# Setting Natural Gas Prices Prepared by: Mark R

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

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

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

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

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

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

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

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

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