Why are we here?Fuel and/or Gas represents a top four cost yet most companies lack a strategic resource to budget effectively.How can I control my cost?How can I maximize my opportunity to save?
Price OriginationAll fuel enters the wholesale market at the “Rack”.Rack pricing is linked to NYMEX tradingThe price of every gallon in the Chicago market has the same point of origination.Since all prices are linked to NYMEX contracts, we can secure a future price thru buying contracts.
Major Product Pipelines VancouverAnacortes New York Minneapolis Billings Salt Chicago Lake City Casper Guernsey Wood River Cushing Patoka Beaumont Houston LOOP
What shapes the curveSupply/DemandSummer Gas- 28 different formulationsInfrastructure limitationsApril 1st Construction-Farming- Driving etc…
Change our Thinking Proactive Energy Management Can I buy at the cheapest price for this year? Initiate Cost Control Measures Implement strategies that positively affect your fuel spend Capitalize on historical price trends that reoccur each year. Use the same strategies as Southwest, just a smaller playing field. Budget fuel expenditures with accuracy
Change How you Buy Fuel!$4.25 Not Here$4.00$3.75$3.50 Buy Here$3.25
Our solutionLock in a portion of your expected fuel purchases before normal inflationary factors kick in.Based on historical trends, fuel will be cheapest in the first quarter and increase from there.You are not purchasing in advance or pre-paying.Customer agrees to buy x gallons at $x.xx price at a particular month in the future.
Fuel Freeze- Step 1Identify your expected purchases for each monthShow March 2012 thru Feb 2013Use previous year and adjust for budget and new business forecast.Identify seasonal variations.
Fuel Freeze- Step 2Reduce each of these numbers by 50%Feb 10, 2012- Lock in pricing for that 50%Each month is a separate buying period, no rollover. Accuracy is important.Deliveries of locked 50% made first each monthBudget that number, plus 10%, into your jobs and equipment rate
Fuel Freeze- Step 3Fuel goes up- you see return on protected gallonsFuel goes down, your unprotected gallons become the hedge.If it drops more, you can lock in another 25%.Once you lock in, any decrease is a buying opportunity.Your jobs still pay the rate you locked inDon’t be a Monday morning quarterback!
Important DatesJan 27, 2012- Mock Pricing #1Feb 3, 2012- Mock Pricing #2Feb 10, 2012- Lock in DateContract executed on Feb 10th. No minimums No upfront cash requirements Customer has complete flexibility in what to lock in.
Sample Price Quote 2/7/2011 2011 Delivered Rate March Diesel 3.50 Gas 3.13 April Diesel 3.59 Gas 3.18 May Diesel 3.65 Gas 3.24 June Diesel 3.68 Gas 3.26 July Diesel 3.68 Gas 3.31 August Diesel 3.71 Gas 3.31 September Diesel 3.74 Gas 3.38 October Diesel 3.75 Gas 3.40 November Diesel 3.78 Gas 3.38 December Diesel 3.76 Gas 3.31 January Diesel 3.78 Gas 3.33 February Diesel 3.81 Gas 3.35
POC RequirementsMonthly Admin Fee based on volumes10 Day ACH on gallons locked in30 Day ACH on all other purchasesSigned contract
How has our strategy performed?Hedge Price represents locked fuel prices bought in Jan/Feb Historical Hedge Price versus Average Market Price: 1994-2009 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Avg Annual Price Hedge Price Our strategy has significantly outperformed the market!
Financial Impact ABC Corporation who bought 200,000 gals per year under this method for the years listed would have saved $828,000 or .23 cents per gallon. In the years 2004-2011, that savings climbs to $640,000 or .40 cents per gallon. Price volatility has grown considerably over the last five years and could continue to grow.
Bottom Line It is not a question of “should I buy under this method” but instead it’s a question of “How Much should I buy under this method”
What are the results?Past performance is no guarantee of future results.In three years, our customers on the Fuel Freeze program have saved over $2 million combined.Most returning customers say the savings is great, but the greatest benefits are: 1. Don’t have to worry about paying for increases. 2. Can concentrate on running our own business. 3. I can finally budget for fuel!
Palatine Oil Fuel Freeze Program-List of References1). JA Frate Joe Alger President 815-459-08392). Illinois Central School Bus Bruce Barr Senior Contract Manager 815-416-11103). Rolling Meadows Park District Bob Hartnett Public Works 847-963-05004). Peapod Bob Kruse Senior Transportation Manager 847-307-87105). Acres Enterprises Jim Schwantz President 847-487-3000
Questions?Please leave your contact info including e-mail.Materials will be e-mailed out to participants. Thank You!