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. .
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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.
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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
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Report FIN 07-14 May 12, 2014
Subject: Commodity Price Hedging Agreements Report Page 4
Prepared By: Appr• ed/Endorsed By:
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Senior Purch.sing Analyst Divisio Head, finance &Treasurer
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Paul Bigioni
Director, Corpo _ - 'ces & City Solicitor
Recommended for the consideration
of Pickering City Council
28, Zot4
Tony Prevedel, P.Eng.
Chief Administrative Officer
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