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Report To: General Government Committee
Date of Meeting: February 5, 2024 Report Number: FSD-007-24
Submitted By:
Reviewed By:
Authored by:
Trevor Pinn, Deputy CAO/Treasurer, Finance and Technology
Mary-Anne Dempster, CAO Resolution#:
Trevor Pinn, Deputy CAO/Treasurer, Finance and Technology
File Number: By-law Number:
Report Subject: 2023 Annual Commodity Hedging Report and Commodity Hedging Policy
Update
Recommendations:
1.That Report FSD-007-24, and any related delegations or communication items, be
received;
2.That the Commodity Hedging Policy attached to Report FSD-007-24, as attachment
1, be approved;
3.That Schedule B to Report COD-054-08, as the “Commodity Price Hedging
Agreements Statement of Policies and Goals” be replaced by the “Commodity
Hedging Policy” and
4.That all interested parties listed in Report FSD-007-24, and any delegations be
advised of Council’s decision.
Municipality of Clarington Page 2
Report FSD-007-24
Report Overview
This report complies with the annual requirements to report to Council on the status of the
existing commodity hedging agreements. The Municipality hedged natural gas in 2023 to
mitigate risks resulting market volatility.
This report also provides an updated, modernized, policy for Commodity Hedging replacing
the previous policy statement from 2008.
1. Background
1.1 Under Ontario Regulation 653/05, the Treasurer must report on an annual basis to
Council regarding the status of existing commodity hedging agreements, including a
comparison of the expected results to the actual use of the arrangements and
confirmation that they comply with the Municipality’s policies and goals.
1.2 As required by the Municipal Act, 2001, Council adopted a Commodity Price Hedging
Agreement Statement of Policies and Goals in report COD-054-08, on October 6, 2008.
In this statement of policies and goals, the responsibilities are delegated as follows:
a. The Deputy CAO/Treasurer (at the time Director of Finance/Treasurer) or designate
is responsible for the financial administrative matters pertaining to commodity price
hedging.
b. The Director of Corporate Services or designate is responsible for the procurement
and contractual administrative matters pertaining to commodity price hedging.
1.3 The designate for the Director of Corporate Services was the Purchasing Manager.
Following the 2020 reorganization, this position has moved to the Finance and
Technology Department and reports to the Deputy CAO/Treasurer.
2. 2023 Annual Reporting Matters
Natural Gas Hedging
2.1 Through the Co-operative Buyers Group, Request for Proposal issued by the Region of
Durham and approved through Report COD-003-20, the Municipality has an existing
energy consulting agreement with Blackstone Energy Services Inc., Toronto, for the
provision of consulting and related services for the supply of natural gas. Blackstone
acts as an independent agent of the Municipality of Clarington to execute direct
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Report FSD-007-24
purchase agreements. The term is for three years with an option to extend two
additional one-year terms.
2.2 The Municipality’s energy consumption trends have been studied since 2008. Detailed
budget estimates are made based on these consumption trends and pricing projections
of the various utilities, including natural gas, for the Municipality’s operating
departments. This information and the procurement strategy aimed at reducing risk and
stabilizing cost continue to focus on the need for a stable natural gas supply contract.
2.3 Blackstone Energy Services Inc., as directed by the Municipality of Clarington, is
authorized to enter into fixed-priced natural gas agreements as required, considering
market conditions at any given time. Previously, natural gas was supplied from two
pools – Dawn (southwestern Ontario) and Empress (western Canada). The
Municipality’s natural gas is now supplied from the Dawn hub.
2.4 The Municipality of Clarington has natural gas commodity hedging agreements up to
October 2026. These agreements are consistent with the Municipality’s statement of
policies and goals for using financial agreements to address commodity pricing and
costs. In May 2022, in consultation with Blackstone, the Municipality entered into two
hedging agreements. One was from November 2022 to October 2023, where 50% of
the gas supply was hedged, and a second was from November 2023 to October 2024,
where 40% was hedged.
2.5 In December 2022, the Municipality entered into additional hedges after consultation
with Blackstone. From November 2022 to March 2023, 20% of the supply is based on
an anticipated colder winter season. As well as for the period November 2024 to
October 2025 for 30% of the supply and for November 2025 to October 2026 for 20%.
2.6 Staff receive regular market intelligence and analysis on the natural gas market from
Blackstone Energy Services. With the information from Blackstone, the Municipality can
proactively respond to the market conditions to ensure a secure supply source and cost
certainty where determined to be prudent.
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Report FSD-007-24
2.7 Based on the recommendation of Blackstone Energy Services, the Municipality entered
into the hedging agreements, all via the Dawn hub, shown in the following chart:
Date Range
Price
($/GJ)
Cost
($/m3 )
Percentage of
Portfolio (%) Comments
November 1, 2022 to
October 31, 2023
7.650 0.294 50 Fixed
November 1, 2022 to March
31, 2023
7.435 0.286 20 Fixed
November 1, 2023 to
October 31, 2024
5.350 0.206 40 Fixed
November 1, 2024 to
October 31, 2025
5.595 0.215 30 Fixed
November 1, 2025 to
October 31, 2026
5.575 0.214 20 Fixed
Notes: Costs are landed and do not include local toles from CDA Enbridge to Union
Dawn. Gigajoules (GJ) conversion to cubic meters (m3) assume 1 GJ = 26 m3.
2.8 The following chart shows the Enbridge natural gas rates, including transportation.
Period Cost of Gas (including transportation)
October 1 to December 31, 2022 $0.3311/m3
January 1 to March 31, 2023 $0.2813/m3
April 1 to June 30, 2023 $0.1956/m3
Municipality of Clarington Page 5
Report FSD-007-24
Period Cost of Gas (including transportation)
July 1 to September 30, 2023 $0.2014/m3
October 1 to December 31, 2023 $0.2124/m3
January 1 to March 31, 2024 $0.1853
2.9 In May and December of 2022, there was much uncertainty in the natural gas market
due to several factors, including the Ukraine-Russia conflict. The Municipality entered
into the hedges to maintain some budgetary stability. The Municipality is well positioned
in the future with the current hedges for the next few years.
2.9 Another element of natural gas purchasing is that the Municipality sets the price on the
bill (POB). The POB is developed to estimate the average cost of the gas, factoring in
transportation costs. Setting the price on bill reduces the fluctuations over the year,
similar to the concept behind consumer “equal billing” plans. The POB was reviewed in
2022 and adjusted upwards to $0.45/m3 to compensate for increasing natural gas
prices. In 2023, the POB was reduced to $0.35/m3 from March 2023 to June 2023. In
July 2023 the POB was reduced to $0.20/m3 and will remain at this point for 2024. This
will be reviewed later in 2024.
2.10 The natural gas year is from November 1 to October 31. During this period the
Municipality may use more gas than estimated during the heating season and less
during the cooling season. These differences are settled in the Municipality’s account at
Blackstone with the gas suppliers. As of October 31, there may be a balance of gas
owing or a supply of gas to be sold in the market based on the gas supply obligation
from the estimate required versus actual usage. Blackstone advises the best time to
settle the gas account for the best price (or hedge price if applicable), which is settled in
the account.
2.11 The contracts met the procurement goal of reducing the risk and stabilizing the cost, as
we have a fixed source of supply for most of the estimated requirement during the
winter months at a fixed price with a reasonable consumption estimate.
Electricity Hedging
2.12 To date, the Municipality has not hedged electricity. The structure of electricity hedging
is different from natural gas. A significant portion of the large electricity accounts is the
Global Adjustment. Only the electricity commodity can be hedged, typically done in
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Report FSD-007-24
strips during peak use periods such as summer cooling. Hedging of the electricity
commodity does not reduce the Global Adjustment charges. Blackstone does provide
market updates on the electricity market. Electricity hedging could be explored in the
future, but it is not anticipated that the Municipality will be hedging electricity in 2024.
3. Commodity Hedging Policy
3.1 The last policy statement on Commodity Hedging was approved by Council in 2008. As
part of continuous improvement and updating policy formats to a consistent model, staff
felt it appropriate to bring an updated policy to Council for consideration. Changes to the
organizational structure since the initial policy also necessitated modernization of the
statement of policy and goals to reflect current responsibilities.
3.2 The Draft Commodity Hedging Policy, see Attachment #1, is based on research from
other municipalities, including the City of London. Adjustments have been made to suit
Clarington’s needs and policy framework.
4. Financial Considerations
4.1 Natural gas hedging is used to reduce risk in the volatility of pricing in our natural gas
needs. Hedging provides consistent pricing on the commodity, which provides
budgetary certainty. The Municipality enters into hedging agreements where it makes
financial sense and only after consultation with commodity advisors.
4.2 The Municipality will enter into commodity hedging arrangements where there is a
financial benefit to the Municipality. These benefits could include long-term financial and
budgetary stability.
5. Strategic Plan
5.1 Creating a Commodity Hedging Policy supports priority L.2.5 Maintain, protect and
invest in Municipal infrastructure and assets. Specifically, the policy will be used in
developing the funding strategy for future capital investments and continued service
delivery.
6. Concurrence
Not Applicable.
7. Conclusion
It is respectfully recommended that the Report be received to meet the reporting
requirements and that the new draft Commodity Hedging Policy be approved.
Municipality of Clarington Page 7
Report FSD-007-24
Staff Contact: Catherine Carr, Project Manager, Financial Systems and Policy, 905-623-3379
ext 2606 or ccarr@clarington.net.
Attachments:
Attachment 1 – Draft Commodity Hedging Policy
Interested Parties:
There are no interested parties to be notified of Council's decision.
Council Policy
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Number: CP-00#
Title: Commodity Hedging
Type: Financial Management
Sub-type: Financial Instruments
Owner: Finance and Technology
Financial Planning
Approved By: Council
Approval Date: February 26, 2024
Effective Date: February 26, 2024
Revised Date: Click or tap to enter a date.
Applicable to: All Staff
1.Legislative or Administrative Authority:
1.1. The Municipal Act, 2001, S.17(2) states that the Minister may make regulations
prescribing financial actions for the purpose of clause (1). This includes the
ability for the Municipality to enter into agreements for the purpose of
minimizing costs or financial risk associated with the incurring of debt.
1.2. The Province of Ontario Regulation 653/05: Debt-Related Financial
Instruments and Financial Agreements outlines the requirements for a
municipality to enter into an agreement under Part II of the Municipal Act, 2001
for the supply of a commodity and entering into a financial agreement to
minimize the cost or financial risk associated with incurring debt for the
commodity.
2.Purpose:
2.1. The purpose of this policy is to adopt a statement of the Municipality’s
commodity price hedging policies and goals. Section 6(1) of O.Reg. 653/05
requires the adoption of such a statement prior to the Municipality entering into
commodity price hedging agreements.
3. Scope:
3.1. This policy applies to all commodity price hedging agreements that the
Municipality may enter into.
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4. Definitions:
4.1. 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 other gem and other physical
goods but does not include chattel paper, a document of title, an instrument,
money or securities.
4.2. Commodity Price Hedging Agreement - A municipality that plans to enter an
agreement under Part II of the Municipal Act for the supply of a commodity
required for a municipal system may enter into one or more financial
agreements to minimize the cost or financial risk associated with incurring debt
for the commodity.
4.3. Contract Agent – means an external agent, contractor, consultant, or other
representative retained by the Municipality to assist with the procurement, sale
and/or delivery of commodities for the Municipality in accordance with the
Municipality’s Purchasing By-law.
4.4. Electricity Market - is a system for effecting purchases through bids to buy,
sales through offers to sell, and short-term trades, generally in the form of
financial or obligation swaps. Bids and offers use supply and demand
principles to set the price.
4.5. Energy Commodity - includes electricity, natural gas, propane, coal, and oil.
4.6. Municipality – the Corporation of the Municipality of Clarington.
5. Policy Requirements:
Statement of Commodity Price Hedging Policies and Goals.
5.1. The Municipality will consider commodity price hedging agreements as a
means of fixing, directly or indirectly, or enabling the Municipality to fix, the
price or range of prices to be paid by the Municipality for the future delivery of
some or all of the commodity or the future cost to the Municipality of an
equivalent quantity of the commodity, where it is advantageous for the
Municipality to do so.
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5.2. In determining whether a particular commodity price hedging agreement is
advantageous for the Municipality, the following will be considered:
5.2.1. Any and all projects of the Municipality are projects for which commodity price
hedging agreements will be appropriate;
5.2.2. If, at the time, it is the opinion that the fixed costs and estimated costs of the
Municipality will be reduced by virtue of the use of such an agreement;
5.2.3. If, at the time, it is the opinion that the future price or cost to the Municipality of
the applicable commodity will be lower or more stable than it would be without
the agreement;
5.2.4. If, at the time, the project includes a detailed estimate of the expected result of
using such an agreement;
5.2.5. If, at the time, it is the opinion that the financial and other risks to the
Municipality that would exist with the use of such an agreement will be lower
than the financial and other risks to the municipality that would exist without
such an agreement;
5.2.6. If, at the time, it is the opinion that the agreement contains adequate risk
control measures relating to such an agreement, such as:
a) Limited credit exposure based on credit ratings and/or on the degree of
regulatory oversight and/or the regulatory capital of the other party to the
agreement;
b) A standard agreement
c) Ongoing monitoring with respect to the agreement.
Authority and Accountability
5.3. The Deputy CAO, Finance and Technology/Treasurer is the designated person
responsible for the administrative matters pertaining to commodity price
hedging and will delegate certain administrative duties and responsibilities to
internal staff and external agents.
5.4. The Deputy CAO, Finance and Technology/Treasurer, or their designate, is
authorized to enter into contracts for the purpose of securing a physical supply
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of commodities that are required by the Municipality in its normal course of
operation and to engage a Contract Agent in accordance with the
Municipality’s purchasing policies.
Report on Commodity Price Hedging Agreements
5.5. If a municipality has any subsisting commodity price hedging agreements in a
fiscal year, the Treasurer of the Municipality shall prepare and present to the
municipal council once in that fiscal year, or more frequently if the council so
desires, a detailed report on all of those agreements. O. Reg. 653/05, s. 7 (1).
5.6. The report must contain the following information and documents:
5.6.1. 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.
5.6.2. 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.
5.6.3. Such other information as the council may require. Such other information as
the Treasurer considers appropriate to include in the report.
6. Roles and Responsibilities:
6.1. Council is responsible for:
6.1.1. Setting the Commodity Hedging Policy.
6.2. Chief Administrative Officer (CAO) is responsible for:
6.2.1. Ensuring the Municipality is compliant with this policy and the legislative
requirements of the Municipal Act, 2001.
6.3. Deputy CAO, Finance and Technology / Treasurer is responsible for:
6.3.1. Establishing relevant processes and controls for implementing commodity price
hedging agreements.
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6.3.2. Negotiating and administering all commodity price hedging agreements.
6.3.3. Ensuring that all commodity price hedging agreements comply with this policy.
6.3.4. Reporting to Council all required legislative information regarding commodity
price hedging agreements.
6.4. Directors / Managers are responsible for the following within their scope
of authority:
6.4.1. Ensuring that appropriate staff are trained on this policy.
6.5. All Staff are responsible for:
6.5.1. Ensuring compliance with this policy.
7. Related Documents:
7.1. O.Reg. 653/05
7.2. Purchasing By-law
8. Inquiries:
8.1. Manager, Financial Planning/Deputy Treasurer
8.2. Manager, Accounting Services/Deputy Treasurer
9. Revision History:
Date Description of Changes Approved By