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HomeMy WebLinkAboutFND-008-17Finance Department Report If this information is required in an alternate accessible format, please contact the Accessibility Coordinator at 905-623-3379 ext. 2131. Report To: General Government Committee Date of Meeting: April 18, 2017 Report Number: FND-008-17 Resolution: GG-225-17 File Number: By-law Number: Report Subject: Annual Commodity Hedging - 2016 Recommendations: 1.That Report FND-008-17 be received for information. Municipality of Clarington Report FND-008-17 Page 2 Report Overview This report complies with the annual reporting required under Ontario Regulation 653/05 of the Municipal Act with respect to Commodity Hedging for 2016. The Municipality of Clarington did not have any hedging agreements in 2016. 1. Background Under Ontario Regulation 635/05, the Treasurer is required to report annually to Council the status of existing commodity hedging agreements, including a comparison of the expected results to actual using the agreements and confirmation that they comply with the Municipality’s policies and goals. As required by the Municipal Act, 2001, Council adopted a Commodity Price Hedging Agreements Statement of Policies and Goals in report COD-054-08, on Monday October 6, 2008. In this statement of policies and goals, the responsibilities are delegated as follows. The Director of Finance/Treasurer or designate is responsible for the financial administrative matters pertaining to the commodity price hedging. The Director of Corporate Services or designate is responsible for the procurement and contractual administrative matters pertaining to the commodity price hedging. 2. Comments As Clarington did not have any hedging agreements, the comments below are intended to provide the context around the ongoing activity and analysis that occurs on this file. Clarington has monitored the energy requirements and consumption patterns throughout the Municipality’s operating departments since 2008. This information together with the procurement strategy aimed at reducing risk and stabilizing cost continues to focus on the need for a stable natural gas supply contract. The Municipality has an energy consulting agreement with Blackstone Energy Consulting for the term of November 1, 2014 to October 31, 2017 with an option to extend for two additional one year terms. This agreement covers many services related to the decision making; arranging contracts for the continuous supply; analysis and reconciliation of usage; and forecasting of natural gas pricing pressures. Blackstone Energy Services Inc. working on the Municipality’s behalf is authorized to enter into fixed price natural gas agreements as per the procurement strategies and to the agreed indicative prices. The 2016 budget used a price of $0.205 m3 for natural gas when calculating the $381,880 total value. The 2017 budget used a price of $0.14 m3 for natural gas when Municipality of Clarington Report FND-008-17 Page 3 calculating the $374,830 total value. This price was based on the projected rates from Blackstone’s analysis of the market. One component of the natural gas purchasing is that the Municipality sets the price on bill (POB). The price on bill is set to estimate the average cost of the gas factoring in transportation costs. Setting the price on bill reduces the fluctuations from one period to another. Blackstone does provide recommendations for the price on bill and the Municipality has the right to change the price on bill at any time. The natural gas year is from November 1 to October 31. During this period the Municipality may use more gas than estimated during heating season and use less gas during the cooling season. These differences are settled in the Municipality’s account at Blackstone with the three (3) gas pools/suppliers (Empress, Dawn, and CDA). As of October 31, there may be a balance of gas owing or a surplus of gas to be sold in the market based on the gas supply obligation calculated from the estimate required versus actual usage. Blackstone provides advice on the best time to settle the gas account for the best price. As well, the price differences between the price on bill and the market gas prices (or hedge price if applicable) is settled in the account. At the time of the 2016 budget preparation the budget price of $0.205 was recommended. However, during 2016 due to a number of market factors natural gas prices were lower than expected. As well, overall the weather was milder. In October 2016, the Municipality reduced the price on bill to $0.14 and has not change d the price on bill since. In 2016, the combination of these factors created a surplus in Clarington’s account in Blackstone of approximately $100,000. Clarington requested a payment of $60,000. The remaining balance was left to be used towards the gas account for the 2016/2017 year. The $60,000 was put in the Municipal Enterprise Reserve Fund to be used towards repaying the Energy Master Plan Phase 1 project costs. Blackstone sends Monthly Reporting Packages and Clarington reviews their account on a regular basis. As noted for 2016, the Municipality did not enter any hedging agreements. It was recommended that a hedge would not be required because of the prediction of a milder winter and low natural gas prices due to increased supply. Currently Clarington does not hedge in the electricity market. Blackstone has indicated that it may be beneficial to look at electricity hedging going forward. The Municipality has focused on energy retrofits in an effort to reduce electricity consumption. 3. Concurrence This report has been reviewed by the Director of Corporate Services who concurs with the recommendations. Municipality of Clarington Report FND-008-17 Page 4 4. Conclusion The Municipality of Clarington did not have a natural gas commodity hedging agreement in 2016. The Municipality did enter into natural gas commodity hedging agreements effective January 2017. The results will be reported on in the 2017 annual update. The market will continue to be monitored by the Municipality and Blackstone Energy Consultants during the term of the consultation agreement. Commodity hedging is based on recommendations from Blackstone and the evaluation of the Municipality’s needs going forward. It is respectfully recommended that this annual commodity hedging report be received for information in compliance with Ontario Regulation 635/05 of the Municipal Act. 5. Strategic Plan Application The recommendations contained in this report conform to the Strategic Plan. Submitted by: Reviewed by: Nancy Taylor, BBA, CPA, CA, Curry Clifford, MPA, CMO Director of Finance/Treasurer Interim CAO Staff Contact: Catherine Carr, Manager of Internal Audit, 905-623-3379 ext. 2606 or ccarr@clarington.net There are no interested parties to be notified of Council's decision.