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News Release |
| FOR IMMEDIATE RELEASE September 10, 2009 |
CONTACT: Wendy Williams Marketing Director 909.379.7151 |
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Fuel Hedging Buys Stability
 To stabilize costs, Omnitrans now hedges 42% of its LNG fuel purchases through an agreement with supplier Clean Energy, seen here delivering fuel. San Bernardino, CA –In July 2008, natural gas was going for $1.81 per gallon – 27% higher than the $1.42 rate Omnitrans budgeted for based on pricing from just five months earlier. Not a good way to start out the fiscal year. Fortunately, July was the high-water mark for fuel prices. By November, per gallon costs dropped to $1.07 which was 25% below the budgeted rate. Better than being over budget, perhaps, but the volatility in the natural gas market created uncertainty for Omnitrans cost projections. Determined to achieve greater stability, Omnitrans CFO Robert Miller began investigating fuel hedging as a strategy to increase cost certainty. “While we attempted each year to adequately budget for fuel using market price forecasts,” said Miller, “market based price estimates of future natural gas prices have not been accurate over the last three years.” Fuel accounts for about 12% of Omnitrans’ total operating costs, second only to labor and benefits at 60%. “While labor cost increases were predictable, fuel was not.” explained Miller. “Budgeting too high for fuel, meant we sacrificed putting more service on the street. Budgeting too low might lead to service cuts and workforce reductions.” The practice of hedging, often employed by airline companies, makes advance purchases of fuel at a fixed price for future delivery to protect against the shock of anticipated rises in price. With Board approval to hedge up to 50% of its liquefied natural gas (LNG) fuel purchases, Omnitrans partnered with Clean Energy, it’s current LNG fuel supplier, to secure gas contracts and administer the program. Ultimately, Omnitrans entered into an agreement to fix the price of 42% of the 420,000 gallons per month that Omnitrans will consume between July 1, 2009 and January 31, 2012. The balance of the monthly fuel requirement is purchased through current contracts using spot market pricing set monthly by vendors using industry standard index pricing. In July and August 2009, the first two months of the contract, the hedge price was higher than market costs, but Omnitrans still benefitted since 58% of fuel purchases are tied to index based pricing. The Agency is now positioned to benefit to some degree from falling fuel prices while at the same time limiting the impact if prices should move higher. As a result, Omnitrans operating costs and cash requirements are stabilized, which is particularly beneficial as the Agency begins a major capital program to introduce bus rapid transit in the service area. “Our goal is not to lower costs,” said CEO/General Manager Durand Rall. “The futures market provides Omnitrans with an opportunity to ensure that our fuel costs are more predictable, allowing us to maintain consistent quality transit services to customers in the San Bernardino valley.” ### |
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Founded in 1976, Omnitrans is the public transit agency serving fifteen cities and the unincorporated areas of the Inland Valley of San Bernardino County in Southern California. Omnitrans currently operates 32 fixed bus routes in a |
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