Tools

MSDS-TDS

NGL - Risk Management Tool: Price Floors

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A Price Floor deal allows a customer to receive a credit or cash settlement at the end of each month if the month's OPIS average price at a selected location is lower than a predetermined price (the 'Floor' price) agreed upon between the parties.

If the monthly average of the OPIS price assessments for the selected location falls below the agreed floor price, the customer will receive a financial settlement for the difference between the contract floor price and the monthly OPIS average for the selected location/terminal multiplied by the number of gallons covered by the floor contract.

Example:

On June 5, your company purchases a pre-buy contract for 100,000 gallons per month, October through March. You then elect to enter into a Price Floor arrangement. A floor price of $0.60 per gallon referenced to a monthly Conway OPIS average is agreed upon between the parties. Based upon conditions in the various propane trading locations at the time, a premium of $0.04 per gallon is charged for the protection offered by the floor contract, and you are invoiced for a total premium of $24,000 (100,000 gallons per month X 6 months X $0.04/gallon).

During the term of the agreement one of the following scenarios will unfold:

Lower prices - If the monthly average of the daily OPIS price assessments for the terminal/location specified in the contract (Conway in this hypothetical example) is less than the floor price specified in the floor contract, then you would receive a check or credit to your account for an amount equal to the difference between the floor price and the average of the OPIS price assessment for the month multiplied by the number of gallons covered by the floor contract for the month.

Higher prices - If the monthly average of the daily OPIS price assessments for the terminal/location specified in the contract (Conway, in this example) is above the floor price specified in the floor contract, then you would not receive any payment under the floor contract for that particular month.

General Requirements/Conditions:

Parties must verify to each other's satisfaction that each of them is legally qualified to enter into financially-settled commodity instruments.
Parties agree to a financial master contract framework (the ISDA) and establish mutually-acceptable credit terms for financially-settled instruments.
Parties agree to a floor price, benchmark physical pricing location (for which OPIS price assessments are published), and number of months that the contract will cover; customer pays the corresponding (non-refundable) premium.
The contract is settled in cash each month against the monthly OPIS average price for the selected location.