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Home My WebLink AboutFND-007-13 Clarbgton REPORT FINANCE DEPARTMENT Meeting: GENERAL PURPOSE AND ADMINISTRATION COMMITTEE Date: April 22, 2013 Resolution#: - 3 By-law#: Report#: FND-007-13 File#: Subject: ANNUAL COMMODITY HEDGING REPORT - 2012 RECOMMENDATIONS: It is respectfully recommended that the General Purpose and Administration Committee recommend to Council the following: 1. THAT Report FND-007-13 be received for information. iY Submitted by: (/ �r Reviewed by: � ancy T ylor, BA, Franklin Wu, CPA, CA, Chief Administrative Officer Director of Finance/Treasurer NT/CC/hjl CORPORATION OF THE MUNICIPALITY OF CLARINGTON 40 TEMPERANCE STREET, BOWMANVILLE, ONTARIO L1C 3A6 T 905-623-3379 REPORT NO.: FND-007-13 PAGE 2 1. BACKGROUND 1.0 Under Ontario Regulation 653/05, 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 of using the agreements, and confirmation that they comply with the Municipality's policies and goals. 1.1 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. 2. COMMENTS 2.0 Since 2008, considerable time has been spent to monitor the energy requirements and consumption patterns throughout the Municipality's operating departments. 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. On October 22, 2009, the Municipality signed an independent consulting agreement with Blackstone Energy Service Inc. for a term of three years with an option to renew for two one-year terms. The Municipality has extended the agreement with Blackstone Energy Service for one year to October 2013 with an option to extend to 2014. This agreement covers many services related to the Municipality's supply of Natural Gas including the supply of information relevant to decision making; arranging contracts for the continuous supply; analysis and reconciliation of usage. 2.1 Blackstone Energy Services Inc. working on the Municipality's behalf was authorized to enter into fixed priced natural gas agreements as per the procurement strategies and indicative prices agreed to. The contract meets the procurement goal of both reducing the risk and stabilizing the cost, as we have a fixed source of supply for 50% of the estimated requirement for each of the three years from 2009 to 2012 at a fixed price with the balance to be supplied on index. This fixed price contract expired in October 2012. The contract price of the supply of natural gas is reviewed and the fixed source is set once a year for the period of November 1, 2011 to October 31, 2012. The figures discussed in the next section reflect the impact of the initial price hedging efforts. 2.2 The 2012 budget used a price of $0.255 m3 for natural gas when calculating the $434,110 total value. This price was based on the actual rates charged in 2011 factored by Blackstone's projection. During the contract term — November 2011 REPORT NO.: FND-007-13 PAGE 3 to October 2012 - the weighted average price of natural gas we paid was $0.1723 per m3. The year to date (November 2011 to December 2012) weighted portfolio average was $0.1723 per m3. This pricing, combined with the mild winter in 2011/2012, resulted in a significant budget savings for the contract period. The System Gas rate for the same term is shown in the chart below. October 2011-December 2011 $0.1224 / m3 January 2012 — March 2012 $0.1118 / m3 April 2012 — June 2012 $0.0806 / m3 July 2012 — September 2012 $0.0859 / m3 October 2012-December 2012 $0.0895 / m3 The fixed price contract resulted in a somewhat higher cost than may have been realized if the supply had been purchased on index however, the Municipality would have had the risk of price volatility and lack of supply availability without the contract. 2.3 As of November 2012 the Municipality does not have a fixed price agreement on natural gas since the index gas rates have been relatively low. The market will be monitored with the intention of locking a portion of the Municipality's requirements in for a fixed price when fundamentals justify that action. 2.4 On December 9, 2009 the Municipality signed an Energy Management agreement with Blackstone Energy Services Inc. to cover Hydro related matters. The agreement is for a three year term with an option to renew for two one-year terms. The Municipality has extended the agreement with Blackstone Energy Service for one year to October 2013 with an option to extend to 2014. Blackstone shall provide the Municipality with supply and service proposals from suppliers, market analysis and hedging initiatives for the Municipality, along with other data management tools. Currently there is no call for hedging on electricity. 3. CONCURRENCE — not applicable REPORT NO.: FND®007®13 PAGE 4 4. CONCLUSION 4.0 The Municipality of Clarington had one commodity hedging agreement which ended in 2012. This agreement was consistent with the municipality's statement of policies and goals relating to the use of financial agreements to address commodity pricing and costs. 4.1 Currently the system gas prices are low. The market will be monitored with the intention of locking a portion of the Municipality's requirements in for a fixed price when fundamentals justify that action. 4.2 It is recommended that this annual commodity hedging report be received for information in compliance with Ontario Regulation 635/05. CONFORMITY WITH STRATEGIC PLAN The recommendations contained in this report conform to the general intent of the following priorities of the Strategic Plan: Promoting economic development X Maintaining financial stability Connecting Clarington Promoting green initiatives Investing in infrastructure Showcasing our community Not in conformity with Strategic Plan Staff Contact: Nancy Taylor, B.B.A., C.A., Director of Finance/Treasurer