Shield Plus Dynamic Cap

  • Investment Objective & Portfolio Management: The Dynamic Cap seeks to protect your organization's energy budget and in so doing add value. Relative to the change in your energy costs, that means the Dynamic Cap strives to do the following:
    • 1. To protect, "cap," your energy budget (i.e., limit costs) if prices rise,
    • 2. If energy prices fall, to create the opportunity for a “budget gift” (where actual costs fall below projected costs), and
    • 3. To outperform, "add value," versus buy-and-hold energy hedges over a 3 to 5 year market cycle.
    The Dynamic Cap’s first objective is the main priority; that is, to make enough money to offset the rise in expenses associated with increasing energy prices. In that light, the Dynamic Cap cumulative gain has significantly exceeded the rise in energy expenses for Shield Plus' clients over the past 6 years ending 12/31/09. This added value is a result of the Dynamic Cap’s option-based market-neutral investment approach that uses "call options" to generate gains when energy prices rise and uses a small allocation of "puts" to safeguard principal when energy prices decline. This limited risk in the Dynamic Cap also permits the client’s expenses to fall as energy prices decline. Comparatively, traditional buy-and-hold hedges typically lock energy prices and expenses; that is, when energy prices fall, there is no opportunity for savings from lower procurement prices. For a more thorough comparison of strategies read the article, “Are Rising Energy Costs Squeezing Your Budget?”
  • Protection: The Shield Plus Dynamic Cap protects institutions from rising energy prices. Specifically, Shield Plus LLC works with institutions, such as universities, colleges, eleemosynary organizations and corporations, on protecting their budgets from rising energy costs. We do not change the procurement process at the institutions—we simply offer a financial overlay that protects their energy budgets. For example, the Dynamic Cap has the potential for a “monthly to annual capture” in which energy investment gains are locked and paired off against an institution’s rising energy costs (in essence “capping” the institution’s energy budget for natural gas, heating oil, diesel fuel, gasoline, crude oil, electricity, ethanol, jet fuel, etc.). If energy prices fall, losses within the Dynamic Cap are limited to a certain dollar amount which has a high probability of being significantly less than the savings from lower spot purchases of energy used to operate the institution.
  • Performance: The Shield Plus Dynamic Cap has achieved a cumulative net total return that has significantly exceeded the rise in energy expenses for Shield Plus' clients over the past 6 years ending 12/31/09. Accredited institutions can request performance by contacting Shield Plus.

Reasons to Protect Your Energy Budget

  • With the world population growing by over 75 million people per year (increasing energy demand) and fossil fuel supply being limited to what is in the ground, the long term trend for energy prices is likely up. We also believe supply disruption, shortage or excess versus demand can occur over any short period of time. As evidence, the 1/22/10 EIA Storage Report shows the following: it is the first time in EIA’s 16-year history of weekly inventory data that combined net withdrawals from storage over 2 consecutive weeks have exceeded 500 Bcf; inventories are now 6 Bcf below the 5-year average, after beginning the year 311 Bcf above the 5-year average. Such events and economic imbalances create price volatility.
  • From Mark Williams, AP Energy Writer, On Monday December 21, 2009, 9:11 am: There is possible legislation, referred to the NAT GAS legislation - House Bill 1835 and Senate Bill 1408. This legislation is geared to improving the climate by reducing carbon emissions. Currently, “27 percent of the nation's carbon dioxide emissions come from coal-fired power plants, which generate 44 percent of the electricity used in the U.S. Just under 25 percent of power comes from burning natural gas, more than double its share a decade ago but still with room to grow.” Natural gas emits half as much carbon as coal when burned to generate the same amount of electricity. Looming climate (i.e., carbon emission, cap & trade) legislation has altered the math used to determine the cheapest way to deliver power. Natural gas is likely the cheapest candidate. US utilities aren't waiting for Washington to jump on the natural gas bandwagon. Exxon Mobil Corporation gave its answer to the cheapest way to deliver power by recently acquiring XTO Energy Inc. for $30 billion. The move will make Exxon the country's No. 1 producer of natural gas. Exxon expects to dramatically boost natural gas sales to electric utilities.
  • When considering heavy-duty vehicles, natural gas is probably the cheapest and cleanest source of energy to power such big rigs (current battery technology is not economical). Even Al Gore has admitted that for the big trucks, natural gas makes the most sense.
  • Electric cars, such as the Nissan Leaf, are being introduced and sold in late 2010. Such electric cars, when re-charging individually and given current technology, will likely consume roughly three times as much electricity as a typical home’s daily usage (“Plugged In” article, Star Tribune, 2/19/10). Neighborhood blackouts are not out of the question. Additional natural gas turbines will likely be one source used to meet the increased electricity demand.
  • Hurricanes, like Katrina in 2005, and terrorism could once again shake energy markets.
  • Investors need options to protect their energy budget, to minimize the risk and to capitalize on volatility.

This graph shows how energy prices, in particular natural gas prices, can easily spike and retreat. The Dynamic Cap capitalizes on such volatility and protects your energy budget.

The Shield Plus Dynamic Cap is available only as an institutional separate account. To learn more, contact Shield Plus.