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HomeMy WebLinkAboutStaff Report 429-09TO: HONORABLE CITY COUNCIL FROM: CITY MANAGER DATE: NOVEMBER 16, 2009 REPORT TYPE: Information DEPARTMENT: ADMINISTRATIVE SERVICES CMR: 429:09 SUBJECT: City of Palo Alto's Energy Risk Management Report for the First Quarter, Fiscal Year 2010 This is an informational repmi 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 with one administrative exception. The credit quality for the City's active counterpatiies improved during the quarter and 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 purchases is $0.46 million. The 36-month mark to market value of the City's gas purchases is negative $6.4 million. Market prices for energy remained low during the quarter and the overall credit exposure to the City is low. The 12-month mark to market value of purchases of renewable power is $9.8 million when marked against the renewable energy Market Price Referent. The 12-month mark to market value of electricity from Western hydro is negative $6.3 million, and the value for Calaveras hydro is negative $3.4 million. The mark to market value represents the difference between the current market price and the contract price. This report is based on market prices and load and supply data as of September 30, 2009. BACKGROUND The purpose of this report is to inform the City Council of the status of the City's energy portfolio and transactions executed with energy suppliers as of the end of the first quarter of Fiscal Year 2010. The City's Energy Risk Management Policy requires that staff report on a quarterly basis to Council on: 1) 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. Attachment A and B summarize the current position and exposure of the City with the electricity and gas commodity portfolios, respectively. Attachment A summarizes the electric portfolio in terms of forward purchase volumes, headroom (volume limit less current purchase volumes), and Mark to mat·ket (MTM) (current market price less contract price). Attachment B summarizes the CMR:429:09 Page 10f9 gas portfolio in terms of transaction volume, 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 hydroelectric resources (referred to as Western and Calaveras), renewable landfill gas to energy and wind generation contracts, and fixed priced forward market purchase contracts to meet its expected load demands. Fixed Price Forward Electricity Purchases. The City currently has purchased supplies of electricity totaling 600,385 MWh for delivery between July 1, 2009 and December 31, 2011. The average price for all of the fixed-price purchases is $54.39 per MWh, up from $53.70 last quarter. The City contracted with four approved counterparties: Shell Energy North America (SENA), Powerex, JP Morgan Chase and Sempra Energy. Figure 1 below illustrates the sources of electricity supplies by month for the next 36 months in terms of megawatt hours (MWh). The 36-month Mark to market (MTM) value of the City's forward transactions for wholesale power was $461,630 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 quarter, is a result of the recent decline in energy prices. 120.000 100,000 80,000 ~ 60,000 40,000 20,000 0 ~ ~ ~ ~ ~ ~ ~ ~ Q ~ ~ ~ ~ ~. ~. ~ K. ~7 ~7 ~ ~7 ~7 ~7 ~ V,s> '0 '0 70 '0 7 7 7 7 '2 :,;> :,;> IlllliJ Western IIIIIIIIiI Calaveras' = Wind IB'1iE Landfill _ Geothermal I!!!!!!!!!I Wholesale -+-Total Load Non-Carbon Emitting Electricity. The City estimates that it will utilize non-cljl'bon emitting electricity sources, including hydro power, for approximately 63% 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 positive $9.8 million when marked against the CMR:429:09 Page 2 of9 California Public Utilities Commission's (CPUC) Market Price Referent (MPR). The MPR serves as the forward price curve for long-term renewable power contracts in California. The MPR represents the cost of comparable long term contract with a combined cycle 'gas turbine facility plus a carbon adder. The MPR is currently the best approximation of long-term renewable energy prices in lieu of a transparent and liquid renewable marketplace. Hydroelectricity With regard to the hydroelectric purchases, which are not considered renewable under the State's Renewable Portfolio Standard, the 12-month MTM value of Western hydro is negative $6.3 million, while the MTM value of Calaveras hydro is negative $3.4 million. This negative number for Calaveras means that the costs are greater than the value of electricity proj ected by the forward market curve 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. Figure 2. Electric Forward Volumes and Mark to Market Values as of September 30,2009 CMR:429:09 70,000 60,000 ~ 50,000 ~ 40,000 Electric Forward Volumes ~ 30,000 iHHTtvl1 IW-~=~'----'i " ;g 20,000 10,000 o ~ ~ ~ ~ '~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ df <::;",cf ,<.;1 ,?-<f )-1><:' ,?--I><b 01'1 <::;",cf ,<.;1 ,?-<i,<: )-1><:' ,?--I><b 01'1 <::;",cf ,<.;1 $400,000 $300,000 $200,000 $100,000 $- $(300,000) $(400,000) $(500,000) $(600,000) Electric Mark to Market DSENA OSempra ~ Powerex IllJP Chase Page 3 of9 Fixed Price Forward Natural Gas. The City currently has purchased supplies of gas totaling 4.7 million MMBtu for delivery between July 1,2009 and March 2012. The average price for all of the fixed-price purchases is $7.35 per MMBtu, up from $7.03 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 counterparty are presented in Figure 3. Figure 3. Gas Forward Volumes and Mark to Market Values as of September 30, 2009 400,000 350,000 :§' 300,000 §! 250,000 ~ 200,000 § 150,000 g 100,000 50,000 o ",0) ",0) ,,<;, ,,<;, ,,<;, ,,<;, ,,<;, ,,<;, ,," ,," ,," ,," ,," ,," ,,'l-,,'l-,,'l-~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ &~~~~~a~~~~~&~~~~ $200,000 $100,000 $0 -$100,000 _ -$200,000 e :;; -$300,000 ~ -$400,000 -$500,000 Gas Mark to Market -$600,000 U-tWI---------------j11: -$700,000 +---LJ--------------J- -$800,000 L _____________ ---'======:!...I CMR:429:09 Page 4 of9 Figure 4 presents the Mark to market history for the 36-month wholesale fixed price purchases of both gas and electricity. It shows how the recent uptick in energy prices has increased the value of the City's electricity and gas portfolios. Figure 4. Mark to Market Value of Gas and Electric Portfolio !O ~~-I~~~~~n~~~~~~~-~~-~'~~~~~~~I ~"3 -$ -$15L---------------------------------------~, Credit Risk To manage credit risk, staff reports on major credit rating agency (S&P aod Moody's) scores, aod the "expected default frequency" (EDF) using the Moody's KMV CreditEdge© aod RiskCalc© analytical tools. The EDF is ao estimated probability that a counterparty will default in the next 12 months. The KMV tools allow staff to carry out "real-time" credit evaluations that include equity pricing aod asset value changes that are not reflected in the static and annually- conducted credit rating agencies' reports. Credit risk has been of particular focus in recent months due to the 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 that the City has no exposure to any financially-based counterparty. The City's financially-based counterparties are JP Morgao Chase and Sumitomo. Under the City's current Risk Management Policy and the City's Purchasing Ordinance, the City is not permitted to transact with any counterparty which has an S&P rating below BBB-, unless approved by City Council. Some exceptions to this prohibition are made on a case-by-case basis, largely for suppliers of renewable energy. Table 1 illustrates how the Moody's KMV CMR:429:09 Page 5 of9 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 0.15% or lower. Table 1. Expected Default Rates and the Equivalent S&P Credit Category Equivalent Median Bound Range Equivalent Median Bound Range Credit EDF credit Credit EDF credit Category measure Lower Upper Category measure Lower Upper AAA 0.01% 0.01% 0.01% BB 0.25% 0.21% 0.33% AA+ 0.02% 0.0'1% 0.02% BB-0.45% 0.33% 0.61% AA 0.02% 0.02% 0.02% B+ 0.83% 0.61% 1 :12% AA-0.03% 0.02% 0.03% B '1.52% 1.12% 2.32% A+ 0.04% 0.03% 0.05% B-3.55% 2.32% 5.42% A 0.05% 0.05% 0.06% eee+ 8.28% 5.42% '12.66% A-0.06% 0.06% 0.07% eee 19.35% '12.66% '19.99% BBB+ 0.07% 0.07% 0.08% eee-20.66% '19.99% 22.07% BBB 0.09% . 0.08% 0.10% ee 23.57% 22.07% 26.02% 1'l:!i;!Bi,': . ;";":,:::',:':<: ','d'f:12%'" c'-' ?O,'W% ;·o:cn,<ffi; I e 28.72% 26.02% 35.00% BB+ 0.170/0 0.150/0 0.21% D 35.00% 35.00% 35.00% The City has Energy Master 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. During the quarter, the expected default rates of the City's counterparties declined or remained essentially stable. 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 September 30, 2009. As can be seen in Table 2, Sumitomo Corporation default rates have increased by 24 basis points, while default rates of JP Morgan Chase decreased 24 basis points during the period. CMR:429:09 Page 6 of9 Table 2. Changes in Expected Defanlt Rates of Connterparties in the Last 90 Days EOF Credit Category Company Name Current Previous Amt. Change % Change Current Previous 1 SUMITOMO CORPORATION 1.34% 1.10% +24bp +21.82% B1 Ba3 2 CONOCOPHILLIPS 0.46% 0.41% +5bp +'12.20% Baa3 Baa3 3 PG&ECORP 0.33% 0.29% +4bp +13.79% 8a02 Baa2 4 IBERDROLA SA 0.29% 0.41% -12bp -29.27% Sml2 B(la3 5 JPMORGAN CHASE & CO 0.16% 0.40% -24 bp -00.00% A3 Baa3 6 SEMPRA ENERGY 0.13% 0.12% +1 bp +8.33% A2 A2 7 ROYAL DUTCH SHELL PLC 0.1'1% 0.13% -2 bp -'15.38% A2 A2 8 BP PLC 0.06% 0.07% -1 bp -14.29% Aa2 Ao3 9 SCOTTISH POWER PLC 0.0'1% 0.02% -1 bp -50.00% Aaa A.a 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 $545,000, 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, Credit Ratings and Expected Default Rtf S t b 30 2009 a es as 0 eplem er , Current Expected "Loss" Counterparty Total Mark to S&P Expected (MTM x Expected Market Ranking Default Default Frequency Frequency) JP Morgan Chase $ -169,363 A+ 0.16 $ 0 Shell $ 170,146 A-0.11 $ 187 , Powerex $ 545,182 AAA 0,0} $ 54 Sempra $ -84,335 AA-0.13 $ 0 Total $ 461,630 1<":, I.';;;. i .. ' i\: .. ·.r\'·'.···;,·.,'·'; $ 241 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:429:09 Page 7 of9 Table 4. 12 Month Renewable Energy Credit Exposure and Credit Ratings Marked Against the Renewable Market Price Referent as of September 30, 2009 Counterparty 12-Month Current Expected "Loss" MTMValue Calculated (MTM x Expected Expected Default Default Frequency) Frequency Market Price Referent ; , ' ' Ameresco, Inc. $ 3,565,495 " l,1S " .' $ 41,003 Pacificorp Power $ 6,267,587 "0 . 0,0] '0 • $ 626 Marketing' . o· ....... ' ", Total $ 9,833,082 . ' ......•.. .. ' $ 41,629 1. Pacificorp Power Marketmg credit IS supported by ScottIsh Power, PLe whIch IS wholly owned by Iberdrola .. 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 counterparty 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 staffs analysis of Ameresco's confidential financial reporting. While Ameresco's EDF score is below the BBB-equivalent, 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. Table 4 illustrates the credit impacts of the widening variance between the wholesale power curve and the State developed renewable Market Price Referent. If either of the counterparties were to default, the City would bear increasing costs if it were required to replace the energy with renewable energy in order to meet the City's Renewable Portfolio Standard goals. 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 contract price, the City has no potential loss at present. Table 5 below calculates the loss which the City would suffer should one of its gas counterparties default. This loss is calculated as the product of expected default frequency and the MTM value. CMR:429:09 Page 8 of9 Table S. Credit Exposure aud Expected Default Frequency of Natural Gas Suppliers as of September 30, 2009 Counter party Total Exceptions TotalMTM Value S&P Ranking Current Expected Default Frequency Expected Loss (MTM x Expected Default Frequency) $ 0 One administrative exception was noted during the Quarter. During one transaction, the recorded phone line was not activated, resulting in the absence of a recording. The information was verified through the signed confirmation from the counterparty. No financial impact occurred. ATTACHMENTS Attachment A. Electric Portfolio Summary Attachment B. Gas Portfolio Summary PREPARED BY: DEPARTMENT HEAD APPROVAL: CITY MANAGER APPROVAL: CMR:429:09 KARL VAN ORSDOL L Director, Administrative Services JAM City Page 9 of9 Attachment A. Electric Summary Report Electricity limit report as of: INO VIOLATIONS Total Number of Deals IVnlllrnj:loC::: 29-Sep-09 281 lcounterDartv I Limit (Volume) ~2E~~~~~)O FY Ending 11 FY Ending 12 I FY Ending 13 FY Ending 14 FY Ending 15 FY Ending 16 ::I Morgan Chase ISENA ITotal nt:i:lU~UUIIi Ir./"II OPhiilips IJP Morgan Chase ISENA Mark to Market Counterparty BP ConocoPhillips JP MorQan Chase Powerex Sempra SENA Total 660,000 660,000 -I 600,000 109,200 55,~251 660,000 58,185 53,975 660 ........ ,., A~' ,wv j ~,,850 I 44,18C 43,920 I _6j;0,CLOO_ __ _ 164,185 98,905 Unit MWh 12 Month Fwd 373,420 I 197,060 99,145 I I ~2E~~~(h~)0 FY Ending 11 FY Ending 12 FY Ending 13 FY Ending 14 FY Ending 15 FY Ending 16 I 660,000 660,000 660,000 660,000 660,000 660,000 660,000 I 660,000 660,000 660,000 660,000 660,000 660,000 660,00C 490,800 600,000 600,000 600,000 600,000 600,00C 601,815 604,775 660,000 660,000 660,000 660,000 i6C ----;sc Rolling 12 Total M2M of Open Months M2M Total Credit Credit Exposure Starting in Violation Headroom Exposure Limit Transactions Violation Headroom Limit October-09 Starting in October-09 $ 30,000,000 $ -$ 30,000,000 $ 60,000,000 $ -$ 60,000,000 $ 15,000,000 $ -$ 15,000,000 $ 25,000,000 $ -$ 25,000,000 $ 10,000,000 $ 169,363 $ 10,169,363 $ 20,000,000 $ (169,363 $ 20,169,363 $ 10,000,000 $ (323,463 $ 10,323,463 $ 10,000,000 $ 545,182 $ 9,454,818 $ 15,000,000 $ (170,552· $ 15,170,552 $ 25,000,000 $ (84,335 $ 25,084,335 $ 15,000,000 $ 661,350 $ 15,661,350 $ 30,000,000 $ 170,146 $ 29,829,854 #N/A $ (1,324,728) #N/A #N/A #N/A $ 461,630 #N/A #N/A Violation Attachment B. Gas Summary Sheet