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HomeMy WebLinkAboutFSD-007-25Staff 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: March 3, 2025 Report Number: FSD-007-25 Authored by: Trevor Pinn, Deputy CAO/Treasurer, Finance and Technology Submitted By: Trevor Pinn, Deputy CAO/Treasurer, Finance and Technology Reviewed By: Mary-Anne Dempster, CAO By-law Number: Resolution Number: File Number: Report Subject: 2024 Annual Commodity Hedging Report Recommendation: 1.That Report FSD-007-25, and any related delegations or communication items, be received for information. Municipality of Clarington Page 2 Report FSD-007-25 Report Overview This report complies with the annual requirement to report to Council on the status of the existing commodity hedging agreements. The Municipality hedged natural gas in 2023 and 2024 to mitigate risks resulting from market volatility. 1. Background Regulatory Requirements 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 policy CP-008 Commodity Hedging Policy in report FSD-007-24. The Policy delegates responsibilities for administration of the hedges and entering into contracts to secure the commodities to the Deputy CAO/Treasurer or designate. 2. 2024 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 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 Municipality of Clarington Page 3 Report FSD-007-25 pools – Dawn (southwestern Ontario) and Empress (western Canada). The Municipality’s natural gas is now supplied from the Dawn hub. Hedges in Place During 2024 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. 2.5 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 the second was from November 2023 to October 2024, where 40% was hedged. 2.6 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%. 2.7 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. 2.8 In September 2024, the Municipality entered into additional hedges. From November 2024 to October 2025, an additional 30% of the supply was hedged based on anticipated seasonal and market conditions. For November 2025 to October 2026, 30% of the supply was hedged to mitigate the risk of supply fluctuations. 2.9 Based on the recommendation of Blackstone Energy Services, the Municipality entered into the hedging agreements impacting the 2024 fiscal year, all via the Dawn hub, shown in the following chart: Date Range Price ($/GJ) Cost ($/m3 ) Percentage of Portfolio (%) Comments November 1, 2023 to October 31, 2024 5.350 0.2060 40 Fixed Municipality of Clarington Page 4 Report FSD-007-25 Date Range Price ($/GJ) Cost ($/m3 ) Percentage of Portfolio (%) Comments November 1, 2024 to October 31, 2025 5.595 0.2150 30 Fixed November 1, 2025 to October 31, 2026 5.575 0.2140 20 Fixed November 1, 2024 to October 31, 2025 3.600 0.1404 30 Fixed November 1, 2025 to October 31, 2026 4.095 0.1597 30 Fixed Notes: Costs are landed and do not include local toles from CDA Enbridge to Union Dawn. Gigajoules (GJ) conversion to cubic meters (m 3) assume 1 GJ = 26 m3. 2.10 The following chart shows the Enbridge natural gas rates, including transportation. Period Weighted Average Cost January 1 to March 31, 2023 $0.2580/m3 April 1 to June 30, 2023 $0.1959/m3 July 1 to September 30, 2023 $0.2032/m3 October 1 to December 31, 2023 $0.1657/m3 January 1 to March 31, 2024 $0.1518/m3 Municipality of Clarington Page 5 Report FSD-007-25 Period Weighted Average Cost April 1 to June 30, 2024 $0.1348/m3 July 1 to September 30, 2024 $0.1358/m3 October 1 to December 31, 2024 $0.1643/m3 Price on Bill 2.11 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 th e year, similar to the concept behind consumer “equal billing” plans. 2.12 The POB was reviewed in 2022 and adjusted upwards to $0.45/m 3 to compensate for increasing natural gas prices. In 2023, the POB was reduced to $0.35/m 3 from March 2023 to June 2023. In July 2023 the POB was reduced to $0.20/m 3. In July 2024, the POB was reviewed and reduced to $0.16/m 3, and it is anticipated to remain at that level for most of 2025. 2.13 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. 2.14 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 requirements during the winter months at a fixed price with a reasonable consumption estimate. Electricity Hedging 2.15 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 strips during peak use periods such as summer cooling. Hedging of the electricity Municipality of Clarington Page 6 Report FSD-007-25 commodity does not reduce the Global Adjustment charges. Blackstone does provide market updates on the electricity market. 3. Financial Considerations 3.1 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. 3.2 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. 4. Strategic Plan Not Applicable. 5. Climate Change Not Applicable. 6. Concurrence Not Applicable. 7. Conclusion It is respectfully recommended that Council receive this report. Staff Contact: Trevor Pinn, CPA, CA, Deputy CAO/Treasurer, 905-623-3379 x2602 or tpinn@clarington.net. Attachments: Not Applicable Interested Parties: There are no interested parties to be notified of Council's decision.