Propane Resources – Propane Supply & Risk Management
   

Supply – Providing advice to enhance opportunity

Our Supply and Risk Management Group is ready to help with any or all of your supply and risk management needs. Some of the ways we have worked with retail propane marketers include:

  • Management of all supply related issues for the company
  • Consulting regularly on all supply related issues for the company
  • Selling propane directly to the retailer as rack gallons or hedge gallons
  • Assisting with arranging propane purchases from other suppliers
  • Reviewing contracts with other suppliers before you sign them

Most suppliers want to sell you propane. Very few take care to ensure that they are setting you up with a supply plan that guarantees you will achieve your desired margins. When is the last time a supply representative consulted with you on the marketing programs you are offering to your customers to help them give you good supply purchasing advice?

Propane Resources believes in matching supply plans to marketing plans. How many gallons are you selling at fixed prices, capped prices, and prices that are simply open to market conditions? How are those programs designed and what is the timing? These are key questions we will ask to start the process of advising you on how to lock in desired margins for the year.

While most suppliers offer rack and pre-buy prices, Propane Resources will introduce you to additional tools that can provide you the flexibility you need protect and enhance your gross margins.

Protect Margins with Flexibility Using the Physical Hedge

A Key Tool to Provide the Flexibility You Need to Protect Margins

Physical hedging involves using actual contracts for physical product to lock in a price. While most are familiar with the process of pre-buying product, we will look more in depth at the process of using physical hedges at [less -]

Mt. Belvieu, TX and Conway, KS because of the benefits that can be derived from the liquidity of contracts at these major supply hubs.

  "Dear Marty and Laraine- Thank you for making sure that we had enough product for the last couple of weeks. We never needed to use our reserve tank at all which was a relief. So, until the next crisis, thanks for your efforts on our behalf! Ken" Reliable Propane, NY
Option One: the simple, but less Flexible PHYSICAL PRE-BUY

Retail propane marketers are familiar with the process of hedging by agreeing to pre-buy product to be lifted at a terminal. Often the agreement allows for lifting anytime between Oct 1 and Mar 31.While this is a simple way to hedge, it does have some downsides: [less -]

  • Falling prices can leave you stuck lifting load by load at a higher price
  • Less demand than expected can leave you with unneeded product
  • Allocation issues can cause pre-bought product to be unavailable
  • You often pay more in storage costs to be able to lift anytime Oct – Mar
Option Two: THE PHYSICAL HEDGE AT A MAJOR SUPPLY HUB

Most successful multi-state marketers hedge at major supply hubs and you should strongly consider this approach for your business. You can purchase product at Conway, KS or Mt. Belvieu, TX which will function as a hedge. You will also [less -]

purchase and lift posted priced product at a local terminal that goes up and down with Conway, KS or Mt. Belvieu, TX while being able to sell the hedge product back into the liquid market at the major hub. If the value of the hedge product goes down, so will your terminal purchases. If the value of the hedge product goes up, so will your terminal purchases. At Propane Resources, we work with retail marketers closely to decide when to sell back the hedge product for maximum protection and benefit to your margins.

PROS

  • Protect against paying higher prices in a rising market
  • Be able to sell product quickly in a falling market rather than lifting load by load
  • Avoid storage costs
  • Avoid the potential lack of availability of a local pre-buy if a pipeline or refinery goes on allocation because you can go to the lowest cost source for each load
  • Spend less than you would for a premium on a financial call option
  • Have the flexibility to position product in any winter month to give you price protection in the event of unexpected retail demand spikes

CONS

  • There is an added step in the process since you must purchase and manage both the hedge product and the product you will lift to sell to your customers.

Note: Propane Resources is here to work with you closely in the process.

FREQUENTLY ASKED QUESTIONS REGARDING THE PHYSICAL HEDGE

Why would I use a physical hedge to have price protection if I am covering gallons to be sold at prices to be set in the future?

The physical hedge is ideal for having price protection for gallons that are to be priced and sold in the future if we see a high probability prices [less -]

are increasing. The flexibility to sell off the hedge gallons at any time provides for many benefits not available with the pre-buy at a terminal.

Why would I use a physical hedge to have price protection if I am covering gallons to be sold at prices I have already set?

The physical hedge can guarantee the same margin protection as the pre-buy at a terminal with added benefits because of the flexibility to sell off. You will not be as likely to end up the winter with overpriced product or just more product than is needed.

Why would I want to buy a hedge that puts me at risk of owing money if prices decline?

If you place a physical hedge, you will get money back if the market increases, but you will owe if the market falls. With regard to owing money, this will be offset by the fact that terminal prices for product are lower if money is owed on the hedge gallons.

How much money down do I need and can I get it back?

We require 10 cents per gallon down as a deposit. If the market goes down significantly, Propane Resources reserves the right to require an additional deposit to cover some of the difference between contract value and market value. Once the hedge gallons are sold, you will receive the deposit back plus the difference if the value of the product has increased.

Can I really sell off the physical hedge at any time?

You can purchase a December 2012 contract today and sell it off later today or tomorrow if you want to, although you will need to sell it by the end of the contract month or take delivery.

If I make money or owe on a physical hedge, when do we settle?

The hedge settles at the end of the month that is contracted and if the market increases, money is paid on the seventh business day after the contract month ends. If the market has declined, the difference is owed five business days after a settlement sheet and invoice are received.

Will it jeopardize the great relationship with my current supplier if I do a physical hedge?

If you intend to do your hedging with Propane Resources but still lift physical gallons for sale to your customers from a trusted supplier, there should be no difference in the number of gallons you lift from them. You will likely purchase less pre-buy gallons and more gallons based on the price at the major supply hub.

What if I simply do not have the time or knowledge to follow the markets, trends and fundamentals to know when to sell off a physical hedge?

Propane Resources functions as your partner to help you decide when to sell off physical hedge gallons. We are constantly watching the market for many customers and will always give you our advice but unless arranged otherwise, you will make the final decisions.

What is the minimum amount I can buy at one time?

The minimum amount is 42,000 gallons to be contracted in any month.

AN EXAMPLE OF THE PHYSICAL HEDGE

Through discussions with retail propane marketers, it is determined that nearly 400,000 gallons will be sold at fixed costs between October and March. In addition, another 700,000 will be sold at prices open to market conditions. [less -]

As always we recommend covering the fixed sales in layers prior to and as they are sold. In several layers, we have positioned 420,000 gallons as hedges at Mt. Belvieu, TX. Propane is positioned with 126,000 in October, 126,000 in November and 168,000 in December. An average cost for October is $1.51, November is $1.52 and December is $1.53. The gallons are initially placed in the Fourth Quarter months but will be rolled to further out months as we get closer.

On our recommendation, the retail marketer has also positioned approximately 25 percent of their 700,000 to be sold at prices open to market conditions. The retail marketer has positioned 168,000 gallons with 42,000 in October, 42,000 in November and 84,000 in December. The average cost for October is $1.50, November is $1.51 and December is $1.52. Often we will cover winter gallons initially with Fourth Quarter contracts which can later roll to the First Quarter. These have greater liquidity if we wish to sell some of them during the Fourth Quarter or even sooner.

To help guarantee margins will be protected, we have ensured that the retail marketer can lift gallons at a terminal at a price of Mt. Belvieu plus 10 cpg throughout the season. Occasionally, nearby refineries will have "fire sales" and provide a lower delivered in price. This will help ensure terminal prices will not prevent the retail marketer from earning desired margins and enhancing them as gallons from nearby refineries are lifted at even lower cost.

As the season approaches, the retail propane marketer will be able to sell off hedge gallons as they lift wet gallons. If the rack price is up, the value of the hedge will be up and its' sell off can help pay the higher price on the rack gallons. If rack prices are down, there will be savings on loads but the retailer will have to pay the difference on the hedge gallons as they are sold off. As contract months end, the retailer can decide to sell off the gallons or move them to the next contract month for a small roll charge of usually a penny to a penny and a half per gallon. As time progresses, if the retailer feels the sales are over-covered, they may make a call to sell off hedge gallons at the current going rate. They may see an opportunity to make some profit in an up market or they may want to cut losses in a falling market. Either way, this is better than their only option with a pre-buy when there are excess gallons : take the gallons load by load by load.

What Do You Know About 'The Physical Hedge'?

Test Your Knowledge

Following, is a quiz to test your understanding of using the physical hedge at Mt. Belvieu, TX or Conway, KS. Answers are provided below or you can submit your quiz [less -]

and we will respond. If would like to discuss this option for protecting your margins, please call any one of our Supply Representatives at 888-739-6732.

The QUIZ

1 Pre-buying propane at a terminal is a form of hedging which many retail propane marketers are familiar with. It is simple but not as flexible as a physical hedge at a major supply hub.


2 A pre-buy at a terminal and a physical hedge at a major supply hub are two ways to guarantee price protection if prices increase.


3 It is less likely you would take delivery on a physical hedge at Conway or Mt. Belvieu than you would on pre-buy gallons at a local terminal.


4 There is no threat to pre-buy product at a terminal if the terminal goes on allocation.


5 A pre-buy for product to be lifted at a terminal will never leave you with more product than needed at the end of the demand season.


6 A physical hedge will never leave you with more hedge product than needed because you can sell it off fast.


7 A physical hedge at a major hub will cause you to owe more than the five cents per gallon down payment if the value of the product falls more than five cents before it is sold off.


8 A physical hedge at a major hub could be sold off the day after you purchase it even if it is a December Contract purchased in April.


9 Using hedge product at a major hub and never taking delivery on it will require you to use less wet gallons from your regular supplier.


 
     
 

 

QUIZ Answers: 1.T 2.T 3.T 4.F 5.F 6.T 7.F 8.T 9.F

It's Been Said About Us...
             
           
             
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""Dear Marty and Laraine- Thank you for making sure that we had enough product for the last couple of weeks. We never needed to use our reserve tank at all which was a relief. So, until the next crisis, thanks for your efforts on our behalf! Ken" Reliable Propane, NY

 
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