While more natural gas utilities used hedging tools to shield their customers from high prices last winter, an increased number said they also are investing in physical gas, using storage to meet peak-demand and looking to add more underground storage capacity in the future, according to a report released by the American Gas Association (AGA) Thursday.

The report, “LDC Supply Portfolio Management During the 2005-2006 Winter Heating Season,” documented utilities’ gas delivery operations last winter, and offered a glimpse into how gas utilities purchased and managed their gas supplies, while facing unprecedented supply challenges. The AGA report included responses from 29 gas utilities in 24 states.

However, despite utility efforts to cushion the effects of higher gas prices and the mild winter last year, “many consumers did pay significantly more to heat their homes during the 2005-2006 winter heating season,” said AGA President David Parker.

The majority of the utilities surveyed (87%) said they had used financial instruments — options, swaps and futures and even fixed-price contracts — to hedge at least a portion of the natural gas they purchased on behalf of customers, the AGA said. This was up from 70% of the respondents during the 2004-2005 winter heating season, and 50% of respondents four years ago, according to the gas utility group.

On the physical side, in preparation for the 2005-2006 winter, 25 gas utilities reported using storage as a primary hedging tool. Twelve of the companies hedged between 26-50% of winter heating season supplies using underground storage, compared to 29 companies in the previous winter. And another 13 utilities provided a physical hedge for up to 25% of their supply portfolio, the AGA said.

A greater percentage of the utilities said they employed a six-month or less strategy for a portion of their hedges last winter, compared to 66% during the 2005-2006 heating season, the report said. Only six companies utilized a 7-12 month strategy for a portion of their hedges, compared to 35 out of 38 utilities using this strategy the previous winter, it noted.

Most of the utility respondents (22) said they planned to use the same hedging strategy during the upcoming 2006-2007 winter heating season that they employed last winter, with four companies planning to hedge more and three less.

Underground gas storage was “front and center” in utilities’ gas supply portfolios during the 2005-2006 winter heating season, the AGA said. Nearly all of the utilities surveyed reported that they used gas storage to meet peak demand and about half of the companies (15 of 29) indicated they were constructing or considering adding more underground storage, the group noted.

Nearly all of the gas utilities surveyed said firm supplies were a central part of their gas supply portfolio, including 17 companies that reported between 26-50% of their required peak-day volumes coming from firm supplies, the AGA report said. Twenty-three utilities said that up to 50% of peak-day supplies originated from pipeline or other storage, while 18 utilities also noted that up to 25% of the deliveries arriving at their citygate on a peak day were earmarked for transportation customers on their system. They said they purchased the bulk of their winter gas supply from independent marketers, producers and producer marketing affiliates more than any other classes of supply aggregators.

As in previous years, the gas utilities that AGA surveyed reported purchasing natural gas supplies for their customers’ use during peak months under a mix of long-term (12 months or longer), mid-term (1-12 months) and spot contracts, the AGA said. While long-term agreements were used by 20 of 29 companies within their “peak-month” gas supplies portfolio, the natural gas purchased under these agreements comprised less than half of purchased peak-month gas for most of the companies in the survey, it noted.

Mid-term agreements were used by all 29 respondents, with 16 companies using monthly contracts. Daily or spot agreements were used by 18 utility companies, according to the AGA. The report noted that first-of-the-month index pricing dominated the market for long- and mid-term supply agreements. However, this year’s AGA survey also included references to fixed price, daily and other New York Mercantile Exchange-based arrangements.

“It should be no surprise that very few companies construct a supply portfolio with all of their eggs in one basket,” said Chris McGill, AGA’s managing director of policy analysis and the report’s author. “In many cases, longer term contracts contributed to baseload obligations, while shorter term contracts allow companies to respond to market changes.”

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