Swing Shift

Energy futures can tame volatility

Jeff Uhlenburg, president of Donovan Heat Treating, is accustomed to high prices for the fuel that fires the forges at his metal finishing foundry in Philadelphia. But in 2002, when natural gas prices jumped from about $5 per thousand cubic feet to more than $18, monthly energy costs for his $2.3 million business leapt from around $30,000 to $60,000. That was more than Uhlenburg could take. "That is like hemorrhaging," he says. "You are operating at a loss and you can only go on so long before you are finished."

Uhlenburg turned to Gasmark, a subsidiary of energy marketer and distributor UGI, to help him control his spending on natural gas. Thanks to energy contracts with Gasmark, the monthly gas bills for his 15-person business now run between $25,000 and $35,000, saving 10% to 40% on its annual energy bill.

With energy prices swinging wildly, now could be a good time to consider buying energy contracts for your business. Prices for natural gas from Louisiana, a key distribution point, have traded as high as $9.61 and as low $5.38 since January, 2007. Buying energy contracts is not as hard as it might sound, and you don't have to follow energy markets closely to do it.

STABILIZING CASH FLOW

Energy contracts use derivatives, primarily in the form of futures or swaps, to allow entrepreneurs to buy energy at a fixed price some time in the future. In March, for example, natural gas traded at around $7 per thousand cubic feet on the New York Mercantile Exchange. If you expected prices to rise, you could buy a contract to lock in that price for a set period, generally no more than two years. Ted Henry, chairman and CEO of Henry Brick, a 90-person, $20 million company in Selma, Ala., locked in prices for a six-month stretch at the beginning of 2006. That turned out to be a $300,000 bet in the wrong direction. But with energy costs of more than $5 million a year, Henry is still using energy contracts. He says: "We buy gas contracts to try to protect ourselves from future prices."

Energy contracts can be purchased from traders, and, if you live in one of the 22 states where power is deregulated, including Arizona, California, and Texas, from energy marketers and unregulated subsidiaries of utility companies. Fees are typically included in the gas price, though the costs of delivering gas may be additional and can run several hundred dollars a month.

Sweetwater Brewing, an $8 million, 20-person microbrewery in Atlanta, compared four different energy marketers before choosing mxenergy, which had the best rate. In October, 2006, Sweetwater locked in a fixed rate of 83 cents a BTU, the market rate at the time. Since then, the rate has risen as high as $1.09, and Sweetwater has reduced its monthly gas bill to about $6,700 from $7,200. "We know how much gas we will use and we can plan our cash flow around it," says Bill Burge, the company's accountant and controller.

If your business spends at least $1 million a year on energy, you might want to work directly with an over-the-counter energy trader. Although these brokers won't necessarily negotiate the actual delivery of gas, they do let you cut out one layer of middlemen.

To find a company that can sell you an energy contract, start by calling your state public utility commission, which can give you the names of energy companies doing business in your area. You can find contact information at (www.naruc.org, the site of the National Association of Regulatory Utility Commissioners. Your bank or chamber of commerce might also be able to recommend an energy company or broker.

By Jeremy Quittner

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