This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Past performance is not necessarily a guide to future performance. Please see additional important information and qualifications at the end of this material. Copyright 2014 Powerhouse David Thompson, CMT Executive Vice President 202-333-5380 www.powerhouseTL.com Buying Smart, Selling Smart Despite Volatile Propane Prices NPGA 2014 Southeastern Propane Exp April 12-13, 201
Transcript
This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Past performance is not necessarily a guide to future performance. Please see additional important information and qualifications at the end of this material. Copyright 2014 Powerhouse
David Thompson, CMT Executive Vice President202-333-5380 www.powerhouseTL.com
“But in the last two months, the steady price decline has turned into a free-fall, as unusually mild temperatures across much of the U.S. have damped demand for gas to heat homes and offices.”
Wall Street Journal 12/31/2011
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What Can You Do To Protect Margins and Grow Your Business?
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Why Hedge Price Risk?
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1. To help stabilize profit margins
2. To help protect the value of inventory in storage
3. To help protect the value of fuel in transit Pipeline Railcar Barge
4. To help differentiate your business Fixed price offerings to your customers Capped price offerings to your customers
5. To help keep company fuel costs within a budget
6. To take advantage of market opportunities Carry markets (storage trade) Regional differences in price (basis trade)
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What is a Futures Contract?
1. Several Contract Months Available
2. Relatively Low Up-Front Cash Requirements
3. Daily Mark-to-Market
4. High Flexibility to Adapt to Changing Market ConditionsA. Regulated Exchange Assures An Opposite Buyer or SellerB. Positions may be liquidated at your discretion
5. Retain Freedom to Purchase Physical Oil at Best Current Price
6. Regulated by the Commodity Futures Trading Commission
7. Financial Security of CFTC Regulated Hedge is Protected by NYMEX Balance Sheet
A standardized contract, traded on a regulated exchange, to buy or sell a specified quality and quantity of a commodity at a specified price and time in the future
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Futures Can Be Used To Fix a Purchase Price and Defer Local Buying
Yore Company Needs to Buy Propane for December Supply (Long Hedge)
Jun 15th Lock in Local “diff”: CME Mt. Belvieu + $0.10 per gallonYore Co. Buys Futures @ $1.15 per gallonEffective local price: $1.25 per gallon
Dec 15th Polar Vortex Returns – Propane Prices Go to $2.00December Futures Prices at $1.90 per Gallon
Local Prices Futures PositionJun 15th $1.25 $1.15Dec 15th $2.00 $1.90Profit or Loss -$0.75 +$0.75
Effective Purchase Price $1.25 per Gallon ($2.00 Local Price - $0.75 Futures Profit)
Note: This example is hypothetical, is used for illustrative purposes only, and does not reflect current prices.
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Futures Can Be Used To Fix a Purchase Price and Defer Local Buying
Yore Company Needs to Buy Propane for December Supply (Long Hedge)Jun 15th Lock in Local “diff”: CME Mt. Belvieu + $0.10 per gallon
Yore Co. Buys Futures @ $1.15 per gallonEffective local price: $1.25 per gallon
Dec 15th Propane Production Surges – Prices Go to $0.75
December Futures Prices at $0.65 per Gallon
Local Prices Futures PositionMarch 15th $1.25 $1.15Dec 15th $0.75 $0.65Profit or Loss +$0.50 -$0.50
Effective Purchase Price $1.25 per gallon ($0.75 Local Price + $0.50 Futures Loss)
Note: This example is hypothetical, is used for illustrative purposes only, and does not reflect current prices.
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Margin
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Collateral deposited for each contract as a show of good faith
Minimum account balance requirements set by the exchange
Margin requirement is eliminated when the trade is liquidated
Subject to change at any time
Your brokerage firm (Futures Commission Merchant) may set margin requirements higher than those set by the exchange
If you are unable to post margin, your positions may be liquidated by your brokerage firm with little, or no, prior notice
Option BUYER (Policy Holder) Pays Premium Receives Right (To Reimbursement if Risk Occurs)
Option SELLER (Policy Writer): Receives Premium Takes on Obligation (To Reimburse Policy Holder if Risk Occurs – and
Policy Holder Files Claim)
Option TypesCalls gain value as prices rise (are “called up”) Risk Avoided: Prices Rising
Puts gain value as prices fall (are “put down”)Risk Avoided: Falling Prices
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Options Can Be Used To Cap a Purchase Price and Defer Local Buying
Yore Company Needs to Buy Propane for December Supply (Long Hedge)
Jun 15th Local Price - $1.25 per gallonDecember Futures at $1.15 per gallonYore Co. Buys Call Options: The $1.15 Call @ $0.15 per gallon
Dec 15th Polar Vortex Returns – Propane Prices Go To $2.00
December Futures at $1.90 per gallon$1.15 Call Option Worth $0.75 per gallon
Local Price Option Position (Premium)Mar 15th $1.25 ($0.15)Dec 15th $2.00 $0.75Profit or Loss -$0.75 +$0.60
Effective Purchase Price $1.40* per gallon ($2.00 local price less $0.60 option profits)
*plus commission and feesNote: This example is hypothetical, is used for illustrative purposes only, and does not reflect current prices.
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Options Can Be Used To Cap a Purchase Price and Defer Local Buying
Yore Company Needs to Buy Propane for December Supply (Long Hedge)
Jun 15th Local Price - $1.25 per gallonDecember Futures at $1.15 per gallonYore Co. Buys Call Options: The $1.15 Call @ $0.15 per gallon
Dec 15th Propane Production Surges – Propane Prices Go To $0.75
December Futures at $0.65 per gallon$1.15 Call Option Worth $0.00 per gallon
Local Price Option Position (Premium)Mar 15th $1.25 ($0.15)Dec 15th $0.75 $0.00Profit or Loss +$0.50 ($0.15)
Effective Purchase Price $0.90* per gallon ($0.75 local price plus $0.15 option premium paid)
*plus commission and feesNote: This example is hypothetical, is used for illustrative purposes only, and does not reflect current prices.
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Propane Cap Program: A Real World Example
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Why Use a Cap Program?
Customers will be economically harmed by higher prices but are concerned they may “buy the top of the market”.
If a customer locks in a price and price moves lower, the marketer often receives undue blame.
Establishing a cap price deal puts the marketer on the same side of the table as the customer. If price mover higher, the customer will have some protection. If price moves lower then the marketer can pass along some of the benefit to the customer.
In the following actual example, on June 19, 2013, the marketer established a $0.8425/gal. cap on 84,000 gal./mo. on Conway propane paying $0.09 cts./gal. premium. This cap deal covered the months of October ‘13 – February ‘14.
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Establishing the Hedge Position
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Hedge Snapshot: Expiration of October Options
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Hedge Snapshot: Expiration of November Options
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Hedge Snapshot: Expiration of December Options
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Hedge Snapshot: Expiration of January Options
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Summary of Hedge
Customer paid $38,295.20 premium to protect 420,000 gallons of Conway-priced propane over the course of winter 2013-14.
This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security/instrument or to participate in any trading strategy. This material is based on public information as of the specified date, and may be stale thereafter. We have no obligation to tell you when information herein may change. We make no representation or warranty with respect to the accuracy or completeness of this material. Powerhouse has no obligation to provide updated information on the securities/instruments mentioned herein.
Futures trading involves significant risk and is not suitable for everyone.
Transactions in securities futures, commodity and index futures, options on futures markets carry a high degree of risk. The amount of initial margin is small relative to the value of the futures contract, meaning that transactions are heavily "leveraged". A relatively small market movement will have a proportionately larger impact on the funds you have deposited or will have to deposit: this may work against you as well as for you. You may sustain a total loss of initial margin funds and any additional funds deposited with the clearing firm to maintain your position. If the market moves against your position or margin levels are increased, you may be called upon to pay substantial additional funds on short notice to maintain your position. If you fail to comply with a request for additional funds within the time prescribed, your position may be liquidated at a loss and you will be liable for any resulting deficit
The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. This material does not provide individually tailored investment advice or offer tax, regulatory, accounting or legal advice. This material was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Prior to entering into any proposed transaction, recipients should determine, in consultation with their own investment, legal, tax, regulatory and accounting advisors, the economic risks and merits, as well as the legal, tax, regulatory and accounting characteristics and consequences, of the transaction. The value of and income from investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies and other issuers or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Powerhouse does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. Some of the information contained in this document may be aggregated data of transactions in securities or other financial instruments executed by Powerhouse that has been compiled so as not to identify the underlying transactions of any particular customer.
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