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HomeMy WebLinkAboutFIN 07-14 city 4 - Report To Executive Committee PICKERING Report Number: FIN 07-14 Date: May 12, 2014 From: Paul Bigioni Director, Corporate Services & City Solicitor Subject: Commodity Price Hedging Agreements Report Recommendation: - That Report FIN 07-14 from the Director, Corporate Services & City Solicitor regarding commodity price hedging agreements be received for information. Executive Summary: The Commodity Price Hedging Policy, approved by Council per Resolution #88/10, requires the Report to contain, at a minimum, all information required by O. Reg. 653/05, as amended, as well as: 1. A statement about the status of the agreements during the period of the Report, including a comparison of the expected and actual results of using the agreements. 2. A statement by the Treasurer indicating whether, in his or her opinion, all of the agreements entered during the period of the Report are consistent with the municipality's statement of policies and goals relating to the use of financial agreements to address commodity pricing and costs. 3. Such other information as Council may require. 4. Such other information as the Treasurer considers appropriate to include in the Report. The City has entered into hedging agreements for natural gas and electricity procurement through Local Authority Services Ltd. (LAS) which is a wholly owned subsidiary of the Association of Municipalities of Ontario (AMO). Financial Implications: The LAS purchasing strategy allows municipalities to buy energy (through forward price hedge contracts) rather than being subject to price volatility through the spot market. . 79 Report FIN 07-14 May 12, 2014 Subject: Commodity Price Hedging Agreements Report Page 2 • Natural Gas The 2014 natural gas budget is $330,510. To protect the City's budget plan, the City has entered into the LAS Natural Gas Procurement Program for the period November 1, 2013 to October 31, 2014 with the price being 15.9 cents/m3. Electricity The City's 2014 hydro budget for all City operations including streetlights is $2.2 million. The LAS Electricity Procurement Program hedged purchase price for the period January 1, 2014-December 31, 2014 is $28.30/MW (program fees included), which equates to a per kWh contracted price of 2.83 cents/kWh, resulting in an expected all- inclusive commodity cost of 8.59 cents/kWh. Discussion: Current upward shifts in utility pricing creates significant challenges in maintaining utility budgets. This uncertainty in energy pricing can impact decision making and cost controllability for facilities: The LAS program provides on a yearly basis a stable energy pricing that assists in maintaining the Council approved budget every year. LAS Natural Gas Program — Enrolled April — 2006 Commodity Expenditure — 2013 - $318,475 Current Contract Price - November 1, 2013 - October 31, 2014 - 15.90m3 Hedged Volume - 75% LAS has hedged 75% of our municipal natural gas requirements at the above price and 25% of our consumption to spot market prices for this purchase term. It has been recently reported that Enbridge has applied to the Ontario Energy Board for a 40% rate increase. Enbridge claims that due to the fact that it has been such a long, cold winter, the cheaper natural gas it has stockpiled is running low and it has had to purchase more expensive natural'gas to meet its customers demands. The City does not purchase natural gas from Enbridge, and 75% of the City's natural gas requirements have been hedged through LAS until October 31, 2014. Furthermore, the LAS program operates within a four year purchasing window, and has already purchased 50% of total requirements for the November 2014 program at competitive rates. The projected Enbridge price increase should not have a significant impact the City's cost for natural gas for the remaining 2014 and the 2015 LAS program period . The 2014 natural gas budget did include a 3.7% increase over the 2013 actuals to provide some budget flexibility. 80 Report FIN 07-14 May 12, 2014 Subject: Commodity Price Hedging Agreements Report Page 3 LAS Electricity Procurement Program — Enrolled January- 2011 Commodity Expenditure — 2013 - $2,138,900 Current Contract Price —January 1, 2014— December 31, 2014— 2.83¢/m3 Total Expected LAS Commodity Rate — 8.59 cents/kWh (Blended hedge price + • spot price + Global Adjustment) Hedged Volume — 75% The LAS 2013 hedged purchase price is 7.2% lower than the 2013 LAS Program rate with an estimated all inclusive cost saving of 0.92 cents/kWh, compared to the current Regulated Price Plan (RPP) rate of 9.50 cents/kWh. LAS has also hedged a block of off-peak power for municipal streetlight accounts that is expected to realize a savings of 1.37 cents/kWh compared to the current RPP rate. LAS has hedged 75% of the City's municipal electricity requirements at the above price and 25% of the City's consumption to spot market prices for this purchase term. This spot market exposure currently provides cost savings to the City compared to the current RPP, in addition to the price stability provided by the hedge purchase. Treasurer's Statement: The objectives of the LAS bulk hedging programs are generally synonymous with our municipal objectives: a. Facilitates Budgeting — purchasing blocks of energy commodities will produce stable prices for budgeting; b. Competitive Pricing — provide savings on required purchases; and c. Maximize Purchasing Power— pooling requirements can leverage better pricing than individual purchasing. The LAS Natural Gas and Electricity Procurement Program has provided the City with a sound commodity hedging strategy for natural gas and electricity. This benefits the City as much as possible when prices are falling and protects the City as much as possible when prices are rising. Annual price stabilization and price benefits from bulk procurement along with individualized support, advice and consumption data reports, provides the City with a means to monitor its usage and accurately forecast its annual utility budgets. Attachments: None 81 Report FIN 07-14 May 12, 2014 Subject: Commodity Price Hedging Agreements Report Page 4 Prepared By: Appr• ed/Endorsed By: I _ :•bK /ma / Stan K: r ki Senior Purch.sing Analyst Divisio Head, finance &Treasurer \— R Paul Bigioni Director, Corpo _ - 'ces & City Solicitor Recommended for the consideration of Pickering City Council 28, Zot4 Tony Prevedel, P.Eng. Chief Administrative Officer • 82