USOURCE HELPS LINDT & SPRUNGLI ACHIEVE BUDGET STABILITY

Challenge

As one of the largest, premier chocolate makers in the world, Lindt strives to always meet demands with the highest quality product. Lindt was accustomed to strategically sourcing superior, sustainably produced raw materials and natural gas for its production. Wanting to apply this disciplined approach to purchasing electricity, Lindt turned to Usource because of our expertise in energy markets and procurement.

Initially, Usource had Lindt on an annual purchasing plan with fixed electricity pricing to ensure budget stability. And until 2014, Lindt had experienced solid results controlling their energy costs through this plan. However, changes in the New England marketplace were leading to increased price volatility, making it harder to achieve budget consistency year over year. Looking forward into 2015 and beyond, Lindt was facing 40% increases in energy prices.
 

Solution

Usource advised Lindt that price volatility and price spikes were being driven by fundamental changes in the New England region, including a growing reliance on natural gas for electricity production with a significant shortage of pipeline capacity. In addition to mounting pipeline constraints, market uncertainty heading into the coming winter was running deep after an extremely cold winter in 2013–2014. A cold winter could lead to price spikes, while a milder winter could alleviate system pressure and reduce prices, creating a possible buying opportunity.

As a large energy user, Lindt wanted budget certainty but also had a degree of risk tolerance to allow flexibility to take in energy buying opportunities to lower overall costs. Usource conducted a series of strategic discussions with Lindt, providing in-depth analysis of market fundamentals and key drivers. Through these sessions, Usource developed energy cost scenarios and created risk management parameters based on cost variance tolerances.

Result

The result was a three-year energy buying strategy that combined budget certainty over time, as well as opportunities to purchase energy in the future at opportune times.

Short term – Upcoming winter:

• Secured a fixed rate through a three-phase hedging strategy to achieve budget certainty and eliminate the risk of a drastic price spike
• Executed hedges based on market conditions until client was 100% hedged

Longer term:

• Hedged 25% up front to pull in some of the favorable outer year pricing
• Established price targets for future winter and summer periods
• Defined ceiling price to lock in should prices start rising rapidly
• Set timeframes on hedge position to ensure desired budget stability
• Layer in hedges based on market conditions

Given the complexity of this energy buying strategy, Usource provides ongoing monitoring and management services and maintains close communication with Lindt to ensure successful execution of the plan. The analysts at Usource deliver daily reports on market pricing and trends to alert Lindt of potential buying opportunities. In addition, Usource provides monthly reports on the client’s current market position and progress toward hedging goals. Finally, update meetings are held each month with the client to ensure the strategy is in alignment with expectations and identify any modifications as desired. This customized strategy has continued to deliver on the objectives Lindt strives for as it prudently expands operations in the next decade.