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HomeMy WebLinkAboutFND-007-19Clarftwn Finance 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: March 25, 2019 Report Number: FND-007-19 Resolution: #GG -181-19 File Number: By-law Number: Report Subject: Annual Commodity Hedging - 2018 Recommendation: That Report FND-007-19 be received for information. Municipality of Clarington Page 2 Report FND-007-19 Report Overview This report complies with the annual reporting requirements to report to Council the status of the existing commodity hedging agreements. 1. Background 1.1 Under the 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 of using the agreements 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 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 commodity price hedging. The Director of Corporate Services or designate is responsible for the procurement and contractual administrative matters pertaining to commodity price hedging. 2. Comments 2.1 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 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. The term was for November 1, 2014 to October 31, 2017 with an option to extend for two additional one year terms. The Municipality has extended the agreement to October 31, 2019. 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 and forecasting of natural gas pricing pressures. 2.2 Blackstone Energy Services Inc. working on the Municipality's behalf is authorized to enter into fixed priced natural gas agreements as per the procurement strategies and to the agreed indicative prices. Previously natural gas was supplied from three pools — Dawn (southwestern Ontario), Empress (western Canada) and Central Delivery Area Municipality of Clarington Resort FND-007-19 Page 3 (CDA). All of the Municipality's natural gas is now supplied from the Dawn hub as of November 1, 2017. 2.3 In 2017, in consultation with Blackstone, the Municipality entered into the hedging agreements as shown below in the chart. Some of the hedge dates are updated to November 1, 2018 to reflect the change in the source of the natural gas supply through the Dawn hub. From November 2017 to October 2019, 100% of the gas supply is hedged. Further notes from Blackstone explain that 5A is a monthly index for price for natural gas which is calculated by taking the average of daily weighted average same day trade prices in a given month. This particular index is at a particular gas hub called AECO (which is in Alberta). Every day Blackstone calculates the weighted average trade price at AECO, for same day purchases. Then the prices are averaged over the month to calculate the 5A rate. The +x.xx is a rate adder which represents the transportation to Dawn from AECO. For example in December 5A settled at 1.5314, and the total price would be 1.5314 + 2.20 = $3.7314/GJ. If there is value, Blackstone will buy gas this way instead of buying it directly at Dawn. Note that all these hedges include some transportation costs for delivery to Dawn. Date Range Pool Price % of Comments ($/GJ) Portfolio November 1, 2017 to October 31, 2018 Dawn 4.45 28% Fixed Rate November 1, 2017 to October 31, 2018 Dawn 5A+1.59 40-43% Indexed Rate November 1, 2017 to October 31, 2019 Dawn 4.24 26-28% Fixed Rate November 1, 2018 to October 31, 2019 Dawn 5A +2.20 48% Indexed Rate November 1, 2018 to October 31, 2019 Dawn 5A +1.25 26% Indexed Rate Municipality of Clarington Resort FND-007-19 Page 4 2.4 A component of the natural gas pools is the setting of the Minimum Daily Volume (MDV). The MDV amounts were changed as shown in the chart below based on past natural gas consumption, climate change projections for the next year. 2.5 Another element 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 over the year. Blackstone does provide recommendations for the price on bill and the Municipality can change the price on bill at any time. Since October 2016, the price on bill has been set at $0.14/m3. This price has been used for 2017 and 2018 budget projections. Due to projections received from Blackstone January 2019, the POB was increased to $0.1905 effective February 1, 2019. The POB will be reviewed in October 2019. 2.6 The weighted average cost of natural gas purchases from November 2017 to October 2018, not including balancing deals, was $3.80/GJ. This would equate to $0.1474/m3. Note that bulk natural gas is priced in GJ which is an energy unit compared to billing on account in m3 which is a volume measurement unit. 2.7 The combination of the hedges, MDV, POB and actual natural gas consumption combine to determine if a balancing transaction is required in the pools. This is always done at the end of the natural gas year in October. In 2017 Clarington had a substantial surplus so a withdrawal of $60,000 was taken from the Blackstone account. In October 2018, Clarington purchased 3,674 GJ of gas at a total cost of $16,422.78 taken from our accumulated surplus to balance our account. With the change in the POB to $0.1905 the hedging account is projected to break even as of October 2019. The natural gas market and the account balance of the Municipality's hedging account are monitored on a regular basis. 2.8 These contracts met the procurement goal of both reducing risk and stabilizing the cost. The Municipality has a fixed source of supply up to October 2019 at a reasonable cost with an appropriate consumption estimate. The current hedges have resulted in overall cost savings to the Municipality. 2.9 To date, the Municipality has not hedged for electricity. The structure of electricity hedging is different from natural gas. A significant component of electricity bills on the November 2017 to October 2018 November 2018 to October 2019 Dawn Hub 141 154 2.5 Another element 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 over the year. Blackstone does provide recommendations for the price on bill and the Municipality can change the price on bill at any time. Since October 2016, the price on bill has been set at $0.14/m3. This price has been used for 2017 and 2018 budget projections. Due to projections received from Blackstone January 2019, the POB was increased to $0.1905 effective February 1, 2019. The POB will be reviewed in October 2019. 2.6 The weighted average cost of natural gas purchases from November 2017 to October 2018, not including balancing deals, was $3.80/GJ. This would equate to $0.1474/m3. Note that bulk natural gas is priced in GJ which is an energy unit compared to billing on account in m3 which is a volume measurement unit. 2.7 The combination of the hedges, MDV, POB and actual natural gas consumption combine to determine if a balancing transaction is required in the pools. This is always done at the end of the natural gas year in October. In 2017 Clarington had a substantial surplus so a withdrawal of $60,000 was taken from the Blackstone account. In October 2018, Clarington purchased 3,674 GJ of gas at a total cost of $16,422.78 taken from our accumulated surplus to balance our account. With the change in the POB to $0.1905 the hedging account is projected to break even as of October 2019. The natural gas market and the account balance of the Municipality's hedging account are monitored on a regular basis. 2.8 These contracts met the procurement goal of both reducing risk and stabilizing the cost. The Municipality has a fixed source of supply up to October 2019 at a reasonable cost with an appropriate consumption estimate. The current hedges have resulted in overall cost savings to the Municipality. 2.9 To date, the Municipality has not hedged for electricity. The structure of electricity hedging is different from natural gas. A significant component of electricity bills on the Municipality of Clarington Page 5 Report FND-007-19 larger accounts such as the recreation facilities is the Global Adjustment. Electricity hedging could be used to mitigate the cost of the electricity but would not affect the Global Adjustment cost. Electricity hedging could be explored in the future. 3. Concurrence This report has been reviewed by the Director of Corporate Services who concurs with the recommendations. 4. Conclusion 4.1 The Municipality of Clarington has natural gas commodity hedging agreements in place up to October 2019. These agreements are consistent with the Municipality's statement of policies and goals relating to the use of financial agreements to address commodity pricing and costs. 4.2 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, 2001. Submitted by: :55 7Z�� `4'4" RPx/iPx/ved by. Trevor Pinn, B.Com, CPA, CA, Director of Finance/Treasurer Andrew C. Allison, B. Comm, LLB 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.