parties to

secure their portfolios and protect the clearing operation from defaults

• Margin Triggers– If margin requirements reach 80% of collateral

deposited, NGX will request additional collateral– At 90%, NGX may restrict the Contracting Parties

trading capabilities– At 95%, NGX is entitled to invoke the liquidation

procedure

28

Collateral

• Collateral Policy– Contracting Parties must have sufficient collateral to

cover their Margin Requirement, utilizing any combination of the forms of collateral and offsets below

– Collateral is held to support the Contracting Party’s traded positions and can only be used to remedy a performance failure by the Contracting Party itself

• Collateral Requirements– Collateral is accepted in the form of cash and

irrevocable letter of credit from an A or higher rated bank

– Collateral requirement can be reduced with an accounts payable or positive variation margin offset

29

Risk Measurement

• Accounts Receivable/Payable– A calculation of the value of gas delivered– Margin requirements are increased if gas has been

taken prior to payment, and decreased if gas has been delivered prior to payment

• Variation Margin (Mark-to-Market)– A calculation of the price at which a forward position

could be instantaneously liquidated given current market prices

• Initial Margin– A calculation of the probability of a movement in

market prices during a two-day holding period– Initial margin coverage protects against a prolonged

liquidation

30

Position Tracking

• Consolidation and Netting– Positions within each product and date range are

consolidated into gross long and short positions– Liquidation risk is managed against the net of the

long and short positions

• Instruments and Date Ranges– Trades across all instruments in a product are

grouped by date ranges in real-time– Instruments may overlap, but date ranges are unique– Ex. A M-Nov instrument and a WB-Nov instrument

would each populate a position for November 1 to November 30th

31

Physical Risk Management

1st of Delivery Month Last Day of Delivery Month 25th of Payment Month

25 Days 60 Months30 Days

Payment Exposure- Margined at full value

Current Month Exposure- Deliveries margined at full value- Open position initial margin- Variation margin all positions

Forward Position Exposure- Open position initial margin- Variation margin all positions

32

What are Initial Margins?

• Defined– Initial Margin is an estimation of the value to which

the clearing house might be exposed during a period of liquidation

– Initial Margin is intended to measure potential change in a value of a portfolio beyond the last mark-to-market price during a period of liquidation

• How Does NGX Utilize Initial Margin?– NGX applies initial margin to Contracting Parties’ net

open positions that would be subject to liquidation in the event of a default

– Initial margin acts as additional position coverage that NGX can utilize in the event of a default to ensure that the clearing operation remains secure

33

Initial Margin Methodology

• Utilization of VaR– NGX utilizes a Value-at-Risk methodology to

determine initial margins– VaR is a method of assessing risk that uses standard

statistical techniques routinely used in a variety of technical fields

– NGX’s VaR calculation measures the worst expected price change in a date range for a product over a given time interval under normal market conditions at a given confidence level

– VaR, while imperfect and subject to several limitations, provides a measurement tool that has historically been an accurate measure to evaluate potential exposure in a portfolio

34

Margin Offsetting

• Accounts Receivable/Payable– All receivables/payables are offset across all NGX

products

• Variation Margin (Mark-to-Market)– All mark-to-market calculations are offset across all

NGX products

• Initial Margin– Initial margins apply only to net open positions for

each forward date range in each product– Limited cross-margining (ie. Initial margin reductions

for highly correlated, yet non-identical hedged positions) is provided today for short-term fixed-price positions

– A project is currently underway to provide portfolio offsets for highly correlated positions in liquid products across both time and locations

35

Margin Example

• Example– On Tuesday, December 27th, BUYCO (buyer)

purchases 5,000 GJ/Day of the NGX Intra-Alberta month of January 2006 physical contract from SELLCO (seller) at a price of CAD $14.000/GJ

• Position Management– As soon as the transaction is matched, BUYCO shows

a net long position of 5,000 GJ for each day from January 1 to January 31, thus a total net long position of 155,000 GJ (ie. 5,000 GJ/Day multiplied by 31 days)

– Conversely, SELLCO shows a net short position of 5,000 GJ for each day from January 1 to January 31, thus a total net short position of 155,000 GJ

36

Margin Example

• Initial Margin– Immediately following the creation of the long and

short positions, initial margin is applied– The initial margin rate for January is currently CAD

$2.300/GJ (17% of price), as statistically generated by NGX

– Both BUYCO and SELLCO have initial margin added to their margin requirement for CAD $356,500 (155,000 GJ multiplied by $2.300/GJ)

– The initial margin requirement will remain in place, unchanged, until one of the following events occurs:

• Either BUYCO or SELLCO offset all or part of their open long/short position, thus reducing their initial margin requirement to zero, or;

• The January long/short position becomes a current month position on January 1st

37

Margin Example

• December 27th to December 31st Margin Requirements– The following table illustrates the margin

requirements for the January position through each remaining day in December:

DateSettlement

PriceBUYCO

Initial MarginBUYCO MTM

SELLCOMTM

SELLCOInitial Margin

Dec 27th 14.100 ($356,500) $15,500 ($15,500) ($356,500)

Dec 28th 13.600 ($356,500) ($62,000) $62,000 ($356,500)

Dec 29th 14.000 ($356,500) Nil Nil ($356,500)

Dec 30th 14.200 ($356,500) $31,000 ($31,000) ($356,500)

Dec 31st 14.200 ($356,500) $31,000 ($31,000) ($356,500)

38

Margin Example

Date

RM-JanSettlement

PriceBUYCO AP/AR

BUYCORM Initial Margin*

BUYCOVariation Margin

BUYCO Total

Margin

Jan 1st 14.300 ($70,000) ($390,000) $45,000 ($415,000)

Jan 2nd 14.200 ($140,000) ($377,000) $29,000 ($488,000)

Jan 3rd 15.000 ($210,000) ($364,000) $140,000 ($434,000)

Jan 4th 15.500 ($280,000) ($351,000) $202,500 ($428,500)

Jan 5th 14.500 ($350,000) ($338,000) $65,000 ($623,000)

CONTINUE

Jan 31st 15.000 ($2,170,000) Nil Nil ($2,170,000)

• January 1st to January 31st Margin Requirements– The following table illustrates BUYCO’s margin

requirements for the January position through each remaining day in January:

* Initial margin rate for the rest of January changes on January 1st to reflect higher spot market volatility, uses $2.600/GJ in the example

39

Margin Example

Date

RM-JanSettlement

PriceSELLCO AP/AR

SELLCORM Initial Margin*

SELLCOVariation Margin

SELLCO Total

Margin

Jan 1st 14.300 $70,000 ($390,000) ($45,000) ($365,000)

Jan 2nd 14.200 $140,000 ($377,000) ($29,000) ($266,000)

Jan 3rd 15.000 $210,000 ($364,000) ($140,000) ($294,000)

Jan 4th 15.500 $280,000 ($351,000) ($202,500) ($273,500)

Jan 5th 14.500 $350,000 ($338,000) ($65,000) ($53,000)

CONTINUE

Jan 31st 15.000 $2,170,000 Nil Nil $2,170,000

• January 1st to January 31st Margin Requirements– The following table illustrates SELLCO’s margin

requirements for the January position through each remaining day in January:

* Initial margin rate for the rest of January changes on January 1st to reflect higher spot market volatility, uses $2.600/GJ in the example

40

Questions and Contact Information

Gary Gault – Vice President403.974.1707gary.gault@ngx.com

Dan Zastawny – Vice President, Clearing & Compliance403.974.4335dan.zastawny@ngx.com

Kenny Foo – Clearing Manager403.974.1737kenny.foo@ngx.com

Natural Gas Exchange Inc.Suite 2330, 140 4th Avenue SWCalgary, AlbertaCanada T2P 3N3

Phone 403.974.1700Fax 403.974.1719