Merchant Trade Capital: Unlimited, Costless Capital?

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Merchant Trade Capital Unlimited, Costless
Capital?

• How much does it take?
• Identifying Capital Components
• Whats the cost?
• Pricing Trade Capital Components
• Will market bear the cost?
• Structural Mitigants (Capital Management)

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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?

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A/R slide
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MTM /- slides

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Whats 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?

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CS term slide
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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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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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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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