Setting Natural Gas Prices Prepared by: Mark R. Burns, PresidentIndependent 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

• www.Futuresource.com

• www.ino.com

• www.Nymex.com

• 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

1. 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

2. 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 1.03 + $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 = $12.0575/Mcf

Example 3 – Multiple Month Multiple Purchase

Assume we buy 100 percent of our winter gas (Nov-Apr)

Contract Month Time Last Chg Open High LowNATURAL GAS Aug '08 10:58:06 10.659 0.122 10.596 10.799 10.519NATURAL GAS Sep '08 10:57:20 10.72 0.115 10.653 10.85 10.574NATURAL GAS Oct '08 10:57:19 10.837 0.135 10.712 10.943 10.688NATURAL GAS Nov '08 10:53:14 11.156 0.124 11.03 11.266 11.03NATURAL GAS Dec '08 10:51:35 11.56 0.128 11.45 11.643 11.4NATURAL GAS Jan '09 10:49:35 11.758 0.101 11.65 11.865 11.642NATURAL GAS Feb '09 10:43:42 11.725 0.093 11.615 11.818 11.615NATURAL GAS Mar '09 10:57:19 11.507 0.115 11.39 11.595 11.378NATURAL GAS Apr '09 10:53:14 10.27 0.058 10.25 10.421 10.2NATURAL GAS May '09 10:57:19 10.13 0.06 10.105 10.23 10.104NATURAL GAS Jun '09 9:42:15 10.25 0.1 10.145 10.27 10.111NATURAL GAS Jul '09 10:51:21 10.33 0.088 10.24 10.38 10.24

Contracts Price Weighting Nov '08 8 11.156$ 89.248 Dec '08 11 11.560$ 127.16 Jan '09 14 11.758$ 164.612 Feb '09 12 11.725$ 140.7 Mar '09 8 11.507$ 92.056 Apr '09 6 10.270$ 61.62Total 59 675.396Weighted Average Nymex 11.447$

• 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