Our marketing business is focused on providing services to our customers and suppliers to meet their energy commodity needs. We market and trade physical energy commodities in selected regions of the globe including crude oil, natural gas, electricity and other commodities. We do this by buying and selling physical commodities, by acquiring and holding rights to physical transportation and storage assets for these commodities, and by building strong relationships with our customers and suppliers.

In order to manage the commodity and foreign exchange price risks that come from this physical business, we use financial derivative contracts including energy-related futures, forwards, swaps and options, as well as currency swaps or forwards.

We also seek to profit from our views on the future direction of energy commodity pricing relationships, primarily between different locations, time periods or qualities. We do this by holding open positions, where the terms of physical or financial contracts are not completely matched to offsetting positions. We may also carry exposures to the absolute change in commodity prices based on our market views or as a consequence of managing our physical and financial positions on a day-to-day basis.

The physical and financial marketing and trading activities we undertake expose us to the risk of loss (and provide the opportunity to profit) from a range of factors including:

• changes to the absolute level of commodity prices;
• changes in the prices of commodities at specific locations;
• changes in the relative level of nearer term prices to future prices;
• changes in the relative value of different qualities of a commodity;
• changes in the volatility of commodity prices;
• changes in the relationships between energy commodity prices and/or derivative instruments;
• changes in the operational costs of our physical transportation and storage contracts;
• physical or financial loss of physical product; and
• disputes over terms of deals and contracts.

In order to manage these risks we have risk management systems and processes including:

• regular reporting to the Board of Directors;
• regular reporting to the Risk Management Committee;
• oversight of activities by experienced commercial management;
• a separate Risk Management Office; and
• comprehensive policies, procedures and controls.

Our risk management activities make use of tools such as Value-at-Risk (VaR) and stress testing. VaR is a statistical estimate of the expected profit or loss of a portfolio of positions assuming normal market conditions. We use a 95% confidence interval and an assumed two day holding period in our measure, although actual results can differ from this estimate in non-normal market conditions, or if positions are held longer than two days based on market views or a lack of market liquidity to exit them, which is typical for long-term assets. We estimate VaR primarily by using the Variance-Covariance method based on historical commodity price volatility and correlation inputs where available, and by historical simulation in other situations. Our estimate is based upon the following key assumptions:

• changes in commodity prices are either normally or “T” (for natural gas since May 2006) distributed;
• price volatility remains stable; and
• price correlation relationships remain stable.

We have defined VaR limits for different segments of our business. These limits are calculated on an economic basis and include physical and financial derivatives, as well as physical transportation and storage capacity contracts accounted for as executory contracts in our financial statements. We monitor and report our positions against these VaR limits daily. Our year end, annual high, annual low and average VaR amounts are as follows:

If market shock occurred as in 2008, the key assumptions underlying our VaR estimate could be exceeded and the potential loss could be greater than our estimate. We perform stress tests on a regular basis to complement VaR and assess the impact of non-normal changes in prices on our positions.

Throughout the second half of 2008 and into 2009, we have been realigning our marketing strategies and positions to focus more on physical business which has been built around storage, blending and transportation. To this end, we are reducing our trading levels in an orderly fashion recognizing the challenging economic environment and we have reduced the overall size of our trading business to reduce volatility and focus on the physical side of our business. We are exiting trading positions that do not support our physical business and we are continuing to reduce trading exposures.