Natural Gas Exchange Inc PRMIA May 31, 2006

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Natural Gas Exchange IncPRMIA May 31, 2006
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• SECTION ONE NGX BACKGROUND

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Introduction to NGX

• Business Concept
• 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
• Services provided
• Electronic Marketplace
• 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

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Current NGX Product Locales
NGX Products Services
Physical Products
Financial Products
Upcoming Products
ATCO NORTH
STATION 2
ALBERTA POWER SWAPS
TEP
ALBERTA SWAPS
NGX INTRA-ALBERTA
EMERSON/GREAT LAKES
EMPRESS
IROQUOIS
HUNTINGDON
SUMAS SWAPS
PARKWAY
ST. CLAIR
DAWN
MALIN
MICHCON SWAPS
NIAGARA FALLS
MALIN SWAPS
CHIPPAWA
CHICAGO SWAPS
NBPL VENTURA
PGE CITYGATE
NICOR-NGPL
ROCKY MTN SWAPS
PGE CITYGATE SWAPS
SOCAL GAS
SOCAL GAS SWAPS
FUTURES SWAPS HENRY SWING SWAPS LDS FOR GDD
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Operational Statistics

• 138 NGX Contracting Parties
• Member firms eligible to transact through
  theExchange
• 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

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• SECTION TWO CLEARING STRUCTURE

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How is Counterparty Risk Mitigated?

• Standard Rules
• Collateral Provisions
• Liquidation Rights
• Backstopping
• Settlement Bank
• Emergency Fund

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Clearing Structure
NGX Emergency Fund (30MM CIBC Mellon Trust)
NGX Cash Reserves
Defaulting Party Collateral (100 Coverage Under
NGX Exposure Model)
Deposit Agreement
Deposit Agreement
Settlement Banking Credit Facility
Payer
Physical Backstopping (storage)
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Clearing Statistics

• Cleared Transactions
• 180,000 transactions cleared annually
• Notional value of transactions consummated is in
  excess of CAD60 Billion annually
• Margin
• Over 130 corporate margin accounts held
• Margin accounts averaging CAD2.0 Billion, peaking
  at one point, in excess of CAD4.0 Billion in cash
  and LCs
• Settlement
• Settlement in both USD and CAD cash streams
• Monthly settlement values averaging over CAD1.2
  Billion (peak, CAD2 Billion) processed

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Collateral Makeup

• Collateral on deposit in excess of CAD 1.88
  Billion
• Approx. CAD 1.6 Billion LCs, CAD 0.28 Billion
  Cash

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• SECTION THREE RISK MANAGEMENT

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Performance Risks

• Failure to Make/Take Delivery
• Failure to Pay
• Failure to Provide Collateral

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Margin Requirements

• Risk Measurement
• Performance risks are quantified through NGXs
  margining methodology, which attempts to estimate
  probable worst-case portfolio value
• Collateral
• Accepted in the form of cash and irrevocable
  letter of credit from an A or higher rated bank
• Collateral is held to support the Contracting
  Partys traded positions and can only be used to
  remedy a performance failure by the Contracting
  Party itself
• 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

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Risk Measurement

• NGX uses Web Reports to monitor trading activity
  and counterparty positions.
• Reports can be accessed from the NGX website
  www.ngx.com, or from the NGX Trading System.
• NGX measures risk in real-time and calculates
  margin requirements to quantify the risk
  measurement.
• Margin Requirements consists of
• Accounts Receivable/Payable (netted)
• Variation Margin (Mark-to-Market, also netted)
• 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

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Initial Margin Methodology

• NGX utilizes a Value-at-Risk methodology
• NGXs 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
• Calculated based on statistical analysis of
  historical prices.
• Calculations
• Delta ln (settlement price/previous day
  settlement price)
• Daily Volatility v(delta1)²
  (delta2)²(deltan)²/n
• VAR standard deviation x v(hold period/ of
  days) x daily volatility x last price
• Standard Deviation 2.7
• Hold Period 2 or 5 days (Depending on market
  liquidity)
• Number of days 2 years
• NGX uses a half life decay rate to give higher
  weighting to the recent periods.

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Reports

• For a number of reasons (scalability, efficiency,
  ease of use, etc) NGX has made all the
  information required by the front, middle and
  back offices available through the Web
• Reports readily accessible include daily trade
  reports, confirmations, invoices, details of
  settlements, deliveries, fees, user permissions
  etc.
• Risk reports are also made available for
  CounterParties to check their own Margin
  Requirements at NGX

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Questions and Contact Information

• Dan Zastawny Vice President, Clearing
  Compliance
• 403.974.4335
• dan.zastawny_at_ngx.com
• Kenny Foo Clearing Manager
• 403.974.1737
• kenny.foo_at_ngx.com

Natural Gas Exchange Inc. Suite 2330, 140 4th
Avenue SW Calgary, Alberta Canada T2P
3N3 Phone [phone] Fax [phone]