"Buyer Beware" is still a good motto for gas buyers looking for win-win natural gas portfolio management results, according to a panel of industry marketing/trading representatives speaking Thursday at GasMart 2007 in Chicago.

Given an ever-expanding number of options for buying gas, the panelists outlined how they attempt to add value for buyers under a presentation theme offering an "Anatomy of a Gas Buyer's Portfolio: Marketing a Win-Win to the Purchaser."

Along with moderator from Shell Trading Gas and Power/Coral Energy Jim Chunn, the three panelists each in different ways stressed that buyers should not get too fixed on getting the lowest price possible at the expense of credit and reliability concerns. The speakers affirmed the fact that volatility continues to drive gas buying programs and the demise of the major energy traders five years ago in the wake of Enron Corp.'s meltdown has made credit, structure and other considerations critical for successful hedging.

"I am not aware of any significant, broad-based credit events that have occurred since Enron," said David Duran, managing director, origination, for Fortis Energy Marketing/Trading, the newly created energy trading unit in the Brussels-based Fortis investment institution's global merchant banking unit. He noted that when Enron went down it was clearing the major portion of all the energy transactions in the marketplace.

"Since then, I don't think there has been anything near that magnitude. There have been other credit events since Enron collapsed that have more to do with the fact that up to the time of the collapse, a number of banks got into 'mini-term' transactions [five-year loans assuming the asset's value would at least be worth its amortized value at the end of the loan period]. Post-Enron those asset values for power transactions declined so dramatically that the values were often below the unamortized portion, leaving the banks to assume the assets. Most of that has now been worked out."

But the continuing volatility has increased the interest in hedging and in buyers protecting themselves. However, just like prices are very volatile, so the level of volatility itself can vary. Right now volatility is relatively low, Duran said. A month ago it was pretty high. But generally volatility increases the value of having options.

Noting that her newly consolidated company, Chicago-based Integrys Energy Services Inc. has a "superior" credit rating and more than $10 billion in assets, Deb McDermid, general manager, said her regionally focused firm urges customers to "think globally and act locally," while stressing they seek value and reliability as well as low prices. "Getting best value is truly a combination of top service and competitive pricing," McDermid said.

In picking a model and sticking with it for gas buying there is a wide variety of market influences that need to be taken into consideration, whether you're a regional, national or global player, the panelists emphasized. McDermid cited the fact that current market dynamics involving tight supply/demand balances, increasingly complex weather factors, world events impacting global pricing, increased liquefied natural gas (LNG) imports, and national initiatives moderating consumption all are not going away any time soon.

From an expanded global perspective, since her firm joined global energy giant Iberdrola of Spain, PPM Energy's Kay Atchison, origination director, reinforced what the other two speakers stressed, namely, price, reliability and service all have to be carefully analyzed, considered and incorporated in any meaningful buying strategies these days. "Price, reliability and service are the base requirements for all gas buyers," she said.

All buyers want some of the same things in terms of price, but for utilities, considerations may be "a little different," Atchison said, referring to regulatory mechanisms dealing with the price's impact on ratepayers and shareholders. "For nonregulated buyers, the questions can be somewhat the same -- the ultimate value to shareholders.

"Ever since the events of 2001-2002, credit has been an important component of reliability," she said. "Credit ratings now drive buying practices, and they become components of pricing."

With the overriding goal of bringing stability to energy costs, the panelists all stressed that there is no simple, one-model-fits-all approach to gas buying. And making win-wins will never be a slam dunk. Fortis' Duran underscored this in explaining how volatility can increase the value of options.

"Clearly, everyone focuses on price; it's a critical element that we all understand," Duran said. "But there are other elements, and two others I think clients need to focus on -- structure and credit terms. Structure involves how the transaction is set up to ensure that you have received the appropriate allocation of risk for value. On the financial side there are a lot of good questions to ask, such as do you need absolute risk protection [fixed price] or are you willing to let the price float?

"I always am careful to not try to pick the bottom or the top [of future prices] -- instead set your risk strategy around your overall business objectives, then act to ensure that you're getting the best value out of those energy risk models," said Duran.

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