1. Setting Natural Gas Prices Prepared by: Mark R
Setting Natural Gas Prices Prepared by: Mark R. Burns, President Independent Energy Consultants, Inc. July 2008

2. Industry Definitions Mcf = 1000 cubic feet of natural gas at STP
Ccf = 100 cubic feet of natural gas at STP
1 Mcf = 10 Ccf Fixed Price Offer
Dth = 1,000,000 Btu
MMBtu = 1,000,000 Btu
1 Dth = 1 MMBtu
Conversion factor Energy Content to Volumetric Flow
1.03 Dth = 1 Mcf
This conversion is set by the local utility - subject to minor change
Nymex = New York Mercantile Exchange

3. Where to Find Nymex Price Quotes
All 20-minute delayed quotes
Real time prices available for a fee
Futures contracts trade by month thru December 2020
Each contract has a unique price
Each contract expires 3-business days before gas flow month
Each contract = 10,000 MMBtus
Many commodities are traded on the Nymex

4. Typical Gas Supply Offers
Fixed Price Offer
Agree up front on a rate that will not change
Example: 1-year fixed gas rate of 10/Mcf Jan-Dec
Each month that rate would appear on customer’s bill
NYMEX Plus Offer
Agree on a formula that will not change
Wholesale rate + Retail Adder = Retail Price
Example: Nymex x Conversion Factor + Retail Adder = Rate
Conversion Factor = Dth/Mcf
Client or consultant determines when rate is set
Formula can be used to set a fixed rate for any period of time

5. Nymex Plus Example 1 – Single Month
Buying 100 percent of natural gas needs for August 2008
Assume formula is: Retail Price = Nymex x $1.50/Mcf
August 2008 natural gas future’s contract trading at $10/Dth
Retail Gas Rate = $10/Dth x 1.03 Dth/Mcf + $1.50/Mcf = $11.80/Mcf
$11.80/Mcf is the rate that would appear on a customer’s August bill
Once again this is the shoppable gas cost only
If a customer used 10 Mcf in August, Gas Cost = $118.00
Total Delivered Cost = Gas Cost + Tax + Delivery Charge + Monthly Service Charge

6. Example 2 – Single Month Multiple Purchases
Assume we buy 75 percent of our August gas on May 1, 2008
Assume we buy the final 25% of our gas on June 1, 2008
Assume we need to buy 12 Nymex contracts to meet 100 percent of our natural gas needs for August 2008
Assume August contract $11/Dth on May 1st
Assume August contract $10/Dth on June 1st
First determine the Nymex weighted average price:
($11/Dth x 9 contracts + $10/Dth x 3 contracts)/12 contracts = $10.25/Dth
Now apply the Nymex Plus formula:
Retail Gas = $10.25/Dth x 1.03 Dth/Mcf + $1.50/Mcf = $ /Mcf

7. Example 3 – Multiple Month Multiple Purchase
Assume we buy 100 percent of our winter gas (Nov-Apr)
Determine weighted average Nymex Price = $11.447/Dth
Apply Nymex Plus formula
Retail Gas Rate = $11.447/Dth x 1.03 Dth/Mcf + $1.50/Mcf = $13.29/Mcf
$13.29/Mcf is the gas supply rate that would appear on customer’s bill for each month November through April

8. Nymex Plus Pricing Key Points
Client and Supplier Agree on a Formula
Supplier locks in all the components of the retail adder
They are indifferent as to where the Nymex trades
Client has the right to execute the formula prior to gas flow month
Locking in the retail adder eliminates ~ 20% of price risk
Able to buy gas for whatever period remains
Able to buy gas in increments
Able to use variable pricing that changes each month
Able to convert to a fixed rate at any time
Questions – Contact Independent Energy Consultants