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Case Study

Intra-state pipeline with regulated LDC and marketing affiliate


Management
g is openly
p y risk averse. Statements made on analyst
y calls include:
• “We are not a trader”
• “We do not speculate”
• “We run a flat book – No net open positions”
Have pipelines and storage assets
Have corporate market risk policy,
policy but wording is vague in some areas

© 2005 KPMG LLP, the U.S. member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted.
KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. 12
Case Study I

Try to find the risk embedded in this natural gas


storage position

© 2005 KPMG LLP, the U.S. member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted.
KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. 13
Case Study I - Solution

1. Flat price risk – Sell an additional 50,000 of Natural gas futures in Oct to match
the 500,000 total of inventory
© 2005 KPMG LLP, the U.S. member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted.
KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. 14
Case Study II

Try to find the risk associated with this Natural gas


storage position

© 2005 KPMG LLP, the U.S. member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted.
KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. 15
Case Study II - Solution

Basis Risk – Basis swaps are in the correct volumes but not in
the correct settlement month. Basis swaps should be matched
to the same volume and same months as the nymex future
hedges
© 2005 KPMG LLP, the U.S. member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted.
KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. 16
Case Study III

Outright Price Position


Delivery Contracts
May '07 25
Jun '07 20
Jul '07
07 20
Can you identify the risks inherent
Aug '07 20 with this example fixed price
Sep '07 15 book?
Oct '07
07 20
Nov '07 (20)
Dec '07 (25)
Jan '08
08 (25)
Feb '08 (20)
Mar '08 (30)
Net Open 0

© 2005 KPMG LLP, the U.S. member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted.
KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. 17
Case Study III - Solution

Outright Price Position This book contains time spread risk.


Delivery Contracts The “Summer
Summer / Winter”
Winter spread is
May '07 25 designed to gain from changes in
Jun '07 20 "Summer Strip"
the structure of the market.
Jul '07 20 120 contracts =
A '07
Aug 20 1 200 000 MMBT
1,200,000 MMBTu's
'
Sep '07 15
Oct '07 20 The net open position is flat which
Nov '07
07 (20) is within the p
policy
y - the detail
Dec '07 (25) "Winter Strip" provides a different risk profile.
Jan '08 (25) (120) contracts =
Feb '08 (20) (1,200,000) MMBTu's
Mar '08 (30) A $.10 change in the value of this
Net Open 0
spread would result in an overall
change in value of $120,000

© 2005 KPMG LLP, the U.S. member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted.
KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. 18
Questions to Ask

How do you define market risk?


Do y
you take fixed p
price p
positions?
Are you exclusively a hedger or do you “optimize” your assets?
Do you have a risk policy?
How do you monitor trading/hedging limits?

© 2005 KPMG LLP, the U.S. member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted.
KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. 19

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