Using diesel futures to manage wood price volatility and risk

1. Managing Diesel Risk for
Biomass Users
De‐Risking Wood Prices
Eric Kingsley
Innovative Natural Resource Solutions LLC
Phone 207‐772‐5440
Mobile 207‐233‐9910
kingsley@inrsllc.com
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2. Innovative Natural Resource Solutions LLC
• Based in New Hampshire and Maine, a region with 25+
years of continuous biomass power experience
• Based in the forest industry – work at the intersection
of forest industry, energy and economic development
• One area of focus is on feedstock supply for biomass
electric, thermal, pellet and liquid fuel projects
• Clients include utilities, merchant generators, investors,
developers, and industries
• Conducted work in all regions of the country
• www.inrsllc.com

3. Diesel as a Component of Biomass
• Diesel is used in every stage of biomass (and
roundwood) feedstock production
– Harvesting
– Skidding
– Chipping
– Trucking
• End users pay for diesel indirectly through
wood fuel (and pulpwood) prices
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4. INRS Diesel Calculator
• Developed using actual diesel use from 4
logging firms in the Northeast, using different
equipment configurations
• Key variables of miles, diesel cost, tons per
load
– Can be modified to include double handing,
backhauls, roundwood / chips, etc.
• Used to estimate per ton – and thus total –
monthly exposure to diesel price risk
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5. INRS Diesel Calculator
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6. Diesel and Wood Fuel Costs are Related
Correlate at the 0.799 level since 2000
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$‐
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$‐
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
$40.00
2Q 00
4Q 00
2Q 01
4Q 01
2Q 02
4Q 02
2Q 03
4Q 03
2Q 04
4Q 04
2Q 05
4Q 05
1Q 06
3Q 06
1Q 07
3Q 07
1Q 08
3Q 08
1Q 09
3Q 09
1Q 10
3Q 10
1Q 11
3Q 11
1Q 12
Biomass Diesel

7. Using This Relationship to Manage Risk
• Existing over‐the‐counter product exists to manage
diesel risk – highly correlated with diesel prices
• Traded electronically, handled by many brokerages,
highly liquid market
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
Diesel Hedge Product
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8. Example
• 16 MW facility using 15,000 green tons per
month (all month purchases assumed even in
this example) of biomass fuel
• Diesel exposure of 2.7 gallons per green ton
• Diesel exposure of 40,500 gallons per month
8Example for Discussion Only

9. Example (A)
• November 2012 option at a correlated price of
$3.73 per gallon
• Option (call option) at $6,459 plus $70 RT
brokerage fee (buy and sell)
• Total option cost $6,529
• Cost per ton of $0.44 (assuming 15,000 tons,
2.7 gallons / ton)
9Example for Discussion Only

10. Anticipated Value Changes at a Range of
Diesel Prices (Strike Price @ $3.73 / gallon)
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$(40,000)
$(20,000)
$‐
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$3.00
$3.25
$3.50
$3.75
$4.00
$4.25
$4.50
$4.75
$5.00
$5.25
$5.50
$5.75
$6.00
Value of Option Cost of Biomass
Example for Discussion Only

11. Example (B)
• Hedging ONLY against catastrophic price
increase costs less
• November 2012 option at a correlated price of
$4.52 per gallon
• Option (call option) at $594 plus $70 RT
brokerage fee (buy and sell)
• Total option cost $664
• Cost per ton of $0.04 (assuming 15,000 tons,
2.7 gallons / ton) – 40 cents less than previous
11Example for Discussion Only

12. Anticipated Value Changes at a Range of
Diesel Prices (Strike Price @ $4.52 / gallon)
12Example for Discussion Only
$(80,000)
$(60,000)
$(40,000)
$(20,000)
$‐
$20,000
$40,000
$60,000
$80,000
$3.00
$3.25
$3.50
$3.75
$4.00
$4.25
$4.50
$4.75
$5.00
$5.25
$5.50
$5.75
$6.00
Value of Option Cost of Biomass

13. Example Summary
November 2012
• Cost to have risk management at $3.83 per gallon
(correlated equivalent) is $0.44 per green ton, $0.04
per gallon at $4.52
• If price of diesel rises, option increases in value
proportionately
• If price diesel falls, option becomes worthless, but user
enjoys lower biomass fuel costs
• Options and wood are traded independently, but
balanced to offset one another
• Under all scenarios, pays fee to purchase an option (in
this case, $0.44 per ton or $0.04 per gallon)
13Example for Discussion Only

14. Considerations
• Options are sold in certain size blocks, and it is unlikely
there will be a perfect fit with a users’ diesel exposure
– will likely be under‐ or over‐hedged
• Options extend out five years; the product is more
liquid as the strike date approaches
• Diesel is a major influence on price changes in biomass
fuel (and pulpwood), but not the only factor. This
strategy addresses only diesel
• Monthly averages are just that
• INRS can work with a company to determine their
diesel exposure and develop a risk management
strategy, but cannot trade client funds
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15. INRS Services
• Working with client and using client‐specific
information
– Estimate diesel exposure on a monthly basis
– For one or more products
– Accounting for seasonal buying patterns
• Develop a hedging strategy, and provide necessary
information to evaluate options, understand contracts
and execute strategy
• On‐going support if desired
• Our goal is to help you de‐risk your wood prices
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