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HomeMy WebLinkAboutFIN 06-18Gly, DICKERING 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 .4()Jl,2c(B Tony Prevedel, P. Eng. Chief Administrative Officer