Loading...
HomeMy WebLinkAboutStaff Report 288-09TO: HONORABLE CITY COUNCIL FROM: CITY MANAGER DATE: JUL Y 20, 2009 REPORT TYPE: Informational DEPARTMENT: ADMINISTRATIVE SERVICES CMR:288:09 SUBJECT: City of Palo Alto's Energy Risk Management Report for the Third Quarter, Fiscal Year 2009 lnis is an infonnational report and no Council action is required. EXECUTIVE SUMMARY Staff has continued to purchase electricity and gas in compliance with the City's Energy Risk Management Policies and Procedures. Despite the current volatility in the credit and financial markets, and a decline in credit quality for a few of the City's counterparties, the City's credit exposure in the commodity purchasing area is minimal. The 36-month mark to market value of the City's fixed price electricity purcha~es is negative $1.5 million. The 36-month mark to market value of the City's gas purchases is negative $10.6 million, Market prices for energy remained low during the quarter and the overall credit exposure to the City is low. 'Inc 12- month mark to market value of purchases of renewable power is negative $8.3 million, based on the forward wholesale price, The 12-month mark to market value of electricity from Western hydro is $1.2 million, while the value for Calaveras hydro is negative $5.7 million, The Mark to Market value represents the difference between the current market price and the contract price. There are no exceptions to report. BACKGROUND The purpose of this report is to inform the City Council of the status of the City's energy pOlifolio and transactions executed with energy suppliers as of the end of the third quarter of Fiscal Year 2009. The City's Energy Risk Management Policy requires that staff repOli on a CMR:288:09 Page 1 of 1 J quarterly basis to Council on: I) the City's energy portfolio; 2) the City's credit and market risk profile; 3) portfolio performance; and 4) other key market and risk information. Appendices A and B summarize the current position and exposure of the City with the electricity and gas commodity portfolios, respectively. Appendix A summarizes the electric portfolio in terms of forward purchase volumes, headroom (volume limit less current purchase volumes), and Mark to Market (M1M) (cUlTent market price less contract pricc). Appendix B summarizes the gas portfolio in terms of transaction volUllle, market value, Mark to Market value and limits. Appendices C and D provide details on the electric and gas portfolios, respectively. DISCUSSION The City obtains electricity from hydro electric resoUl'ces (referred to as Western and Calaveras), renewable landfill gas and wind generation contracts, and fixed priced forward market purchase contracts to meet its expected load demands. Fixed Price FOrw(lrd Electricity Purchases. The City currently has purchased supplies of electricity totaling 550,865 MWh for delivery betwecn April I, 2009 and December 31, 20 II. The average price for all ofthe fixed-price purchases is $53.59 per MWh, down from $54.22 last quarter. The City contracted with four approved counterparties: Shell Energy North America (SENA), Powerex, lP Morgan Chase and SClnpra Energy. Figure 1 below illustrates the sources of electricity supplies by month for the next 36 months in terms of megawatt hours (MWh). The 12-month Mark to Market (MTM) value of the City'S forward transactions for wholesale power was negative $1.52 million at the end of the quarter. Figure 2 presents the forward volumes and MTM positions for each electric supplier by month of delivery for all forward fixed price electricity contracts. The reduced value of the contracts, as compared to last qualter, is a result of the recent decline in energy prices. CMR:288:09 Page 2 of II 100.000 90,000 80,000 70,000 60,000 50.000 40,000 30,000 20,000 Figure 1. Load Resource Balance 10.000 ml~~t~~t~lrutJtI~ali~lI :llli:i)ldt~~Ij£lI:.c(bdblj2:.lt~ m ___ =~-=c--~=C-C-""'--I 0I.3JWos!em c:::.JCalaloeras ~Wind : r:::::::J LandfiU .. Geothermal , • ___ Total Load c:::::J Forward Contracts Non-Carbon Emitting Electricity. The City estimates that it will utilize non-carbon emitting electricity sources, including hydro power, for approximately 62% of the total annual electric load over the next 12 months, The 12 month MTM value of the City's forward positions for landfill gas and wind renewable power is negative $3.7 million, based on a wholesale power forward curve. Note that the Mark to Market is based on the forward price curve of wholesale power and does not reflect either the value of renewable attributes or a value of a shadow price of carbon. With regard to the hydro clechic purchases, which are not considered renewable under the State's Renewable Portfolio Standard, the 12-month MTM value of Westem hydro is $1.2 million, while the MTM value of Calaveras hydro is negative $5.7 million. This negative number for Calaveras means· that the costs are greater than the value of electricity for the next 12 months. Note that the Calaveras project provides other benefits to the City which have not been included in the market value. Therefore, the total value of the Calaveras project is not fully reflected in the MTM value. CMR:288:09 Page 3 of I I Figure 2. Electric Forward Volumes and Mark to Market Values as of March 31, 2009 Forward Electric Volumes (MWh) , 60,000 50,000 40,000 30,000 20,000 10,000 Forward Electric Mark to Market $300,000 $200,000 $100,000 $- $(100,000) $(200,000) $(300,000) $(400,000) $(500,000) Sempra $(600,000) Powerex $(700,000) JP $(800,000) CMR288:09 Page 4 of 11 Filled Price Forward Natural Gas. The City currently has purchased supplies of gas totaling 4.9 million MMBtu for delivery between April 1,2009 and January 2012. The average price for all of the fixed-price purchases is $6.40 per MMBtu, dowu from $6.95 last quarter. The forward purchases have been transacted with five approved counterparties: SENA (Shell Energy), Sempra, Powerex, ConocoPhillips and British Petroleum. The forward volumes and MTM values of all fixed price forward natural gas contracts by month and by cOUllterparty are presented in Figure 3. Figure 3. Gas Forward Volumes and Mark to Market Values as of March 31, 2009 CMR:288:09 450.000 400,000 350,000 300,000 250.000 200,000 150,000 100,000 50,000 Gas Forward Volumes (MMBtu) o ~~~~~~~~~~~~~~~~~ ~#~~~~##~~~~##~~~ $- $(100,000) $(200,000) $(300,000) $(400,000) $(500,000) Gas Forward Mark to Market $(600,000) 0 Powerex $(700,000) -F------\:: :1-----------1111 ConocoPhillips IEBP $(800,000) +----.......... ,--" ~-----........ --=~==='- $(900,000) .l...-_____ . __ . __________ .• ~. ____ • ____ ___J Page 5 of II Figure 4 presents the Mark to Market history for the 36-month wholesale fixed price purchases ofboili gas and electricity, It shows how the recent sharp decline in energy prices has altered the value of the City's electricity and gas portfolios, For electricity, the decline in Mark to Market value is also driven hy the forecast for low hydro generation due to the current drought conditions, Figure 4. Mark to Market Value of Gas and Electric Portfolio Mark to Market History Credit Risk To manage credit risk, staff reports on major credit rating agency (S&P and Moody's) scores, and ilie "expected default frequency" (EDF) using the Moody's KMV CreditEdge© and RiskCaIc© analytical tools, The EDF is an estimated probability iliat a counterparty will default in the next 12 monilis, The KMV tools allow staff to carry out "real-time" credit evaluations that include equity pricing and asset value changes that are not reflected in ilie static and annually- conducted credit rating agencies' repOlis, Credit risk has been of particular focus in recent monilis due to ilie extreme volatility in the credit markets, and the potential impact on Palo Alto's electricity and gas counterparties, It is important to note at the outset iliat the City has no exposure to any financially-based counterparty and that the City'S exposure in both the gas and electric positions has significantly declined in the quarter with the decline in wholesale market prices, The City's financially-based counterparties are JP Morgan Chase and Sumitomo, Under the City's current Risk Management Policy and ilie City's Pll-chasing Ordinance, ilie City is not permitted to transact with any cOlllterparty which ha~ an S&P rating below BBB-, unless CMR:288:09 Page 6 of 11 approved by City Council. Some exceptions to this prohibition are madc on a case-by-case basis, largely for suppliers of renewable energy. Table 1 shows how the Moody's KMV expected default frequency (EDF) ratings correspond to S&P credit categories. To be equivalent to a BBB-or better rating, any counterparty should have an EDF measure of D. 15% or lower. Table 1. Expected Default Rates and the Equivalent S&P Credit Cate2Qry Equlval$nt Median Bound Range Equivalent Median Bound Range Cradlt EDF credit Cr.dlt EDF cr.dlt Category mea$ure Lower Upper Category measure lower Upper AAA 0.0-1°/" O.O'!% 0.Q1% BB 0.25% 0.21% 0.33% M+ 0.02% Q.01% 0.02% SS-OA5% 0.33% 0.6'1% M 0.02% 0.02% 0.02% 8+ 0.830/1) 0.61% 1.12% AA-0.03% 0.02% 0.03% B 1.52% -1.12% 2.32% A+ 0.04% 0.03% 0.0.5% B-3.55% 2.32% 5.42% A 0.05% 0.05% 0.06% eee+ 8.28% 5.42% 12.00% A-0.06% 0.06% 0.07% eee '19.35% 12.66% 19.99% SBB-0.07% 0.07% 0,00% CCC-20.66% 19.99% 22.07% BBB 0,09% 0.08% 0.'10% CC 23.57.(J/o 22 07% 26.02% I BBB-Q 'J2% O.IO'Y, 0.'15% I e 28.72% 26.02% 35.00% BB+ 0:17% 0:15% 021% D 35.00% 35.00% 35.00% The volatility in the credit markets has significantly impacted the creditworthiness of some of the City's counterparties, especially in regard to those counterparties which are primarily financial institutions, notably Sumitomo and JP Morgan Chase. The City has Energy Mastel' Agreements signed with 7 counterparties in total: Sumitomo, JP Morgan Chase, Sempra, ConocoPhillips, Shell, Powerex and BP. In addition, the City has renewable electricity contracts with Pacificorp Power Marketing and Ameresco. Of this group of nine companies, the City currently has outstanding contracts with seven counterparties, as listed in Table 3, Table 4 and Table 5 below. Currently, the City has a credit exposure with only one counterparty, Powerex. Table 2 presents analysis of the changes in default rates in Palo Alto's publically traded counterparties in the last 90 days of trading as of January 1,2009. It shows the expected default rates of the City's financially-based countel'parties. As can be seen in Table 2, Sumitomo Corporation default rates have declined by 68 basis points, while default rates of JP Morgan Chase, the last oflhe City's financially-based counterparties, increased 37 basis points during the period. CMR:288:09 Page 7 of Ii Table 2. Changes in Expected Default Rates of Counterparties in the Last 90 Days EDF Credll Calegory Company Nome Current Previolls AmL. Ch£lnge % Change Clurent Previous 1 SUMITOMO CORPORATION "1.96% 2.65% -69 bp -26.04% B£l3 8'1 r 2 ROYAL BANK OF SCOTLAND GROUP PLe IT 1.'11% 0.26% +85 bp +3213.92% 802 8£101 r 3 JPMOHGAN CHASE & CO 0.78% 0.4-1% +37 bp +90.24% 801 8002 r 4 CONOCOPHILUPS 0.43% 0.18% +25bp +-138.89% 8002 A2 r 5 IBERDROLA SA 0.43% 0:11% +32bp +290.9'1% 8£102 All3 r 6 FPL GROUP INC 0.23% 0.2-1% +2 bp +9.52% A3 A3 r 7 SEMPRA ENERGY 0.10% 0.07% +3bp +42.86% A03 An2 r B ROYAL DUTCH SHELL PLC 0:10% 0.06% +4bp +60.67% A03 A02 r 9 BP PLC 0.06% 0.05% +1 bp +20.00% A£fl Arrl r '10 SCOTTISH POWER PLC 0.0-1% 0.02% ·"1 bp -50.00% Ana Aoa r Electricity. CPAU's electric supplier counterparty credit exposure and the supplier credit ratings are presented below. Note that City has a credit exposure only when the Mark to Market value is positive. CPAU's largest exposure, in excess of $209,000, is with Powerex. Powerex is a wholly owned subsidiary of British Columbia Hydro Authority, owned by the provincial government of British Columbia (Canada) which is rated AAA, the highest rating given. Table 3. Electricity Suppliers -Credit Exposure and Credit Ratings as of March 31 2009 , Current Expected "Loss" Total Mark to S&P Expected Counterparty Market Ranking Default (MTM x Expected Default Frequency Frequency) JP Morgan Chase $ -420,941 A+ 0.78 $ 0 Shell $ -1,063,605 A-0.10 $ 0 Powerex $ 209,592 AAA 0.Q1 $ 20 Sempra $ -268,181 AA-0.10 $ 0 Total $ -1,543,13 5 ~i\'}sL't"'FFF:;',E?i:;: $ 20 Renewable Electricity. Palo Alto's contracts for renewable "green" energy include both wind contracts with Pacificorp Power Marketing (PPM) as well as contracts to convert landfill gas to electricity with Ameresco, Inc. The credit exposure and EDF ratings for these counterparties are presented below. CMR:288:09 Page 8 of 11 Table 4. 12 Month Renewable Energy Credit Exposure and Credit Ratings as of March 31,2009 • Counterparty 12-Month Current Expected "Loss" MTMValue Calculated (MTM x Expected Expected Default Default Frequency) Frequency • AIl1eresco, Inc. L--___ $ -980Jl6 0.25 $ 0 I Pacificorp Power Marketing' L--____ ... $ -2,708,001 0.01 $ 0 IT~~ .. _ $ -1,248,126 $ 0 " 1. Pacijicorp Power Marketmg credit IS supported by Scoltlsh Power. PLC, As Table 4 shows, the City does have contracts for renewable power with a counterparty whose EDF score is significantly higher than the 0.15% BBB-equivalent. This eounterparty is Ameresco, a renewable power developer with whom the City has three existing contracts and one pending long-term power contract. The City currently receives approximately 51,000 MWh of electricity from these projects annually. Ameresco is not publically traded and is not rated by any of the major credit rating agencies; the EDF score listed in Table 2 is based on staff's analysis of Ameresco's confidential financial reporting. While Ameresco's EDF score is below the BBB-equivalent, the current Mark to Market value is negative, resulting in no credit exposure to the City. In addition, the City has additional protections in these contracts which would allow the City to continue receiving the renewable power in the event of an Ameresco default. Natural Gas. As Table 5 shows, Mark to Market value of contracts with all five counterparties is negative. Because the current portfolio is valued less than the eontraet price, the City has no potential loss at present. Table 5 below ealeulates the loss whieh the City would suffer should one of its gas counterparties default. This loss is caleulated as the prhduct of expected default frequency and the MTM value. Table 5. Credit Exposure and Default Ratings of Natural Gas Suppliers as of March 31, 2009 Counter party CMR:288:09 TotalMTM Value S&P Ranking Current Expected Default Frequency Expected Loss (MTM x Expected Default Frequency) $ 0 Page 9 of II Supply Rat~stabilization Reserve Adequ~{;y A key premise to the City's risk maoagement practices centers on ensuring the adequacy of supply reserves with respect to the risks undertaken as a result of purchases of gas and electricity commodities. Table 4 below summarizes the current and projected supply reserve levels for gas and electricity as of March 31, 2009 based on the City's SAP financial system. Table 6. Supply Rate Stabilization Reserve Levels for Electricity and Gas ($ Millions) (Preliminary unaudited figures from City's Finaocial System) Beginning Unaudited Projected Reserve Balaoce Commodity Reserve Changes to ($ Millions) as of i Balaoce as Reserves : 6/30/09 of 6/30/08 FY2009* Electricity $ 47.3 $ (7.7) $ 39.5 Gas $ 7.3 I $ (3.7 ) $ 3.6 .. * AccountIng actIVIty figures to date reflect what has been booked mto the Clty's financial system. These figures are preliminary until outside auditors have completed their review and the Comprehensive Annual Financial Report is produced. There could be significant changes to the RSR balances based on year end adjustments that have not as yet been booked. The data presented in Table 6 and discussed below, are based on unaudited preliminary financial reports. These data are presented here to provide timely information to Council. The projected reserve balaoces listed above for gas and electricity are impacted by differences in accounting methodologies for the two reserves. All contracts aod commitments for purchases of gas for the fiscal year have been entered into the City'S SAP accounting system when the commitment is made, and therefore are included in the projected end of year balance. However electricity commitments for the remainder of the fiscal year are not entered into the financial system until the month of delivery. As a result, the projected balaoce for electricity is actually approximately $5.2 million lower thao the $39.5 million listed above, or $34.3 million. The current reserves for electricity are well above the minimuro and well above credit, regulatory aod other risks for the next 12 months. Total risks associated with the electric supply reserve for the next 12 months include: $2.0 million for credit reserves; $4.0 million for hydro risk; $4.3 million for market risk of the yet-to-be-purchased positions in the next 12 months; and $8.4 million for possible regulatory, operational and other risks. These risks total $18.7 million. With regard to gas, the current projected reserve level of $3.6 million is far below the minimuro level of $9.8 million as set by current policy. However, based on expected additional revenue in this fiscal year, total gas supply reserves are expected to be $8.4 million at the end of the fiscal year. Total risks to the gas supply reserve total $4.1 million. CMR:288:09 Page 10 ofll As always, changing market dynamics, intemational events, and othcr factors outside the City's control, can have a significant and adverse impact on the adequacy of reserves for both gas and electricity over a short timeframe. Staff monitors these factors as well as the financial condition of the City's counterparties on an on-going basis. Exceptions No exceptions were noted during the Quarter. ATTACHMENTS Appendix A. Electric Portfolio Summary Appendix B. Gas Portfolio Summary PREPARED BY: DEPARTMENT HEAD APPROVAL: CITY MANAGER APPROV AL: CMR:288:09 KARL VAN ORSDOL Energy Risk Manager L Director, Administrative Services Page 11 of 11 Appendix A -Electric Portfolio Summary Umlt report as Of: ffiYvH5CA'tfON$ Total Numbe-t of Deals Volumes Counterparty Amereseo 8P ConocoPhillips JPM an ChasE;! Patific Summit Energy PnW<ml1< PPM _ ca SENA Total )onoco~hiJl po ~orrz.an Chase ~ex rEi"tlpt SENA I Mark to Market '" :;onocoPhil ~ Se" SEI'i To. 3O-Mat-09 '~ Limit (Volume) FY Ending 09 ! FY Ending FY Ending 11 FY Ending FYEnding13 f12 months) 10 12 440,000 · · -6flil,OOO . · , -· . 800,000 · 600,000 45,800 109,200 --.' --660.000 109,565 32,385 53,975 55,225 - 660,000 - - . . 860,000: . 69,i35 22 oeo 44,180 · 650,000 308,225 154,1$5 55,225 -- #NIA I 534,025 327,U{) 153,381) I 55,225 - Unit; MWh FYending05l I FYEnding FY'" ~-11 I FYErKling I "YEn" " ~ months) I 10 ""owmg 12 .-wing ,000 ~,200 Rolling 12 12 Month FWd I Months M2M Credit Exposure Starting in APril-I Umit 09 -'lQ ~ N1A 1,34$,005 Z,51$,0S1 I~ I 660,000 609~Q99m __ §90,OOO 1- Violation Headroom S60 Total Credit Exposure-Limit FYEndlng14 FYEnding 15 -· · -, -. -. - ------· FY Ending 14 fY ~~ding 440:000 440.000 860,000 660,000 660 000: 660,000 500,000 ___ 600,000 • of O""n Transactions Startiog in Apri!~' ~~Q!" Violation Violation #N/A Headroom 00,000 5,OOO,i 7,500,; r,OSa,60S}! 1$ 3O,000,con 13511 #NlA #NlA