Volume 3 — Valuation and Risk Metrics © Copyright 2002, CCRO. All rights reserved. 44 Gas The spread approximation model is used to value a delivered natural gas commodity that is peaking services, where delivered prices vary with the price at the point of gas supply. • The model’s inputs are: − Forward prices at receipt and delivery point − Contract quantity − Forward gas volatilities − Correlation between gas pricing points − Contract pricing − Risk-free discount rates and risk premium • The model’s outputs are: − Monthly intrinsic and extrinsic option values − Monthly NPV of fixed payments − Mark-to-market value by month Storage Model To compute the intrinsic value of underground natural gas storage assets, a linear program may be used that computes the optimum pattern of injections and withdrawals. This program and the contractual inputs (e.g., fees, fuel retention) compute the value of using underground storage as a spread between injection and withdrawal months. For the extrinsic value of underground storage, a software may be used that computes the option value from trading gas futures to hedge storage contracts, trading daily cash instead of futures and reoptimizing injections and withdrawals considering the Monte Carlo simulated price scenario. This value is decayed over the life of the storage contract according to the decay in the value of an option. Discounted Cash Flow Model A discounted cash flow model may be used to compute the MTM value of deals using the most likely set of forward prices and volumes rather than computing expected values based on a probability distribution or Monte Carlo simulations. The monthly cash flows of a multicontract tolling agreeing (one unit-contingent purchase, multiple contract sales, plus market sales) are modeled using a discounted cash flow model written to explicitly incorporate each of the pricing/volume determinants in the contracts. Unit availability is an input to the model. The model computes pretax cash flows and discounts the results to derive the net present value. In cases of back-to-back transactions, the net present value (NPV) of the annual anticipated margin is computed.