Introduction to Fuel Hedging. 23 rd April 2010

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Jeffery Osborne
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1 Introduction to Fuel Hedging 23 rd April

NAB Commodity Risk Management National Australia Bank & YB/CB is at the forefront of helping our global banking clients manage the impact of commodity

2 NAB Commodity Risk Management National Australia Bank & YB/CB is at the forefront of helping our global banking clients manage the impact of commodity prices on their profitability We offer hedging solutions on various commodities:- Grains and Soft Commodities Base and Precious Metals Energy Products 2

NAB Commodity Risk Management The objective of this presentation is to highlight the price volatility of fuel and outline the solutions the NAB/YB can offer to help manage this risk.

3 NAB Commodity Risk Management The objective of this presentation is to highlight the price volatility of fuel and outline the solutions the NAB/YB can offer to help manage this risk. Explore the make-up of diesel prices and illustrate how they have prices have moved through time. Analyse the benefits and mechanics of a diesel hedge. Finally we will give some current pricing 3

4 Oil Facts 1 Barrel = 35 gallons = 159 litres 7.2 Barrels = 1 Metric Tonne = 1,145 litres. US oil consumption 22m Barrels per day Saudi estimated reserves 267bln Barrels North Sea (UK) estimated reserves 4bln Barrels 4

5 GBP libor GBP/EUR GBP/USD GBP Swap USD Swap Gold Aluminium Copper Nickel Sugar NY Cocoa Liffe Wheat Soybeans Corn Coffee NY WTI Crude Brent Crude Jet Fuel Diesel 1.0% Fuel Oil Natural Gas Historic Volatilities ULSD volatility is almost 40%, far greater than most other markets

6 Diesel Excise, Tax and Margin EXCISE &TAX MARGIN The level of duty applicable in the UK as follows:- Ultra-low sulphur diesel - duty of 57.19p per litre. RAW PRICE 6

7 Diesel Prices The price you pay for diesel is made up of a number of components The Raw Price in USD Which is converted to GBP at the prevailing exchange rate Added to this is applicable Duty Supplier margin - delivery/storage costs may also be included Lastly VAT is added at 17.5% The volatile component of this price is the RAW PRICE Platt's ULSD 10 ppm Cargoes CIF NWE (North West Europe), Platt's are an independent news company owned by Standard & Poor and they have been reporting on the oil markets for 75 years. 7

8 Historical Prices ULSD 10ppm pence per litre ULSD GBp/l GBP The graph shows the historical movement in ULSD 10ppm in 1 per litre - remember all commodity prices are priced in US dollars It is particularly interesting to note the high and low points - and the amount of volatility inherent to the prices /01/ /01/ /01/ /01/ /01/ /01/ Metric Tonne = 1145 Litres 8

9 How can we hedge Diesel Exposure Futures Price of Oil quoted on exchange ICE Futures London Market size of these exchange traded Futures usually beyond SME clients and they are traded in fixed volumes and dates. We look to aggregate a number of deals to get to market size. Based on these Futures contracts we offer a Fixed price for the period required. Large Corporate have hedged their diesel exposure for a long time as part of a robust risk management strategy. Their exposure to fuel cost volatility reduces the certainty of their cost base. 9

10 Hedging Price Exposure NAB/YB is not in the oil producing business and we will have no involvement with your physical agreements. The hedge is a separate and independent transaction to the underlying purchase of fuel. We offer Diesel hedges that are cash settled based on the prices quoted on Platt's index. The hedge will be a stand alone transaction that is based on price movements in the underlying wholesale market. 10

11 Example Hedge Let s assume that you have an exposure of 2.4 million litres p/a and wanted protection for 50% of this for 1 year. You take out a hedge for 1.2 million litres per annum spread evenly over 12 months 100,000 litres per month. In Jan 2009 it would have been possible to take out a 12 month swap ( Fixed Price) on USLD at pence per litre. 11

12 How settlement works Date Price Fixed Price Difference Fuel Quantity Payment Feb ,000 4, Mar ,000 2, Apr ,000 3, May , Jun , Jul , Aug , Sep ,000 2, Oct ,000 4, Nov ,000 3, Dec ,000 5, Jan ,000 3, ,

13 Summary of Analysis It is important to remember that the hedge is a standalone, cash settled derivative. You will still continue to source fuel in the same fashion as normal. You should be aware that the cost that your suppliers charge for the diesel will rarely be exactly the same as that quoted on the Platt's index. This type of hedge can never give an exact match. However, over a period the correlation between your suppliers price and the Platt's index will easily be observed. 13

14 Think of the Hedge like a set of Scales Price of Oil Increases - Heavier Burden on the Business Physical Hedge The Hedge Brings Balance 14

15 What are the benefits for your company? Ability to offer customers fixed term pricing with no fuel escalator There are no brokerage costs or margin calls. Simple administration with the bank providing confirmations each month - low input required from Finance team. There is no physical delivery under the contract - so no impact on relationships with existing fuel suppliers (e.g. BP). This would impose a degree of cost stability which should enable you to budget with a far greater degree of certainty. 15

16 Diesel Commodity Swaps Diesel Hedging is not a gamble It is also not an investment Hedging = Risk Management and nothing to do with Hedge Funds Minimum of 50,000 litres per month (total size of around 1m litres) Available for terms up to 3 Years Prior to trading you would need to sign ISDA (International Swap Dealers Association) documents. These set out the rights and obligations of the transactions. We would also need to mark appropriate facility limits in house. 16

06 2007 Diesel requirements hedged 97% 2008

17 Diesel Hedge National Express published accounts as at Diesel requirements hedged 97% 2008 Diesel requirements hedged 63% 2009 Diesel requirements hedged 35% 17

18 Current Indications Monthly Settling Swap Prices Brent USD / bbl JET USD / MT Jet Ukp/litre ULSD 10ppm Ukp/litre IPE Gas oil UKp/litre Spot 3m 6m 12m 18m 24m 36m 18

19 What Next? We would always recommend that you discuss the implications with an independent financial advisor often your accountant. Contact Details: Kevin Ledwith Treasury Solutions Partner Preston Telephone :

20 Disclaimer UK DISCLAIMER: So far as the law and the Financial Services Authority Rules allow, National Australia Bank Ltd ("the Bank") disclaims any warranty or representation as to the accuracy or reliability of the information and statements in this Document. The Bank will not be liable (whether in negligence or otherwise) for any loss or damage suffered from relying on this Document. This Document does not purport to contain all relevant information. Recipients should not rely on its contents but should make their own assessment and seek professional advice relevant to their circumstances. The Bank may have proprietary positions in the products described in this Document. This Document is for information purposes only, is not intended as an offer or solicitation, nor is it the intention of the Bank to create legal relations on the basis of the information contained in it. No part of this Document may be reproduced without the prior permission of the Bank. This Document is intended for Investment Professionals (as such term is defined in The Financial Services and Markets Act 2000 (Financial Promotion) Order 2001) and should not be passed to any other person who would be defined as a private customer by the rules of the Financial Services Authority ("FSA") in the UK, or to any person who may not have experience of such matters. Issued by National Australia Bank Limited A.B.N , 88 Wood Street, London EC2V 7QQ. Registered in England BR1924. Head Office: 500 Bourke Street, Melbourne, Victoria. Incorporated with limited liability in the State of Victoria, Australia. Authorised and regulated by the Financial Services Authority in the UK 20

FUEL PRICE RISK MANAGEMENT POLICY REPORT "FUEL HEDGE"

FUEL PRICE RISK MANAGEMENT POLICY REPORT "FUEL HEDGE" Sep-18 FUEL PRICE RISK MANAGEMENT POLICY REPORT Sep-18 (Office of Management and Budget 09/30/2018) The Fuel Price Risk Management Policy approved