Managing Fuel CostsManaging Fuel Costs

Presented to:Presented to:

John Q. FuelbuyerJohn Q. Fuelbuyer

ABC CorporationABC Corporation

July 1, 2010July 1, 2010 Joe FellJoe FellDirector of ProcurementDirector of Procurement

Palatine Oil CompanyPalatine Oil Company847-358-3600847-358-3600

Jfell@palatineoil.comJfell@palatineoil.com

POC Price Risk ManagementPOC Price Risk Management

Proactive Energy ManagementProactive Energy Management• There are strategic tools that can be implemented to There are strategic tools that can be implemented to

significantly affect your Total Fuel Spendsignificantly affect your Total Fuel Spend..• Utilize these tools as an overlay against historical price Utilize these tools as an overlay against historical price

trends that reoccur each year. trends that reoccur each year. • Buy effectively and maximize your opportunities to save.Buy effectively and maximize your opportunities to save.• Increase the predictability of future cash flows.Increase the predictability of future cash flows.• Assist in the strategic planning process.Assist in the strategic planning process.• Budget fuel expenditures with accuracyBudget fuel expenditures with accuracy

Marketplace DynamicsMarketplace Dynamics• In 09’ crude went from $30 to $80 per barrel. Insulate your In 09’ crude went from $30 to $80 per barrel. Insulate your

business from factors that can erode profit margins, such as business from factors that can erode profit margins, such as Global Petroleum volatility.Global Petroleum volatility.

What’s Driving VolatilityWhat’s Driving Volatility

Economic ForcesEconomic Forces• Supply & DemandSupply & Demand

Refining capabilityRefining capability SpeculationSpeculation Currency ValuationCurrency Valuation Middle East unrestMiddle East unrest WeatherWeather Geo-PoliticalGeo-Political RecessionaryRecessionary

Change How you Buy Fuel! Change How you Buy Fuel!

Gas PricesGas Prices

2009 Gas Prices ( Before Taxes)

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Diesel PricesDiesel Prices

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Buy

Not Here

Buy Here

Not Here

Buy Here

Analyze Current MethodsAnalyze Current Methods

Most do not actively pursue a buying Most do not actively pursue a buying strategy for their third or fourth largest strategy for their third or fourth largest expenditure.expenditure.

The industry dictates how this is done.The industry dictates how this is done. The largest percentage of fuel is The largest percentage of fuel is

purchased between the months of May purchased between the months of May and October, when prices are the highest.and October, when prices are the highest.

Target the months your usage peaks, and Target the months your usage peaks, and lock in prices prior to the time frame the lock in prices prior to the time frame the increases occur.increases occur.

Historical Pricing TrendsHistorical Pricing Trends

Crude and refined products are Crude and refined products are cheapest in the first quartercheapest in the first quarter• Focus changes to gasoline productionFocus changes to gasoline production• Refineries enter maintenance periodRefineries enter maintenance period

Prices Rise in 2Prices Rise in 2ndnd Quarter Quarter• Boutique formulations of gasolineBoutique formulations of gasoline• Summer driving season startsSummer driving season starts• Fuel costs peak in the SummerFuel costs peak in the Summer

November 1 starts initial slowdownNovember 1 starts initial slowdown• Farming and Construction finish up.Farming and Construction finish up.

Fuel/Gas Price OriginationFuel/Gas Price OriginationCost of Commodity at NYMEX Transport to local marketplace

$-Price Lock takes place here

Trucks deliver from terminalProduct sold at retail

Fuel Cost Mitigation StrategyFuel Cost Mitigation Strategy Lay out expected fuel volumes for each month of Lay out expected fuel volumes for each month of

the upcoming calendar year.the upcoming calendar year. Reduce each monthly number by 50%.Reduce each monthly number by 50%. Lock in Pricing for that 50% in JanuaryLock in Pricing for that 50% in January

• History shows, this is when fuel is the cheapestHistory shows, this is when fuel is the cheapest• We are not buying the fuel, only locking in the price.We are not buying the fuel, only locking in the price.

POC Risk Management will provide customers with a POC Risk Management will provide customers with a locked price per month, each month, for up to a year in locked price per month, each month, for up to a year in advance.advance.

We now have a blended rate which is 50% locked We now have a blended rate which is 50% locked and 50% market rate in the month it is used.and 50% market rate in the month it is used.

Fuel Cost Mitigation Strategy Fuel Cost Mitigation Strategy (continued)(continued)

Physical Fuel Deliveries Physical Fuel Deliveries • POC fuel customers will be invoiced the locked in POC fuel customers will be invoiced the locked in

rate. rate. FIFO method is utilized with locked in gallons billed first.FIFO method is utilized with locked in gallons billed first.

FinancialFinancial ReconciliationReconciliation • Those customers who do not receive fuel deliveries Those customers who do not receive fuel deliveries

from POC or buy retail, will settle up financially at the from POC or buy retail, will settle up financially at the end of each month based on the volume agreed on at end of each month based on the volume agreed on at contract signing.contract signing.

• If prices increase at the pump, POC pays you the If prices increase at the pump, POC pays you the difference. If prices decrease, you pay POC. difference. If prices decrease, you pay POC.

Fuel Cost Mitigation StrategyFuel Cost Mitigation Strategy(continued)(continued)

Customer invoiced monthlyCustomer invoiced monthly• Billed FIFO at rate secured by POCBilled FIFO at rate secured by POC

Market rate prevails thereafterMarket rate prevails thereafter

POC provides “Fuel Cost Scorecard”POC provides “Fuel Cost Scorecard”• Monthly Reports and ReviewMonthly Reports and Review

Program Cost of Fuel vs. Market PriceProgram Cost of Fuel vs. Market Price Year end results and cost managementYear end results and cost management

No fuel supplier changeNo fuel supplier change• You purchase fuel at existing providersYou purchase fuel at existing providers

Palatine Oil Manages risk solutionPalatine Oil Manages risk solution

How has our strategy How has our strategy performed?performed?

$0.00$0.50$1.00$1.50$2.00$2.50$3.00$3.50$4.00

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Hedge Price Avg Annual Price

Historical Hedge Price versus Average Market Price: 1994-2009

Hedge Price represents locked fuel prices bought in Jan/Feb

Locking in a percentage of your fuel in the first quarteroutperformed the market in each year but 98’ & 99’.

Financial impactFinancial impact

ABC Corporation who bought 200,000 gals ABC Corporation who bought 200,000 gals per year under this method for the years per year under this method for the years listed would have saved $558,000 or .23 listed would have saved $558,000 or .23 cents per gallon.cents per gallon.

In the years 2004-2009, that number In the years 2004-2009, that number climbs to .40 cents per gallon.climbs to .40 cents per gallon.

Price volatility has grown considerably Price volatility has grown considerably over the last five years and could continue over the last five years and could continue to grow.to grow.

Which side of the numbers do you prefer?Which side of the numbers do you prefer?

If we bought gas in 2009 under this method, If we bought gas in 2009 under this method, what would the outcome have been?what would the outcome have been?

What Are The Results?What Are The Results? Reduce exposure and Variable CostsReduce exposure and Variable Costs

• Leverage POC’s Scale & Buying PowerLeverage POC’s Scale & Buying Power Over XXXX customersOver XXXX customers Total Volume XXXXXXTotal Volume XXXXXX

Minimal time requirementMinimal time requirement• POC manages and executes contractsPOC manages and executes contracts• Issues monthly reports invoices and creditsIssues monthly reports invoices and credits

Budget predictability – Manage future costsBudget predictability – Manage future costs Risk MitigationRisk Mitigation

• High side “blow out” High side “blow out” • Concede some down side opportunity.Concede some down side opportunity.

Capitalize on Historical TrendsCapitalize on Historical Trends• Fuel is cheapest in the first quarter. Fuel is cheapest in the first quarter.

Bottom LineBottom Line The future becomes predictableThe future becomes predictable

• Price Volatility RemovedPrice Volatility Removed• Fuel costs can be budgetedFuel costs can be budgeted

No “budget blowouts”No “budget blowouts”

You’re not buying fuel in advanceYou’re not buying fuel in advance• Securing future price of fuel todaySecuring future price of fuel today• Never take delivery of fuelNever take delivery of fuel• Buying at seasonal lowBuying at seasonal low

Offsetting summer price increasesOffsetting summer price increases

Creating a competitive advantageCreating a competitive advantage• Margin and earnings more predictable than Margin and earnings more predictable than

competition’scompetition’s