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Swaps for Producers
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AmmoniaKing, an producer of ammonia, is interested in managing the
margin between natural gas feedstock and ammonia during the next six
months. The company is concerned that market conditions could
deteriorate more than expected and squeeze margins to the point of
jeopardizing the annual profit plan. To eliminate this threat, AmmoniaKing
enters into a swap with Enron that locks in the spread between natural gas
and ammonia at $100/ton on 300,000 tons of ammonia, or 75% of
monthly production. This margin virtually ensures that the ammonia unit
will meet its financial target.
During the life of the swap:
- AmmoniaKing continues to purchase natural gas from suppliers and
sell ammonia to customers of its choice, at floating market prices.
- On a monthly basis, AmmoniaKing and Enron exchange payments equal
to the difference between the fixed spread of $100/ton and the
prevailing floating price spread.
- For example, if the floating spread is $95/ton in a given month,
AmmoniaKing will receive $5/ton in a given month on 300,000 tons.
However, if the floating spread is $105/ton AmmoniaKing will owe
$5/ton to Enron.
- AmmoniaKing has stabilized a portion of its operating margin with the
swap, giving the company the ability to achieve a key performance
target.
back to Swaps
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