The Risky Business of Hedging

I came across an interesting article in The Wall Street Journal this week suggesting that the NYMEX crude contract may be ceasing to work as a benchmark for international hedging of crude oil price exposure.

We’ve recently seen that high storage levels in Cushing, Okla., have depressed NYMEX crude prices relative to similar sweet crudes in Europe – ordinarily NYMEX crude should be trading at a premium but instead it is about $3 below Brent crude, a very similar grade of crude that comes out of the North Sea.

The result is that people looking to the NYMEX contract to hedge their crude oil exposure may not be protected – if a refinery, for example, had purchased NYMEX to hedge its crude oil feedstock exposure and yet purchased its physical from the UK, its hedges would not work and it would pay at least $3 more per barrel for the imported crude – customers like this would be understandably angry.

Enough of the technical stuff. How is this relevant to MXenergy’s customers?

First, it illustrates how the NYMEX contracts are imperfect hedges, at best. It also means that businesses that use the NYMEX to hedge, such as in trigger deals – may not be happy if the NYMEX price were to fail to track physical market transactions – any customer that was triggering off the NYMEX would find themselves paying much more than they would have if they had locked in their basis.

Alternatively, imagine if there were a mid-continent pipeline explosion that trapped gas in the gulf so that prices in the gulf stayed low while the physical market near the customer took off – without being hedged with a fixed price, the customer might suddenly find itself paying high prices even though the NYMEX looked low – another reason for fixed prices!

Finally, it shows how extraneous market forces – a refinery outage in Texas, for example – can have an impact that reaches around the world to an airline in Europe hedging its jet fuel, to a producer in the Mideast hedging its production, to a ship in the far east hedging its bunker fuel.

Likewise, a lot of things can affect the prices of gas in the Gulf of Mexico – such as the current unrest in Nigeria – that may not look relevant to our customers at the time.

That’s why we’re constantly keeping a close eye on global and economic developments for you. What do you think? We’d love to hear from you.

Earth Day in Atlanta

We are now home from our Earth Day journey to Atlanta. We had a blast meeting everyone at the SweetWater Brewing Company's event in Candler Park. Here's the MX staff manning our tent. From left to right: Jeff Mayer, Pamela Fink, Robi Artman-Hodge, Dave Johnson, Cristina Leon & Krista Huber.

When it Rains it Pours

When it rains it pours… MXenergy is sponsoring not one but two Earth Day events in our territories this month.

In Georgia, we have teamed up with SweetWater Brewing Company www.sweetwaterbrew.com for their annual event this Friday in Atlanta. In New Jersey, MX has also partnered with the US Fish & Wildlife Service to help plant 1,600 trees at the Edwin B. Forsythe National Wildlife Refuge in Oceanville.

In both New Jersey & Atlanta we are launching our Earth Friendly Partner program in which we are matching customer contributions of $.01 per therm – about $10 per year for the average homeowner – to purchase 100% carbon offsets. I still find it hard to believe that homeowners account for more than 5 tons – that’s right, tons! – each year of carbon dioxide emissions. We have purchased carbon offset credits that have been issued in connection with reforestation projects on a couple American Indian reservations in Montana. Trees absorb carbon dioxide through photosynthesis as they convert CO2 into carbon for growth and release oxygen into the atmosphere.

When customers agree to pay an additional penny a therm, MX matches the contribution and contributes to the reforestation effort. Customers who join the program receive a certificate that confirms their efforts to help clean up our environment.

Our New Jersey program is similar although we are not purchasing carbon offsets. Instead, we are helping the US Fish & Wildlife Service plant trees. We have agreed to buy tree shelters – little tents – to protect the seedlings from deer. The shelters stay in place until the sapplings are large enough to survive grazing wildlife. After all, a dead tree does not absorb carbon dioxide!

Unlike the Georgia program, the New Jersey plantings do not generate carbon offsets so we cannot sell these to our customers, although we do offer the Earth Friendly Partnership across the state of New Jersey, due to a concept known as “additionality”: Only reforestration projects that would not otherwise have happened qualify for carbon credits. Instead, we are simply making a donation to the government to subsidize the shelters. We are doing our best to be good corporate citizens.

So when it rains…you can take shelter under our new trees!

Come See Us in Atlanta

It's Wednesday afternoon and do you know where your favorite energy czar is heading? (Move over Matt Lauer; we may have a new feature, Where in the World is Jeff Mayer?) The weather is getting nicer and he should be spending the school vacation week with his son in Connecticut, but he's had a better offer. He's heading down to Atlanta tomorrow to visit with a few large commercial customers and to help launch our Earth Friendly Partnership.

MXenergy is a proud sponsor of SweetWater Brewing Company's earth day event in Candler Park Friday from 2:00 - 11:00 p.m. It should be a great time and I'm sure my friends at SweetWater would not mind if I extend an invitation to stop by and say hello. Details about the event can be found at http://www.pemi.net/420fest/. And if you want a SweetWater T-shirt, let me know.

I will also be a guest on the Business Hour on Radio Sandy Springs Friday morning at 10:00 a.m. EST. I did this show a couple months ago and had a lot of fun. Sandy Springs is a newly formed municipality outside Atlanta, the largest new town formed in the country in recent years if I recall correctly. If you're not in the immediate area you can listen to the show online at www.radiosandysprings.com.

Promise to post some photos, etc. upon return -- provided they're Earth Friendly!

Protect the Flowers with Natural Gas

As I was driving to work the other day I was listening to Keyspan, the utility in Long Island, pitching a deal on WCBS-radio. Keyspan will finance a new gas furnace if customers who are now on heating oil will switch to natural gas. “Clean-burning natural gas… No sulphur dioxide emissions… No noxious odors from incomplete combustion… No nasty oil leaks…”

“Oil leaks?” I ask myself. I never thought about those before. Once in a while my wife and I remember that nasty oil tank buried under the garden in front of our house. But that’s only because we’re going to have to deal with it some day if ever think about moving. Leaks in the basement outside the furnace are another story entirely. Now that would be nasty! Maybe it’s time to hook up to that natural gas line after all.

Talk about serendipity. Or should I say, “serendi-pity.” Later in the day I’m getting some coffee and I overhear Darlene telling a story to one of our colleagues. It went something like this:

I always wondered how the heating oil delivery guys know how much oil to put in
the tank. Do they have a dip stick? Somebody told me they listen for
a whistling sound.

Anyway, the other day I noticed we were
low on oil so I called asked for a half tank. I figured it would be enough
to carry us through the remainder of the winter.

You can
imagine my surprise when I came home and I found that the truck driver had
overfilled the tank. Over 10 gallons of oil leaked into the basement after
destroying the flower beds and staining the shingles on the side of our house.
Some computers were damaged in the workshop. To top it off, the driver
must have realized his mistake because he used our garden hose to try to rinse
the oil off of the house! There was oil in the storm drain and all over
the soil of the flower beds lining our driveway.

We called
our insurance company and they arrived with somebody from the EPA to assess the
damage. We’re now looking at a hefty cleanup once soil samples come
back. Contaminated soil runs the length of our driveway and into our
yard. We probably lost our plantings and may have to redo the
driveway.

And here I’m working at a natural gas company. None
of this would have happened if we had natural gas!

I have to admit that I felt a little embarrassed admitting to my colleagues that we have heating oil at home. Despite the fact that we don’t yet serve customers in Connecticut, I haven’t wanted to push too hard on the home front. My wife is the CEO of our family affairs and it would be hypocritical of me to second guess her on matters like this. But if cheaper prices are not a good enough reason (after all, natural gas has been cheaper that heating oil in recent years), now I have another one: Protect our flower beds! This might be an easier sale than I thought!

Do You Have a Carbon Monoxide Alarm?

I have a confession to make: I have been singularly unsuccessful in convincing our customers of the necessity of purchasing carbon monoxide alarms.

I could say “we” have been unsuccessful but that would be unfair to the efforts of our superb marketing team. They have only tried to implement a series of strategies that yours truly has cooked up…to disastrous effect! Just think: We have tried selling by direct mail what I think is the world’s best – as well as one of the world’s cheapest -- CO alarms – at our wholesale cost! We have offered them to new customers. We have tried selling them on our website, also at cost! But over four years we have sold fewer than 500 alarms! That is less than .1% of our customers!

Ever since the father of a friend of mine came close to walking through heaven’s gate because of a faulty boiler, I have been obsessed with the importance of CO alarms. Let me be clear: EVERY HOMEOWNER AND BUSINESS MUST HAVE AT LEAST ONE IF NOT TWO CARBON MONOXIDE ALARMS.

CO kills. And it is all too common. Recently we were fortunate to have a TERRIFIC young lady join us. One day over lunch she heard we were offering CO meters. She told her story to colleagues and when I heard about it I asked her to write it down. This is the email she sent me:

Jeff:

I had a very frightening experience last February involving carbon monoxide.

My roommates and I had just moved into a new house. One evening two of us returned home at the same time and noticed a strange odor. We thought nothing of it as renovations were ongoing and the house had many funny odors during that process. But our third roommate had been home for a substantial amount of time already. At one point she complained that she was feeling “out of it”. Jen and I were quite tired from our workday so we ignored her and continued whatever we were doing. We didn’t think about the fact that a woman and her son who lived in a suite on the lower level had been unusually quiet and we had not heard any noise from them all evening.

After dinner we sat around the kitchen table, not saying much but all feeling sick: you know, headaches, dizziness, etc. When my friend Becky, who had been home all day, got up from her chair, she passed out. Jen and I realized something was wrong and instantly thought of the odor. We called 911 and when the Fire Department arrived, the meters they carried started beeping wildly before even entering our house. It was Carbon Monoxide.

The firemen asked if there was anybody else in the house and we told them about the family downstairs. They rushed down and found the woman and her 4 year old son. They were immediately taken to the hospital. The three of us were able to talk to the fire and ambulance personnel and were informed that the level of Carbon Monoxide on the floor where we lived was over 300 times the minimally harmful level for humans! They told us that if we had all just gone to sleep as we planned we
would not have woken up. The woman and her son were affected more quickly than
us as they lived on the level where the problem originated.

We spent the next day in the hospital for monitoring and had terrible headaches and dizziness for days afterwards. We couldn’t stand up without feeling like we were going to faint. It was a terrible recovery week.

Our house did not have CO monitors, and we did not even think to put install one when we moved in. We have been taught, as a society, that smoke detectors and fire alarms can save our lives. But until recently, CO alarms have not fallen into that same category. They need to be. In my life, it is now a necessity. Sometimes I think that the ending of this story might not have been an educational one, but a terminal one. Though I am grateful that it was the former of the two, I don’t want anyone to
experience a night like ours.

My friend’s experience was similar. He is 84 and had lost his wife a few months earlier. His wife had been sick for a couple years and they had a care-giver who used to come by a few times a week. After his wife passed away he stayed in touch with the aide. One night she happened to swing by his house on the way home from work and stopped by to say hello. She could see the lights on but there was no answer when she knocked. Concerned she opened the door and found my friend lying on the ground. Apparently she also felt faint and called 911. By the time the police arrived, both of them were passed out. They both spend a couple days in the hospital recovering.

Sadly, these stories are all too familiar. Some people may recall Vitas Gerulitis, one of my favorite tennis players in the 70s. In 1995, Vitas died of CO poisoning that was emitted from a pool heater in the home of a friend with whom he was staying on Long Island. That same year a family of five in Cleveland died from CO. The symptoms of CO poisoning are very similar to flu symptoms so most people dismiss them: headaches, weakness, feeling tired, nausea, shortness of breath. In fact, that family in Cleveland had visited their doctor the week before and he sent them home to recuperate! Thanks, Doc!

Some states and towns have passed laws that require builders to install CO alarms in all houses and apartments. Fire departments throughout the country recommend them. You would think that businesses that make them and sell them would do all they could to get the word out. But somehow we have all failed.

We will continue to offer the alarms at our wholesale cost at http://www.onlinechoice.com But I would love to hear from customers who have had similar experiences. And if anybody has a better idea about how we can get these alarms into all of our customers’ homes, please write!

Earth Friendly Beer

I recently had the pleasure of sending out two crisp $50 bills to two MX employees.

The story began about a month ago. I had gone to visit Freddy Bensch of SweetWater Brewing Company in Atlanta http://www.sweetwaterbrew.com . I suspect it was not an accident that our meeting was not scheduled at breakfast. It was late in the afternoon and as we arrived the modern glass lined lobby was filling up with a few hundred attractive young Georgians drawn by the weekly happy hour! Within a few minutes I had a mug in my hand and a smile on my face.

Freddy , who calls himself the “Big Kahuna” on his business card, showed me around his spotless plant on Ottley Drive in Atlanta. I had my first taste of beer directly from the “cask” (read: 800 gallon stainless steel drum). I also had a momentary fantasy of what Lucille Ball and Ethel Mertz would have done if they were employed here but I let it pass.

We were chatting over some of his latest brew when we asked if he knew about MXenergy’s new Earth Friendly Partner program. We proceeded to describe how all of our offices had screened “Inconvenient Truth” back in November. We then resolved as a company to help our customers offset their carbon dioxide emissions: CO2, after all, is the primary cause of global warming and the average residential customer emits 5.2 tons of CO2 per year (you read that correctly: 5.2 tons!).

After some research and discussions with climate experts in London and Washington, MXenergy launched the Earth Friendly Partner program in December. Under the program, customers pay us an additional $.01 per therm of gas consumed – approximately $10 per year for the average residential customer – and we purchase certificates representing tree planting projects. The cost is actually over $.01/therm but we decided that MXenergy will make up the difference; hence the name “Earth Friendly Partner.” We and our customers will work together to offset their carbon emissions. [Note: As you may remember from your high school bio class, trees and grass lands absorb CO2 in the process of photosynthesis. For our first offsets we purchased the carbon offsets generated by two Northwestern Indian tribes. A London based company that is active in saving the rain forests around the world, Sustainable Forestry Management, provided the offsets. Below are some photos of the reserve in Montana and the greenhouse with the saplings used for the project.]

When we launched the program, we had no idea if any customers would be interested. But within a few weeks Rodger, our head of customer care, reported that 26% of all customers shown the product bought it! That’s when I called up our commercial marketing team and proposed the following one-time offer: $100 to the first person in our company to sell the Earth Friendly Partner program to a commercial customer!

Now back to SweetWater. I’d like to think it wasn’t the beer talking but we started to explain Earth Friendly to Freddy and before he had gotten the words out the Chief Kahuna said, “Where do I sign?”

Footnote: I returned home to Connecticut with a Sweetwater t-shirt for my son Marshall. The shirt shows a leaping fish being hooked on the back. Marshall wore it the next day and came home to report that he was stopped in the high school hallway by a friend whose family moved up from Atlanta recently. “Hey, Dude, good beer!” I didn’t ask Marshall what the drinking age was in Georgia but I think I know..

Our Customers Are Always Right

Received a call the other day from Stone Ermentrout from Stone Tevis, Inc. Mr. Ermantrout began by saying he was an old customer with a new problem: he had received a disconnect notice and could not understand how it happened. Interestingly, instead of sounding aggravated – as I can tell you I would be in his shoes – Mr. Ermantrout was calling to alert me to a potential problem. I’ll bet, he said (and I paraphrase), you have other people who don’t pay their bills from time to time because they think your invoice is junk mail.

I pulled out your invoice, he said, and sure enough there was a PO box in Houston and a PreSort 1st Class postage box in the corner.

So instead of complaining that he was disconnected, Mr. Ermantrout was calling to make sure we knew that he had probably tossed our invoice out as junk mail. He surmised that other customers might be doing the same thing. I’ll bet your delinquency rate would drop, he concluded, if you changed the envelope and made it look more like a bill.

I called out to Gina Goldberg, our intrepid VP of Sales and Marketing, whom I heard talking outside the office I share with three of my colleagues, and I relayed the story. Amazing, she said, I think we’ve gotten another call on that recently because we were working on this just the other day. She went back to her team and asked how much it would cost to retool our invoicing format. $40,000? She got off the phone and said, “It sounds like a lot, but can you imagine how many customers are bouncing off walls now when they get these disconnect notices? We have to do this.”

I picked up my phone and called James Ganter, head of commercial sales. “James, I’m sending you an email with a customer name. Loot the supply closet and send him a package of our uniform sweatshirt, a Max and Murphy doll, and a mousepad.” Then I called Mr. Ermantrout. Unfortunately, he had just gone off to a meeting but when I left a message his secretary said, “Oh, you’re the folks I send the gas bill to every month.”

I said “Please tell Mr. Ermantrout that there is no reason to return my call but I just want him to know he is my favorite customer in Atlanta today. He’ll know why.”