HomeMy WebLinkAboutFIN 06-18Gly,
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Report to
Executive Committee
Report Number: FIN 06-18
Date: May 7, 2018
From: Stan Karwowski
Director, Finance & Treasurer
Subject: Commodity Price Hedging Agreements Report
Recommendation:
It is recommended that Report FIN 06-18 from the Director, Finance & Treasurer
regarding commodity price hedging agreements be received for information.
Executive Summary: The Commodity Price Hedging Policy FIN 060, approved by
Council per Resolution #88/10, requires a Report to Council at least once each fiscal
year with respect to any and all commodity price hedging agreements in place
containing, at a minimum, all information required by Section 6(1) 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 that 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 Commodity Hedging Price Agreements; and
3. Such other information as Council may require.
The City has entered into hedging agreements for the commodities of 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 Hedge Procurement Program currently includes
138 municipalities. It buys energy commodities at varying percentages of their total
volume through forward price hedge contracts, rather than being subject to 100% of the
price volatility through the Spot Market.
The City has elected to continue with Hedging 65% of both the City's natural gas and
electricity requirements while the remaining 35% is purchased at fluctuating Spot.
Market prices.
Report FIN 06-18 May 7, 2018
Subject: Commodity Price Hedging Agreements Report Page 2
Natural Gas
The 2018 draft natural gas budget is $375,852. To protect the City's budget plan, the
City has entered into the LAS Natural Gas Procurement Program for the period
November 1, 2017 to October 31, 2018 at the hedge price of 11.90/m3.
Electricity
The 2018 draft hydro budget for all City operations including streetlights is $3.05 million.
The LAS Electricity Procurement Program hedged purchase price is $21.41/MW
(program fees included), which equates to a per kWh contracted price of 2.141 ¢/kWh,
for the period of January 1, 2018 - December 31, 2018. This results in an expected all-
inclusive commodity cost of 11.8480/kWh.
Discussion: Volatile shifts in utility pricing create significant challenges in
maintaining utility budgets. This uncertainty in energy pricing can impact decision
making and cost controllability for the City. The LAS Hedge Procurement Program
stabilizes energy pricing, which assists in maintaining the Council approved budget
every year. The City has hedged 65% of the City's municipal natural gas and electricity
requirements at the prices contained in this report with the remaining 35% of the City's
energy consumption being purchased at spot market prices for the 2018 term. This
spot market exposure provides cost savings opportunities to the City compared to the
current Regulated Price Plan (RPP) for eligible accounts, in addition to the price stability
provided by the hedge purchase price.
LAS Natural Gas Hedge Procurement Program — Enrolled April — 2006
Commodity Expenditure — 2017 - $315,131
Current Contract Price - November 1, 2017 - October 31, 2018 - 11.90/ni3
Hedged Volume — 65%
The LAS 2018 hedged purchase price for the purchase only portion of natural gas
decreased by 7.75% (or 10/m3) from the 2017 rate. However, the delivery charge has
increased over the same period as the province began including a Cap & Trade charge
of 3.35 ¢/m3to the delivery charges beginning January 1, 2017 which offsets any
potential savings from the lowered hedge purchase price.
LAS Electricity Procurement Program — Enrolled January — 2011
Commodity Expenditure — 2017 — $2,494,137
Current Contract Price — January 1, 2018 — December 31, 2018 — 2.1410/kWh
Total Expected LAS Commodity Rate — 12.7230/kWh which includes: 65% Hedge
Price + 35% Average Hourly Ontario Energy Price + Average Global Adjustment
The LAS 2018 hedged purchase price portion decreased by 10% (or 0.229¢/kWh) from
the 2017 rate. It is estimated that an all-inclusive cost avoidance of 0.477¢/kWh should
be realized, compared to the average Time of Use rates of 13.2¢/kWh. Additionally,
LAS hedged a block of off-peak power for municipal streetlight accounts that is
Report FIN 06-18 May 7, 2018
Subject: Commodity Price Hedging Agreements Report Page 3
expected to provide a rate of 11.8480/kWh. However, due to an expected increase in
the Global Adjustment Average Rate and Ontario's Average Hourly Energy pricing, an
increase to the overall cost of electricity is expected to increase 0.6660/kWh or 5.5%
compared to the 2017 all-inclusive rate.
Treasurer's Statement:
The objectives of the LAS bulk hedging procurement programs are generally
synonymous with our municipal objectives:
Facilitates Budgeting — purchasing blocks of energy commodities will produce stable
prices for budgeting,
Competitive Pricing — provides savings on required purchases; and
Maximize Purchasing Power -- pooling requirements with 134 municipalities and over
170 participating organizations 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
when prices fall and protects the City as much as possible when prices rise. The
hedging program also helps the City to partially offset natural gas and electricity cost
increases due to the Province's Cap and Trade Program and fluctuations in the Global
Adjustment Rate for electricity. Annual price stabilization and price benefits from hulk
procurement along with individualized support, advice and consumption data reports,
provides the City with a means to monitor its usage and more accurately forecast its
annual utility budgets.
Attachments: None
Pre•ared By:
Ray R■drigues
Manager, Supply & Services
Approved / Endorsed By:
Stan Karwowski
Director, Finance & Treasurer
Recommended for the consideration
of Pickering Cit uncia
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Tony Prevedel, P. Eng.
Chief Administrative Officer