1. 1 Merchant Trade Capital: Unlimited, Costless Capital? A.How much does it take? Identifying Capital Components B.What’s the cost? Pricing Trade Capital Components C.Will market bear the cost? Structural Mitigants (Capital Management)

2. 2 A.How Much (Capital) Does it Take? Identifying Capital Components “Lending” (Deploying) Capital –Credit Assets –Sales Payment cycle (net/25) –PRMAs (MTM Assets): Probabilistic Capital Deployed “Borrowing” (Sourcing) Capital –Credit Liabilities –Purchases: (same payment cycle) –PRMLs (MTM Liabilities): Probabilistic Capital Sourced –Why/how is this a bad thing?

3. 3 [A/R slide]

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5. 5 [MTM +/- slides]

6. 6 B.What’s the Cost? Pricing Trade Capital ‘Lending’ Commodity / Position (Credit Assets) –Market Price of Credit (Credit Spreads and Default Probability) –Portfolio Diversification –Term Structure Sensitivity (credit theta) –Subordination (contractual and structural) ‘Borrowing’ Commodity / Position (Credit Liabilities) –Uncommitted Capital / Incomplete Capital –BalanceSheet Liquidity Stress/Tax –Missing Piece: Contingent Capital (Backstop) –Cost of Contingent Capital?

7. 7 [CS term slide]

8. 8 “Fully-loaded” Capital Cost: Example #1 A/Rs & A/Ps Example: Purchase at GasDaily; 10,000 MMBtu/d; and Sale at GasDaily; 10,000 MMBtu/d –How Much Capital? Lend Capital (Sale): A/R Credit Risk Assumed Borrow Capital (Purchase): A/P BalanceSheet Liquidity Consumption –Cost of Capital? Counterparty Default Risk BalanceSheet Stress –Incremental increase in committed capital revolver

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11. 11 “Fully-loaded” Capital Cost: Example #2 PRMAs & PRMLs Example: BUY: 1-Year Fixed-Price Swap; 10,000 MMBtu/d SELL: 1-Year Fixed-Price Swap; 10,000 MMBtu/d –Capital Identified Capital Deployed (Sale): Potential MTM Credit Risk Assumed Capital Sourced (Purchase): Potential MTM Liability/Liquidity Assumed –Cost of Capital Counterparty Default Risk –Credit Spreads (or Default Probability and Recovery) –Term Structure: One-Year; delcining volume BalanceSheet Stress –Incremental increase in committed capital revolver?

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15. 15 C.Will Market Bear the Cost? Structural Mitigants & Capital Management Position Consolidation –Consolidation Factor (gross vs. net throughput ) –Cleared Products –Capital Management Opportunity Market Structure –Price Discrimination despite Counterparty Anonymity? –Example: best available price (price stack ‘depth’) –Credit risk premium embedded? Capital Advantages?

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