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Ciro Resolution # 112/11 Report
Dated May 16, 2011 Executive Committee
PICKERING Report Number: CST 12-11
Date: May 9, 2011
5®
From: Gillis A. Paterson
Director, Corporate Services & Treasurer
Subject: Commodity Price Hedging Agreements
Ontario Regulation 291/09, Municipal Act, 2001
Recommendation:
That Report CST 12-11 of the Director, Corporate Services & Treasurer regarding
Commodity Price Hedging be received for information.
Executive Summary: The Commodity Price Hedging Policy under the Municipal Act,
Regulation 291/090, approved by Council per Resolution #88/10, requires the Director,
Corporate Services & Treasurer to report to Council, at least once each fiscal year,
regarding any and all commodity price hedging agreements.
The report shall contain, at a minimum, all requirements as set out in O. Reg. 291/09
(as it exists from time to time) and shall include:
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 into 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 Natural Gas Procurement Program hedged
purchase price has resulted in a stable annual price of 22.9¢/m3. The market rate for
natural gas as of December 30, 2010 is 15.4¢/m3. Although this rate is currently lower
than the current LAS program rate, it is expected that as current reserves are used up,
Report CST 12-11 May 9, 2011
Subject: Commodity Price Hedging Agreements Page 2
Ontario Regulation 291/09, Municipal Act, 2001
the market prices will start to rise to 20¢ - 25¢ /m3. It is anticipated that over the long
term, this contract will prove financially beneficial.
In addition, LAS continues to operate a program reserve fund. Member remittances,
beyond supply and program administration costs, are held in the reserve and rebated
back to members via an annual distribution; in August 2010 a rebate of $9,657.41 was
issued to the City for 2009 and the City expects a similar 2010 rebate as well. These
rebates lower the City's annual costs.
The Las Electricity Procurement Program hedged purchase price has resulted in a
stable annual price of 3.82¢/kWh plus the Provincial Benefit Charge of 2.80¢/kWh which
is lower than the new Regulated Price Plan (RPP) price of 7.4¢/kWh, even with the
average Provincial Benefit factored into the cost. LAS has also hedged a block of off-
peak power for municipal streetlight accounts that may realize up to 10% - 15% in
annual savings compared to current market rates.
Sustainability Implications: By joining the LAS programs, the City will reduce its
energy costs that in-turn will continue to assist the City in maintaining its financial
sustainability objectives.
Background:
LAS Natural Gas Program - Enrolled April - 2006
Commodity Expenditure - 2010 - $394,466
Current Contract Price - November 1, 2010 - October 31, 2011 - 22.9¢/m3
Hedged Volume - 70%
The current LAS Natural Gas Program price represents an 11.5% cost decrease for the
City from the previous LAS program price of 25.9 ¢/m3. LAS has also leveraged low
natural gas prices in 2010 to make additional purchases for the November, 2011 to
October, 2012 program year. With approximately 70% of the volume hedged for this
future period, LAS anticipates a program price of approximately 23¢/m3.
The LAS strategy for natural gas continues to be established with a view towards longer
term predictability and stability for budgeting. To ensure these objectives are met, LAS
continues to operate within a three year purchasing window, and has already purchased
25% of total requirements for the November 2012 period.
LAS Electricity Procurement Program - Enrolled January - 2011
Commodity Expenditure - 2010 - $1,668,000
Current Contract Price - January 1, 2011 - December 31, 2011 - 3.82¢/kWh plus
Provincial Benefit Charge of 2.80¢/kWh = 6.62¢/kWh
Hedged Volume - 70%
Report CST 12-11 May 9, 2011
Subject: Commodity Price Hedging Agreements Page 3
Ontario Regulation 291/09, Municipal Act, 2001
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LAS has hedged 70% of our municipal electricity requirements at the above price and
the remainder of our 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
c. Maximize Purchasing Power - pooling requirements can leverage better
pricing than individually.
The LAS Natural Gas and Electricity Procurement Program has provided the City a
sound commodity hedging strategy for natural gas and electricity, which benefits us as
much as possible from falling market prices and protects us as much as possible when
prices are rising. Excellent program administration utilizing industry experts provides a
reliable energy supply with the price benefits of bulk procurement. Annual price
stabilization and long term price predictability, along with individualized support, advice
and consumption data reports, provides the City a means to monitor our usage and
accurately forecast our annual utility budget.
Attachments:
1. Commodity Price Hedging Policy
Report CST 12-11 May 9, 2011
Subject: Commodity Price Hedging Agreements Page 4
Ontario Regulation 291/09, Municipal Act, 2001
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Prepared By: Approved/Endorsed By:
B. uzm Gillis A. Paterson
Senior Purch ing Analyst Director, Corporate Services & Treasurer
Co : Chief Administrative Officer
Recommended for the consideration
of Pickering Ci Council
Zoo, 20
Tony Prevedel, P. Eng.
Chief Administrative Officer
ATTACHMENT#-~_TO REPORT#.`/~. -
City Procedure
44
PICKERIN
Procedure Title: Commodity Price Hedging Procedure Procedure Number:
FIN 060-001
Reference: Date Originated: Date Revised:
April 28, 2010
Approval: Chief Administrative Officer Point of Contact: Director, Corporate Services &
Treasurer
.ti zo, v
61
Procedure Objective
To provide procedures for the provision of Commodity Price Hedging Agreements
where applicable.
Index
01 Definitions
02 Delegation of Responsibilities
03 Procedure
01 Definitions
01.01 City - The Corporation of the City of Pickering.
01.02 Treasurer - the Chief Financial Officer and Treasurer of The
Corporation of the City of Pickering.
01.03 Authority - the Treasurer or designate.
01.04 Contract Agent - means an individual or organization acting on
behalf of the City as an independent contractor, external to the City
to provide advice on a price hedging strategy and/or to execute
agreements and transactions to acquire a Commodity.
01.05 Commodity means, whether in the original or a processed state,
an agricultural product, a forest product, a product of the sea, a
mineral, a metal, a hydrocarbon fuel, electricity, a precious stone or
3J
i) evaluate the financial and other risks to the municipality that would
exist with the use of such an agreement and determine if such risk
would be lower than the financial and other risks to the municipality
that would exist without such an agreement;
j) use best judgment to determine that the agreement contains adequate
risk control measures;
k) ensure ongoing monitoring with respect to the commodity price
hedging agreements; and
1) report to Council at least once each fiscal year with respect to any and
all commodity price hedging agreements in place. The report shall
contain, as a minimum, all Provincial Government requirements as set
out in legislation and regulations of the Municipal Act and contain the
following information and documents:
• 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;
• 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
• such other information as Council may require.
Procedure Title: Commodity Hedge Pricing Procedure Page 3 of 3
Procedure Number: FIN 060-001
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other gem and other physical goods but does not include chattel
paper, a document of title, an instrument, money or securities.
01.06 Price Hedging Agreement - means a financial agreement to
provide price stability and/or minimize the cost, financial and other
risks associated with the procurement of a Commodity.
02 Delegation of Responsibility
The Treasurer, or designate, is authorized to enter into contracts for the purpose of
engaging a Contract Agent in accordance with the City's Purchasing Policy.
The Contract Agent will only be authorized to act within the scope of their specific authority
under any executed Contract and/or Agency Agreement with the City and shall, in
accordance with such a Contract or Agreement, provide services to the City.
03 Procedure
Any Commodity Price Hedging opportunities shall be submitted in writing, to the
Treasurer or designate, including an explanation and justification for the request. The
Treasurer for the City is the designated person responsible for administrative matters
pertaining to commodity price hedging. The Treasurer will:
a) determine whether a particular commodity price hedging agreement is
advantageous for the City;
b) determine if the request conforms to the Statement of Commodity
Price Hedging Policies and Goals;
c) determine if the request conforms to the definition of Commodity in
accordance with the Commodity Price Hedging Policy;
d) refer the request to a Contract Agent or appropriate City staff to
provide advice on a price hedging strategy and/or to execute
agreements and transactions to acquire the commodity;
e) delegate certain administrative duties and responsibilities to internal staff
and or external contract agents;
f) review any and all commodity purchases for which commodity price
hedging agreements will be appropriate;
g) ensure that either the financial position of the City will be enhanced by
virtue of the use of such an agreement or guarantee supply of the
commodity will be achieved by virtue of the use of such an agreement;
h) ensure that the all-inclusive contracted price and cost to the City of the
associated commodity will be lower or more stable than it would be
without the agreement;
Procedure Title: Commodity Hedge Pricing Procedure Page 2 of 3
Procedure Number: FIN 060-001