MGMT 8605M Week 5 Scenario Analysis Example

Three States of the World for a Fertilizer Plant's Gas Bill: A Scenario Analysis Building Base, Adverse and Severe Cases Around Natural Gas Cost, With Each End Taken From the Henry Hub Record Rather Than a Round Percentage

Student Name

Walden University

MGMT 8605M: Financial Risk Management and Decision Making for Organizations

Instructor Name

Month Day, Year

Three States of the World for a Fertilizer Plant's Gas Bill: A Scenario Analysis Building Base, Adverse and Severe Cases Around Natural Gas Cost, With Each End Taken From the Henry Hub Record Rather Than a Round Percentage

A Sentence Before a Number

Cedar Bluff Nitrogen, a composite producer of ammonia and nitrogen solutions in Iowa, uses natural gas as both fuel and feedstock. It produces about 420,000 tons of ammonia-equivalent product a year and consumes about 33 million British thermal units of gas per ton, roughly 13.9 million MMBtu a year. It buys gas at prices indexed to the Henry Hub benchmark. Gas is about two-thirds of its cash production cost, so the gas price is the exposure that most determines its margin. This analysis gives that exposure a range using three scenarios for fiscal 2027.

The base scenario is a year like most recent ones: gas supply is ample, storage is near normal and winter is mild enough that brief cold snaps do not set the annual average. The adverse scenario is a year like 2022, when global demand for American gas rose sharply after the disruption of European supply, and Henry Hub prices stayed high for months rather than days. The severe scenario pairs that gas price with a fall in fertilizer prices, which would occur if a large harvest and weak crop prices reduced farmers' demand at the same time that gas stayed expensive.

The Scenario Table

[after]

Volumes and the base product price come from Cedar Bluff's plan. Gas prices come from the published Henry Hub daily spot series (U.S. Energy Information Administration, 2026).

Table 1

Gas Cost Scenarios for Cedar Bluff Nitrogen, Fiscal 2027

Severity Taken From the Record

The base price of $3.25 is the writer's assumption, set between the series' recent level, about $3.00 in early October 2026, and its 2025 average of about $3.52. The adverse price is not a chosen percentage. It is the actual average Henry Hub spot price for calendar 2022, $6.45, a level the market sustained for a full year within recent memory. Monthly averages that year ran above $8.00 in May and August. Choosing a documented year rather than "base plus 100 percent" means the board can ask what happened in 2022 and judge whether it could recur.

Two Prices That Can Part Company

Gas and nitrogen fertilizer prices tend to rise together, because gas cost sets the price of the marginal producer. That linkage protects Cedar Bluff in the adverse scenario only partly, since its product contracts reprice with a lag. The severe case removes the protection: fertilizer prices fall 20 percent while gas stays at the 2022 level. The two can part company when farm demand weakens independently of energy markets. In that case margin falls by about $91.5 million against base, more than Cedar Bluff's planned operating income.

No Probabilities, by Design

The table assigns no probability to any column. Schoemaker (1995) described scenarios as a set of plausible alternative futures meant to stretch thinking rather than as forecasts, and argued that assigning probabilities invites managers to plan for the most likely case and ignore the rest. Bradfield et al. (2005) traced how scenario methods developed in business planning as a way of exploring uncertainty that probabilistic forecasting handled poorly. The purpose here is to show the board what the plant must survive, not how likely each state is.

What the Range Excludes

The range uses annual averages, which hide short spikes. In late January 2026, Henry Hub daily spot prices rose from about $3.00 to $30.72 on January 23 before falling back within two weeks. A plant buying gas at daily prices during such a week would face a cash cost far above what the annual figures show. Cedar Bluff buys mostly at monthly index prices, which dampens this effect, but the analysis does not model it. The range also excludes plant outages, changes in production volume in response to prices and any hedges the company might add. Each exclusion is a candidate for later work. In a severe year, for example, Cedar Bluff might cut production rather than run at a loss, which would shrink its gas bill along with its revenue, so the severe column probably overstates the margin loss for a plant willing to idle. A follow-up analysis could model that choice explicitly.

References

Bradfield, R., Wright, G., Burt, G., Cairns, G., & Van Der Heijden, K. (2005). The origins and evolution of scenario techniques in long range business planning. Futures, 37(8), 795-812. https://doi.org/10.1016/j.futures.2005.01.003

Schoemaker, P. J. H. (1995). Scenario planning: A tool for strategic thinking. Sloan Management Review, 36(2), 25-40.

U.S. Energy Information Administration. (2026). Henry Hub natural gas spot price, daily [Data set]. https://www.eia.gov/dnav/ng/hist/rngwhhdD.htm