Natural Gas Exchange Inc

PRMIA – May 31, 2006

2

SECTION ONE: NGX BACKGROUND

3

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 HistoryInitial Ownership by Westcoast Energy Inc.Acquired by OM on Jan 1, 2001Acquired by TSX Group March 1, 2004

• Services providedElectronic 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 Centralized collateral management Centralized risk management

4

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

5

Operational Statistics

• 138 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

6

Historical NGX Trading Activityto March 31st, 2006

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

Year

Tota

l Qua

ntity

Tra

ded

(PJ)

-

100

200

300

400

500

600

700

800

900

1,000

1,100

Mon

thly

Ave

rage

Tra

ded

(PJ)

# of Days 324 365 365 365 365 365 366 365 365 365 366 365 90

Electricity (PJ) - - - - - - - - - 18 20 4 0

US Swaps - - - - - - - - 12 58 58 93 3

CDN Swaps - - - - - - - - 260 1,130 1,458 412 30

OTC Clearing (PJ) - - - - - - - - 84 351 236 449 160

U.S. (PJ) - - - - - - - - 1 6 - 1 0

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

Western Canada (PJ) 23 59 427 938 1,379 2,349 2,353 2,756 3,617 3,901 4,513 6,936 2,063

Percentage Growth 0% 161% 621% 119% 47% 70% 7% 26% 44% 41% 15% 20% 33%

Monthly Average Traded (PJ) 2 5 36 78 115 196 209 262 378 534 613 735 881

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

7

2006 Trading Turnover by Product Type

Eastern Canada Physical (PJ)

14.7%

OTC Clearing (PJ)6.0%

Western Canada Physical (PJ)

78.0%

U.S. Physical (PJ)0.0%

US Swaps (PJ)0.1%

CDN Swaps (PJ)1.1%

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)

8

SECTION TWO : CLEARING STRUCTURE

9

How is Counterparty Risk Mitigated?

• Standard Rules

• Collateral Provisions

• Liquidation Rights

• Backstopping

• Settlement Bank

• Emergency Fund

10

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

11

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

12

• Collateral on deposit in excess of CAD $1.88 Billion

• Approx. CAD $1.6 Billion LC’s, CAD $0.28 Billion Cash

Collateral MakeupNGX Margin Dispersion May 30, 2006

AR Margin, $560

Variation Margin, $76

Initial Margin, $494

Cushion Collateral $400

Surplus Collateral $263

$-

$500

$1,000

$1,500

$2,000

Collateral Posted

CA

D $

MM

13

NGX - Bank Risk by S&P Rating, May 30, 2006

$129,000,000.00

$803,725,000.00

$860,192,830.00

$87,950,000.00

CAD 0

CAD 250,000,000

CAD 500,000,000

CAD 750,000,000

CAD 1,000,000,000

AA AA minus A plus A

S&P Rating

14

SECTION THREE: RISK MANAGEMENT

15

Performance Risks

• Failure to Make/Take Delivery

• Failure to Pay

• Failure to Provide Collateral

16

Margin Requirements

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

17

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

18

Initial Margin Methodology

• NGX utilizes a Value-at-Risk methodology

• 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

• Calculated based on statistical analysis of historical prices.Calculations:

Delta = ln (settlement price/previous day settlement price)

Daily Volatility = √[{(delta1)² + (delta2)²…(deltan)²}/n]

VAR = standard deviation x √(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.

19

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

20

Questions and Contact Information

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