Energy Procurement:

How risk management

can benefit your

company

2

A few words of introduction

Paul Cicio, President of IECA

3

Webinar Format

• Agenda:

– 10:00-10:30 AM: Presentation by

Kobe Cannaerts of E&C America, Inc.

– 10:30-11:00 AM: Q&A Session

• Have a question? Type it in the chat box and

we’ll address it during the Q&A.

• Please retain the “raise your hand” option for

the Q&A. If we don’t get to your questions,

don’t worry, simply type it in the chat box.

CONTENT

Energy markets

Risk

managementAbout E&C

Energy markets

6

The roller coaster…

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NYMEX Henry Hub Natural Gas Futures Electronic (Front Month)

14 years

back

7

… on a long slide down?

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NYMEX Henry Hub Natural Gas Futures Electronic (Front Month)

7 years

back

8

…or not at all?

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Henry Hub Front Month

3.5 years

back

?

9

“Winter is Coming”

2.5

3.0

3.5

4.0

4.5

Nove

mb

er

Dece

mb

er

Ja

nu

ary

Fe

bru

ary

Ma

rch

Ap

ril

Ma

y

Ju

ne

Ju

ly

Au

gu

st

Se

pte

mb

er

Octo

be

r

Rolling 12-Month Strip Historical Trend Comparison

2011-2012 2014-2015

10

Rig Count Decreases by Shale Deposit

86/51%

51/45%

240/47%

492/45%32/37%

14/36%

83/18%

Total:

666/44%

Total and percentage rig count decreases by shale deposit since 1/1/2014

11

Gas Production Efficiency Gains

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Baker Hughes Oil and Gas Split Gas Rig Count

EIA STEO Actual Natural Gas Total Dry Production

12

US LNG Project Status

Phase Name In-service Date Capacity (Bcf/day)

Under construction Sabine Pass train 1-4 2016* 2.34

Under construction Dominion Cove Point 2017 0.65

Under construction Freeport LNG 2018* 1.73

Under construction Corpus Christi LNG 2018 1.76

Under construction Cameron LNG 2019* 1.56

Subtotal 8.05

Planned Sabine Pass 5-6 ? 1.1

Planned Lake Charles Export 2019 1.99

Planned Jordan Cove LNG ? 0.80

Planned Alaska LNG ? 2.61

Planned Oregon LNG 2019 1.17

Total 15.71

*Estimated in-service dates

13

Exports to Mexico

14

Electricity Generation by Fuel

0

20000

40000

60000

80000

100000

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140000

160000

180000

200000

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-04

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-15

Mill

ion k

Wh

Net Electric Generation from Coal Net Electric Generation from Natural Gas

15

Clean Power Plan Implementation

Final Rule DuePlans due from

States

EPA Proposes

Clean Power Plan

States submit initial

plans/request

extensions

Interim Reductions

Begin/Stats submit

Interim report

Full compliance

with Emissions

Rate Standard

2013-2014 2015 2017-20182016 2020-2022 2030

16

Clean Power Plan Building Blocks

1647

1005

75178

45 216

130

0

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1800

2012 FossilRate

Heat Rate Redispatch to PreserveNuclear

Expand RE Expand EE 2030 Standard

Em

issio

n R

ate

(LbC

O2 p

er

MW

h)

EPA's Best System of Emission Reduction (BSER) Determination, US Average

EPA started

with 2012

fossil rate

Application of

blocks

results in

2030

standard

Blocks represent emission rate reduction options

Block #1 Block #2 Block #3 Block #4

Range

across states

from 0

lb/MWh to

665 lb/MWh

17

The pitfalls of buying energy

Wishful

thinking

Greed

“This or that reason will

make prices fall again.”

“If the market rises

further, we are dead.” “Such a good price, we

shouldn’t miss it.”

“I feel that it’s going

to fall again.”

FearPrice fixed

Market average

PanicFIX

FIX

FIX

FIX

Wait in a

rising market

Fix too soon

in a falling

market

Fail to fix (enough) at

opportunity moments

18

… and how to avoid them

Don’t buy as

it falls tactics

Opportunity

hunting

strategy

Price fixed

Market averageStop loss

strategy FIX

FIX

FIX

FIX

FIXFIX

FIX

Risk management

20

Gazing into the mist

Short term Long term

MARKET ANALYTICS

Actively monitor markets for

hedging opportunities

RISK MANAGEMENT

work to shield clients from major price

increases

MARKET ANALYSIS

STRATEGY

At which pace will you take a

rise or fall in energy prices?

21

Steps in setting up a strategy

• Budget risk

• Market risk

• Survival risk

Determine the

strategic risk profile

• Averaging

• Fixing

• Fixing & unfixing

• Spot market optimization

• Advanced: options, commodity swaps, etc.

Determine the tactical

hedging tools

• Hedging horizon

• Choice of contract

• Fixing tunnels

• Stop loss limits

• Protections against operational risks

Edit strategy

note

22

Setting up a strategy

Falling cost of energy

= falling price of

product ?

(and to some extent

vice versa)

Is the energy cost a

high proportion

of the margin ?

MARKET RISK STRATEGY

• keep close to the market

average

• determine at what pace the

product prices react

• adapt the forward hedging

strategy to it

SURVIVAL STRATEGY

• keep close to the market

average

• ‘Lock in a margin’ when possible

YES

NO YES

BUDGET RISK STRATEGY

• aim at stabilizing budgets inside

the business’s cycles

NO

23

Approaches to price fixing

Prices

floating on

spot

markets

One shot

forward

fixing of

prices

PRICE MANAGEMENT

Use mixtures of forward

hedges at different

moments and spot pricing

Advantages:

- A more refined risk

managed

- Better responsiveness

to market opportunities

24

Market risk

strategy

Survival risk

strategy

Budget risk

strategy

1. Buy the dips Be careful with

buying too much

too far into the

future

When the price

level is reasonable

compared to

income: buy large

chunks

Buy large chunks

for several years

into the future

2. Buy at regular

intervals

More buying

moments or

average prices

More buying

moments or

average prices

Fewer buying

moments

3. Buy when the y-

o-y budget risks

exceeding

predefined limits

Take limits that

are sufficiently

high

Take limits that are

sufficiently high

Take limits that

are in line with

general budgeting

requirements

Setting up a strategy

25

Incremental price locks technique

Y + 2 timeY + 1Q1 - Y

START OF THE

CONTRACT

Y + 3

START OF NEXT

CONTRACT

START OF NEXT

CONTRACT

energy price

26

Block model

3,88

3,89

3,78 4,15

3,77 4,3 4,93

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MMBTu

2014

Hedge 1 Hedge 2 Hedge 3 Hedge 4 Expected consumption

27

Load following model

-

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kW

h

Hedge 1 Hedge 2 Hedge 3 Hedge 4 Expected consumption (kw)

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1/1

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1/1

1/1

4

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1/1

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1/0

2/1

5

1/0

3/1

5

$/M

Wh

Aug/16 contract compared to all forward and spot Aug notations traded in the past 750 days

Perc10 zl Perc25 l Perc50 m Perc75 h Perc90 zh aug/16

Opportunity hunting

Buy less

(or sell)

Buy more

29

Opportunity hunting

Compared to what the market was

prepared to pay for a similar product, how

historically good is today’s price?

30

Example:

Opportunity hunting

Very low Perc 10 Only 10% of all prices are low er than this level

Low Perc 25 Only 25% of all prices are low er than this level

Middle Perc 50 50% of all prices are low er than this level

High Perc 75 75% of all prices are low er than this level

Very high Perc 90 90% of all prices are low er than this level

N+1 N+2 N+3

100% 75% 50%

75% 50% 25%

50% 25% 0%

25% 0% 0%

0% 0% 0%

0% 0% 0%prices > VH (90%)

Actual prices

VL (10%) > prices

L (25%) > prices < VL (10%)

M (50%) > prices < L (25%)

H (75%) > prices < M (50%)

VH (90%) > prices < H (75%)

Base (Henry Hub) Percentile

March 2015 2,89 1,20%

April 2015 2,59 0,00%

May 2015 2,49 0,10%

June 2015 2,51 0,40%

July 2015 2,57 0,70%

August 2015 2,60 0,90%

September 2015 2,62 1,00%

October 2015 2,66 0,10%

November 2015 2,79 0,10%

December 2015 2,97 0,20%

January 2016 3,08 0,80%

February 2016 3,07 2,50%

March 2016 3,03 2,60%

April 2016 2,91 1,90%

May 2016 2,92 1,90%

June 2016 2,95 2,30%

July 2016 2,99 2,80%

August 2016 3,01 3,30%

September 2016 3,00 3,70%

October 2016 3,03 3,30%

November 2016 3,11 3,00%

December 2016 3,30 2,90%

January 2017 3,44 5,20%

February 2017 3,42 7,40%

10-25%

25-50%

50-75%

75-90%

90-100%

31

Risk Management

• Market value = what is my price if I buy everything today?

• Portfolio value = what is my price if I buy everything today, taking into account what I have bought already? (E.g., the market is at 40 and you have bought 50% at 50, than your portfolio value is 45 and your market value 40)

• Risk limit = based on maximum year-on-year budget increase

• Maximum portfolio value = portfolio value + a value-at-risk calculation

3.0

3.5

4.0

4.5

5.0

5.5

6.0

12/2

1/1

2

01/2

1/1

3

02/2

1/1

3

03/2

1/1

3

04/2

1/1

3

05/2

1/1

3

06/2

1/1

3

07/2

1/1

3

08/2

1/1

3

09/2

1/1

3

10/2

1/1

3

11/2

1/1

3

12/2

1/1

3

01/2

1/1

4

02/2

1/1

4

03/2

1/1

4

04/2

1/1

4

05/2

1/1

4

06/2

1/1

4

07/2

1/1

4

08/2

1/1

4

$/M

MB

tu

gas 2014

Current portfolio value Current market valueMax Portfolio value Risk limit

Volume Portfolio Market

$/MMBTu MMBTu value value

2014 2.400 4,06 4,32

Portfolio Market

$ value value

2014 9.736,73 10.375,42

Budget-at-risk gas

32

KPI’s & SLA’s

Deadline compliance

• Deadlines are set for every task

• Reductions on fees when compliance drops below thresholds

Strategy compliance

• Audits of compliance with the strategy on an item-per-item basis

• Reductions on fees when compliance drops below thresholds

Savings

• Calculation of savings on:

• Contract negotiations

• Portfolio value vs benchmark price

• Refunding of invoice mistakes

• Reductions on fees when Savings / fees ratio drops below thresholds

System uptime

• Continuous monitoring of uptime

• Reductions on fees when compliance drops below thresholds

About E&C

34

INDEPENDENTENERGY PROCUREMENT CONSULTANCYGas &

electricity

Focus on procurement

strategy, not on consumption

reduction

We are not a supplier,

trading house, or

brokerage.

CLIENT

SUPPLIERCONSULTANT

What do we do?

35

Integrated international approach

• Since its creation in 2005, E&C has grown

organically, responding to the request of our

clients.

36

Our services

Data management ePoint

Portfolio consultancy

Portfolio management

Documentation Visualisation Analysis Communication

Contracting

• Organizing RFP

• Define contract

choice

Risk

management

• Strategy

• Monitoring

Price lock

advice

• Market

intelligence

• Direct contact

Financial

controlling

• Market

intelligence grid

fees & taxes

• Budget analysis

• Bill validation

• Consumption

monitoring

Hedging decisions Quote Validation Trade Execution

Q & A

38

Kobe Cannaerts

Managing Director, E&C America Inc.

d: (347) 443 9962 m: (646) 832 8054

More information?