Common use of Position Limits Clause in Contracts

Position Limits. The oil position limits are divided into outright positions, as well as a range of spread and individual position limits. The outright position limits refers to the net risk position, i.e. includes all physical and financial (e.g. futures and swaps) positions. Examples of outright oil positions would include the following: • Exchange transactions, such as Heating Oil, Gasoil, RBOB, Natural Gas, and WTI; • Over-the-Counter (OTC) swaps positions; and • Cash (physical) positions. The outright positions for both oil and natural gas are measured on a daily basis, with the limits in place applying to the total portfolio, i.e. the combination of system supply, system optimization and discretionary positions. All of the other position limits in place apply to the combination of the system optimization and discretionary portfolios. As per of the determination of the positions, ▇▇▇▇▇▇▇ defines “standard” hedging products. In general, basis refers to the price differential between the cash or spot price of a commodity and the price of the nearest month futures or swaps contract. Basis may reflect different time periods, qualities or locations. Consistent with common market practice, for the oil business ▇▇▇▇▇▇▇ uses basis to refer to quality differences. As indicated below, ▇▇▇▇▇▇▇ treats location spreads for oil separate from basis (quality). Note that for the natural gas business, basis typically refers to location, since quality differences are generally not pertinent. Privileged and Confidential - 12/5/2011 Similar to the oil location spreads, ▇▇▇▇▇▇▇ treats system positions with potential basis exposure differently than discretionary positions. ▇▇▇▇▇▇▇ generally runs a balanced book with the system positions largely hedged with what is considered to be the most appropriate trading instrument. The current “base” hedging instruments are as indicated below, recognizing that they may change in the future depending on product availability and considerations such as liquidity. Gasolines NYMEX RBOB futures contract* Ethanol NYMEX RBOB future contract or CBOT ethanol futures contract* Distillates NYMEX Heating Oil (HO) futures contract* Fuel Oils NYH 1% Sulfur Residual Fuel Oil Swaps * Could also use comparable swaps contracts There is no basis spread recorded for any system position hedged with the base hedging instrument. For fuel oil there can also periodically be a strong rationale to use an alternative instrument such as Gulf Coast 3% sulfur fuel oil swaps or crude oil (either WTI or ▇▇▇▇▇ futures or swaps) as a hedge. These instruments could be preferred due to considerations such as liquidity or quality differences. If these alternative instruments are used as a hedge then a cross commodity as well as a location spread (if applicable) is recorded for the position Note, however, that up to 500,000 barrels of residual fuel oil can be hedged with crude oil without counting against the approved cross commodity and location spread limits. Any positions beyond this 500,000 barrel limit would count against the pertinent position limits. Spreads are defined as offsetting positions which net to a balanced overall position. Although the positions offset, there can still be substantial exposure. As indicated, the oil spread position limits apply to the system optimization and discretionary trading portfolios, i.e. any activities associated with the system supply portfolio are not subject to these additional spread limits. The most notable system supply example for ▇▇▇▇▇▇▇ is the use of forward (a.k.a. deferred) spreads when the heating oil market is in a contango or carry structure. These spreads are completed in anticipation of a subsequent filling of a corresponding volume of oil inventory in the tanks, frequently called summerfill. When the oil is purchased to put in the tanks, the long position of the spread can be closed out, with the remaining short position acting as the hedge on the physical inventory. Another example of a system transaction is a “pre-roll” of the distillate inventory hedge. As indicated earlier, ▇▇▇▇▇▇▇ operates with a substantially balanced book, with the inventory hedged within limited tolerances. For light oil products, the base assumption is that inventory is hedged with the prompt month NYMEX position of the most appropriate oil commodity (see table above). As an example, during the month of December, the base distillate inventory hedge would be a corresponding volume of January NYMEX heating oil contracts. Since these January NYMEX contracts would expire at the end of December, it is necessary to exit the positions prior to month-end. The exit from these contracts is generally accomplished by either closing the position if the hedge volume is no longer needed or “rolling” it to the next month, e.g. in this case purchasing the short January contract(s) and selling a corresponding volume of February contract(s). This process whereby the prompt month ▇▇▇▇▇▇ are “rolled” to the next month prior to expiration is considered part of the requisite system activity and the positions are included in the System Supply portfolio. There can also be strong incentive to “pre-roll” an inventory hedge beyond the next month. For example, if the inter-month price spreads appear attractive, a pre-roll can either lock in a gain (when in contango) or limit a loss (when in backwardation) to what is considered an acceptable level. ▇▇▇▇▇▇▇ can pursue this strategy depending on the current and expected market conditions. Since these pre-rolls are pursued in Privileged and Confidential - 12/5/2011 support of the system requirements, they are also included in the System Supply positions. The position limits recognize this pre-roll option up to a maximum of three million barrels (President’s limit) and up to two additional months forward beyond the prompt month roll. Based on the example cited in the paragraph above, the January inventory hedge could be pre-rolled up to April and be considered a system supply pre-roll rather than a system optimization position. Any pre-roll beyond this time frame is considered part of the System Optimization portfolio and subject to the additional position limits imposed on the combination Discretionary plus System Optimization positions. Note that the pre-rolls are in concept quite similar to the forward spreads discussed above. A key difference is that the pre-rolls refer to positions where the “long” side of the spread is a cash position rather than a forward month paper position. The oil spread limits on the combination Discretionary plus System Optimization positions are divided into four categories, again with potential positions on the exchanges, OTC, or cash markets: • Time spreads, i.e. based on the same commodity in different time periods; • Location or geographical spreads, based on the same or similar (e.g. heating oil and gasoil are considered similar) commodity in different locations; • Basis spreads, based on a spread between the same or similar physical commodity and futures or swaps contract; and • Cross Commodity spreads, based on different commodities, e.g. heating oil / crude oil positions or a heating oil / natural gas spread. Note that if residual fuel oil is hedged with crude oil (WTI or ▇▇▇▇▇), no cross commodity spread is calculated as these instruments can be the preferred hedge instrument due to liquidity or other considerations. Option trading is approved for exchange (NYMEX or ICE) and OTC options for Oil Supply / Trading. Natural Gas Supply / Trading has natural gas options trading approval, though only for system transactions. The Oil group is authorized to trade natural gas cross commodity spreads, though only as part of a hedge. As an example, a residual fuel oil / natural gas spread trade could be used to “lock in” the economics of a capital project designed to convert fuel usage from residual fuel to natural gas. This type of transaction would be measured as part of the system trading portfolio, though would need to be specifically documented as such. In addition to the total oil spread limits, ▇▇▇▇▇▇▇ recognizes individual spread position limits on the System Optimization plus Discretionary positions. These limits are put in place to help recognize that concentration in individual spread positions can carry additional risk compared to a more diversified portfolio. Similar to many other companies, ▇▇▇▇▇▇▇ aggregates all forward natural gas market risk into high level components for position management and hedging purposes. This approach groups positions with similar risk profiles to establish market exposure. The position limits are based on this breakdown:

Position Limits. The oil position limits are divided into outright positions, as well as a range of spread and individual position limits. The outright position limits refers to the net risk position, i.e. includes all physical and financial (e.g. futures and swaps) positions. Examples of outright oil positions would include the following: • Exchange transactions, such as Heating Oil, Gasoil, RBOB, Natural Gas, and WTI; • Over-the-Counter (OTC) swaps positions; and • Cash (physical) positions. The outright positions for both oil and natural gas are measured on a daily basis, with the limits in place applying to the total portfolio, i.e. the combination of system supply, system optimization and discretionary positions. All of the other position limits in place apply to the combination of the system optimization and discretionary portfolios. As per of the determination of the positions, ▇▇▇▇▇▇▇ defines “standard” hedging products. In general, basis refers to the price differential between the cash or spot price of a commodity and the price of the nearest month futures or swaps contract. Basis may reflect different time periods, qualities or locations. Consistent with common market practice, for the oil business ▇▇▇▇▇▇▇ uses basis to refer to quality differences. As indicated below, ▇▇▇▇▇▇▇ treats location spreads for oil separate from basis (quality). Note that for the natural gas business, basis typically refers to location, since quality differences are generally not pertinent. Privileged and Confidential - 12/5/2011 Similar to the oil location spreads, ▇▇▇▇▇▇▇ Sprague treats system positions with potential basis exposure differently than discretionary positions. ▇▇▇▇▇▇▇ generally runs a balanced book with the system positions largely hedged with what is considered to be the most appropriate trading instrument. The current “base” hedging instruments are as indicated below, recognizing that they may change in the future depending on product availability and considerations such as liquidity. Gasolines NYMEX RBOB futures contract* Ethanol NYMEX RBOB future contract or CBOT ethanol futures contract* Distillates NYMEX Heating Oil (HO) futures contract* Fuel Oils NYH 1% Sulfur Residual Fuel Oil Swaps * Could also use comparable swaps contracts There is no basis spread recorded for any system position hedged with the base hedging instrument. For fuel oil there can also periodically be a strong rationale to use an alternative instrument such as Gulf Coast 3% sulfur fuel oil swaps or crude oil (either WTI or ▇▇▇▇▇ futures or swaps) as a hedge. These instruments could be preferred due to considerations such as liquidity or quality differences. If these alternative instruments are used as a hedge then a cross commodity as well as a location spread (if applicable) is recorded for the position Note, however, that up to 500,000 barrels of residual fuel oil can be hedged with crude oil without counting against the approved cross commodity and location spread limits. Any positions beyond this 500,000 barrel limit would count against the pertinent position limits. Spreads are defined as offsetting positions which net to a balanced overall position. Although the positions offset, there can still be substantial exposure. As indicated, the oil spread position limits apply to the system optimization and discretionary trading portfolios, i.e. any activities associated with the system supply portfolio are not subject to these additional spread limits. The most notable system supply example for ▇▇▇▇▇▇▇ is the use of forward (a.k.a. deferred) spreads when the heating oil market is in a contango or carry structure. These spreads are completed in anticipation of a subsequent filling of a corresponding volume of oil inventory in the tanks, frequently called summerfill. When the oil is purchased to put in the tanks, the long position of the spread can be closed out, with the remaining short position acting as the hedge on the physical inventory. Another example of a system transaction is a “pre-roll” of the distillate inventory hedge. As indicated earlier, ▇▇▇▇▇▇▇ operates with a substantially balanced book, with the inventory hedged within limited tolerances. For light oil products, the base assumption is that inventory is hedged with the prompt month NYMEX position of the most appropriate oil commodity (see table above). As an example, during the month of December, the base distillate inventory hedge would be a corresponding volume of January NYMEX heating oil contracts. Since these January NYMEX contracts would expire at the end of December, it is necessary to exit the positions prior to month-end. The exit from these contracts is generally accomplished by either closing the position if the hedge volume is no longer needed or “rolling” it to the next month, e.g. in this case purchasing the short January contract(s) and selling a corresponding volume of February contract(s). This process whereby the prompt month ▇▇▇▇▇▇ are “rolled” to the next month prior to expiration is considered part of the requisite system activity and the positions are included in the System Supply portfolio. There can also be strong incentive to “pre-roll” an inventory hedge beyond the next month. For example, if the inter-month price spreads appear attractive, a pre-roll can either lock in a gain (when in contango) or limit a loss (when in backwardation) to what is considered an acceptable level. ▇▇▇▇▇▇▇ can pursue this strategy depending on the current and expected market conditions. Since these pre-rolls are pursued in Privileged and Confidential - 12/5/2011 support of the system requirements, they are also included in the System Supply positions. The position limits recognize this pre-roll option up to a maximum of three million barrels (President’s limit) and up to two additional months forward beyond the prompt month roll. Based on the example cited in the paragraph above, the January inventory hedge could be pre-rolled up to April and be considered a system supply pre-roll rather than a system optimization position. Any pre-roll beyond this time frame is considered part of the System Optimization portfolio and subject to the additional position limits imposed on the combination Discretionary plus System Optimization positions. Note that the pre-rolls are in concept quite similar to the forward spreads discussed above. A key difference is that the pre-rolls refer to positions where the “long” side of the spread is a cash position rather than a forward month paper position. The oil spread limits on the combination Discretionary plus System Optimization positions are divided into four categories, again with potential positions on the exchanges, OTC, or cash markets: • Time spreads, i.e. based on the same commodity in different time periods; • Location or geographical spreads, based on the same or similar (e.g. heating oil and gasoil are considered similar) commodity in different locations; • Basis spreads, based on a spread between the same or similar physical commodity and futures or swaps contract; and • Cross Commodity spreads, based on different commodities, e.g. heating oil / crude oil positions or a heating oil / natural gas spread. Note that if residual fuel oil is hedged with crude oil (WTI or ▇▇▇▇▇), no cross commodity spread is calculated as these instruments can be the preferred hedge instrument due to liquidity or other considerations. Option trading is approved for exchange (NYMEX or ICE) and OTC options for Oil Supply / Trading. Natural Gas Supply / Trading has natural gas options trading approval, though only for system transactions. The Oil group is authorized to trade natural gas cross commodity spreads, though only as part of a hedge. As an example, a residual fuel oil / natural gas spread trade could be used to “lock in” the economics of a capital project designed to convert fuel usage from residual fuel to natural gas. This type of transaction would be measured as part of the system trading portfolio, though would need to be specifically documented as such. In addition to the total oil spread limits, ▇▇▇▇▇▇▇ recognizes individual spread position limits on the System Optimization plus Discretionary positions. These limits are put in place to help recognize that concentration in individual spread positions can carry additional risk compared to a more diversified portfolio. Similar to many other companies, ▇▇▇▇▇▇▇ aggregates all forward natural gas market risk into high level components for position management and hedging purposes. This approach groups positions with similar risk profiles to establish market exposure. The position limits are based on this breakdown: