Fertilizers brochure - final text file 2001
 
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FERTILIZERS

It's time to manage your price risk.
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Managing Price Risk
For producers and consumers of ammonia and fertilizers, price volatility is an all-too-familiar cost of doing business. To compete effectively in your industry, you need a way to control the risk created by price volatility. Enron can help with financial price management tools that can smooth earnings, facilitate cash flow management, and bring greater certainty to financing, investment and acquisition decisions. 
 
Helping Ammonia and Fertilizer Producers Improve their Business
Few industries are more competitive or volatile than ammonia or fertilizers. From the very unstable pricing found in the markets for raw materials to the ebb and flow of market demand for finished products, producers can face enormous challenges in maintaining profit margins and cash flows.
Now there's help. For many years, Enron has been helping producers like you neutralize the risk of price volatility both upstream and downstream, using financial price management tools we pioneered more than a decade ago for the energy industry. Because Enron is a major trader of many commodities around the world, we're intimately familiar with the risks you face and are uniquely positioned to help you mitigate them. 
Enron can also make it easier for you to trade the commodities you buy and sell, using EnronOnline, our Internet-based, global transaction system for commodities that allows you to view real-time prices and transact instantly online. EnronOnline posts bid and offer prices for over 1,500 global commodity products as well as complimentary weather, news and market information. In addition, it allows you to view full contractual terms and available volumes for products.
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Finally, we can leverage, in your market, our position as the largest wholesaler of natural gas and electricity in North America. For example, we can structure cross-commodity transactions that link your electricity or natural gas bills to the price of the goods you produce. In this type of transaction, you would pay more for energy when your product prices are high when you can best afford it, and less when your product prices are low and your cash flows are constrained.

Helping Ammonia and Fertilizer Consumers Improve their Business

The ammonia and fertilizer markets that you depend upon are among the most volatile in the world. Yet your investors and lenders are demanding ever-greater stability in the growth of your company's revenues, earnings and cash-flow. For solutions to this apparent paradox, turn to Enron. As a leading provider of price management services across various industries, we can help you buy the commodities you need more efficiently, hedge the risks associated with their pricing, and, ultimately, lower your cost of capital. 
Take a few moments to review the alternatives listed here, then spend a few more moments with Enron. We'll review your risk exposure with you and suggest risk-reducing strategies for taking control of your commodity price exposure.
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SWAPS

Swaps are the most widely used price risk management tool for a variety of reasons, the most common being, no upfront transaction cost. 
Swaps give companies the ability to effectively switch from one price structure to another - from floating price to fixed or vice versa. They are used most often to fix, or lock in, prices and margins between prices. In exchange for price protection, the ability to capitalize on some beneficial price movements is sacrificed.
The typical swap transaction involves the exchange of a fixed price for a variable price tied to an acceptable market index. Settlement is financial - i.e., cash changes hands; physical product does not. Each month during the life of the transaction, the difference between the two prices is calculated and payment is made to the appropriate party.
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Swap: Producer example 

AmmoniaKing, a 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 percent of monthly production. This margin virtually ensures that the ammonia unit will meet its financial target.
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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.
 
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Swap: End-user example 

FertPro, a manufacturer of a variety of fertilizer products, is preparing its annual price catalog for many of its ammonia-based products. The company's customer base demands the ability to buy the products at the listed catalog price regardless of ammonia feedstock prices. This makes it impossible for FertPro to pass on feedstock price increases no matter what the magnitude. On the other hand, customers don't necessarily expect lower prices if ammonia feedstock prices should fall; they simply want a listed price they can count on. To service its customers while protecting its margins, FertPro enters into a one-year price swap. The swap effectively fixes the price of ammonia at $100/ton on a monthly volume of 10,000 tons, or 75 percent of anticipated monthly catalog sales.
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DURING THE LIFE OF THE SWAP:

?        FertPro continues to purchase ammonia from suppliers of its choice at floating market prices.
?        On a monthly basis, FertPro and Enron exchange payments equal to the difference between the swap fixed price of $100/ton and the floating price for ammonia.
?        For example, if the floating price for ammonia is $105 in a given month, FertPro will receive $5/ton on 10,000 tons. However, if the floating price is $95/ton FertPro will owe $5/ton to Enron.
?        The net effect of combining the swap cash flows with actual purchases of ammonia feedstock is a fixed price of $100/ton.
?        The swap enables FertPro to publish and stand behind its listed prices with full confidence that the margin on those sales is largely protected from fluctuating feedstock prices.
 
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CAPS & FLOORS

Like Swaps, Caps and Floors provide price protection, but they have the added advantage of providing benefit from favorable price movements. They are commonly thought of as price "insurance," i.e., for a premium you are entitled to full price protection when prices move through a specified level. A price Cap protects against rising prices without sacrificing the advantage of falling prices. Floors are the opposite of Caps; they guard against falling prices while preserving upside price potential.
With a Cap or Floor, the full cost of the protection is predefined - it is equal to the premium paid for the Cap or Floor. There are no potential future costs related to price movements.
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Cap: End-User example

CropFood, a manufacturer of urea, wants to develop business with a prospect that has difficulty passing on price increases, but is expected to pass on decreases without delay.
To distinguish itself from competitors, CropFood ensures the prospect that for the next 12 months, CropFood will never ask for a price increase above its very competitive product prices, no matter how high ammonia feedstock prices go. And to sweeten the deal, CropFood agrees to promptly pass on all feedstock price decreases as soon as they are announced, no questions asked.
The prospect likes CropFood's straightforward pricing policy and agrees to purchase 1,000 tons of urea per month. In order to honor its pricing promise without putting the company's margins at risk to rising prices, CropFood purchases a one-year price cap on ammonia at $120/ton for 12,000 tons per month. The cost of the cap is $2/ton.
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DURING THE LIFE OF THE CAP AGREEMENT:

?        CropFood continues to buy ammonia from its regular suppliers at market prices.
?        Enron receives a $2/ton premium from CropFood for the $120/ton price cap.
?        If the market price for ammonia goes above $120/ton in a given month, Enron will pay the difference to CropFood. If prices are less than $120/ton, CropFood enjoys the lower market prices for its feedstock.
?        The effective cost of ammonia paid by CropFood is the floating market price up to a maximum of $120/ton plus the $2/ton premium paid for the cap.
?        CropFood has, for a known cost of $2/ton captured new business by meeting the customer's price needs without putting the company at risk to ammonia prices in the process.
 
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Floor: Producer example

AmmoniaKing, a producer of ammonia, anticipates a plant turnaround starting in three months time and lasting for two months. The company intends to build extra ammonia inventory of 50,000 tons over the next three months to meet sales obligations during the two-month period the plant is taken off-line. There is concern that prices could soften over the two-month turnaround period, squeezing the margin on the excess inventory to be sold during that time.
To protect against a sharp price reduction during the turnaround period, AmmoniaKing buys a two-month ammonia price floor today that becomes effective in three months time. The floor price is set at $145 and costs $3/ton. The total premium payable by AmmoniaKing is $150,000 (50,000 tons multiplied by $3/ton).
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EACH MONTH DURING THE LIFE OF THE PRICE FLOOR:

?        AmmoniaKing sells excess ammonia inventory to its customers at prevailing market (floating) prices.
?        Enron receives a $3/ton premium from AmmoniaKing for the $145/ton price floor.
?        If the floating price for ammonia is greater than the $145/ton floor price, there is no action under the floor contract. The effective price received by AmmoniaKing for its ammonia is the floating market price less the $3/ton premium.
?        If the floating price goes below the $145/ton floor price to $140/ton, for example, AmmoniaKing will receive the $5/ton difference from Enron. In this instance, AmmoniaKing effective price for ammonia is $142/ton - the $145/ton floor price less the $3/ton premium.
?        In summary, the price floor has established a minimum price of $145/ton with full upside potential at a known cost of $3/ton.
 
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Your sales, profits and cash flows are too important to be left to today's volatile market. Call us today to shield your income statement from price volatility. Working together, we can develop a alternative price protection plans so that you can choose one that makes sense for you and brings value to your organization. To begin exploring your options with Enron, call Doug Friedman, Director of Petrochemicals Risk Management Group, Marc Distefano, or Rob Krotee, at 713-853-5592.
 
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?2001 Enron Corp. Enron and the Enron logo are registered trademarks and Endless possibilities and EnronOnline are trademarks of Enron Corp. or one of its subsidiaries.
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