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HomeMy WebLinkAboutStaff Report 145-10TO: HONORABLE CITY COUNCIL FROM: CITY MANAGER DEPARTMENT: ADMINISTRATIVE SERVICES DATE: MARCH 8, 2010 CMR: 145:10 REPORT TYPE: Information SUBJECT: City of Palo Alto's Energy Risk Management Report for the Second Quarter, Fiscal Year 2010 This is an informational 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 with no exceptions. The credit quality for the City's active counterparties improved during the quarter with one exception. 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 $0.31 million. The 36 -month mark to market value of the City's gas purchases is negative $6.6 million. The 12 -month mark to market value of purchases of renewable power is $9.9 million when marked against the renewable energy Market Price Referent. The 12 -month mark to market value of electricity from Western hydro is $6.4 million, and the value for Calaveras hydro is negative $3.0 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 December 31, 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 second 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 market (MTM) (current market price less contract price). Attachment B summarizes the gas portfolio in terms of transaction volume, market value, Mark to market value and limits. CMR:145:10 Page 1 of 10 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 443,630 MWh for delivery between January 1, 2010 and March 31, 2012. The average price for all of the fixed -price purchases is $56.91 per MWh, up from $54.39 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 negative $312,381 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. When the cost of a position or portfolio is compared to current market prices, it is "marked -to -market". Marking to market represents unrealized changes in the value of forward transactions relative to current market prices. A positive MTM indicates an increase in value of a transaction above the contracted price while a negative MTM indicates a decrease in the value of the transaction below the contracted price. 120,000 •,, :4.0,4. r.;", (���� n " % /F�4fi „4t'Pt.'.,,?...,� s5 # ^.� € nt �rl sz ,,, C R'G�+t�� y ,xA -; 100,000 ,f f ,,'44. P. sre: • of t i V f �(���f ' ,T,Orx f.rg N',t�� .v, r" Y,� l�` 7 T 3; �� ti�tifi 7 S -,4,.,,,,,„ f ,.� , -_ „A ,, :,tr Sy s t., ii. .�,1 •- . �t s , '?k..,....:.-.-.. ,, . aeP 80,000 60,000 40,000 20,000 0 Figure 1. Electric Load Resource Balance ✓�` 47 2i ✓G7 k% 4/ ✓o 4, 27 ve,7 ts, �Lo ✓�, '17 'Li ✓4� `S'ob //, ��7 d�7 ,0 �7 L7 h7 ��7 �y7 `77 A7 L7 ,i7~7 �y'7r' 7`� 2 2 O O O O O 7 7 7 7 7 2 1,4.'• !Western lJ Calaveras ice %1 Wind Landfill ® Wholesale --w--Total Load Non -Carbon Emitting Electricity. The City estimates that it will utilize non -carbon emitting electricity sources, including hydro power, for approximately 68.7% 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 $9.9 million when marked against the California Public Utilities Commission's (CPUC) Market Price Referent (MPR). The MPR CMR:145:10 Page 2of10 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 $6.4 million, while the MTM value of Calaveras hydro is negative $3.0 million. This negative number for Calaveras means that the costs are greater than the value of electricity projected 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 December 31, 2009 ❑SENA WSempra Powerex ,: 131 JP Morgan Chase CMR:145:10 Page 3 of 10 Fixed Price Forward Natural Gas. The City currently has purchased supplies of gas totaling 5.2 million MMBtu for delivery between January 1, 2010 and October 2012. The average price for all of the fixed -price purchases is $6.19 per MMBtu, down from $7.35 last quarter. The forward purchases have been transacted with four approved counterparties: SENA (Shell Energy), Sempra, Powerex, and British Petroleum. The City also had one end -of -the -month balancing transaction with Pacific Gas and Electric. 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 December 31, 2009 800,000 700,000 - 600,000 500,000 - 400,000 - 300,000 - 200,000 - 100,000 - $100,000 $- $(100,000) $(200,000) $(300,000) $(400,000) $(500,000) $(600, 000) $(700,000) $(800,000) ❑SENA CMR;145;10 Page 4 of 10 Figure 4 presents the Mark to market history for the 39 -month wholesale fixed price purchases of both gas and electricity. It'shows how the downturn in energy prices over the past 18 months has decreased the value of the City's electricity and gas portfolios. Figure 4. Mark to Market Value of Gas and Electric Portfolio .}� 8 Y I$ ,?�`- . f� k 4 ?y } ii , 4 `+C 4 , �- l's i� St 0)1.1 N (y Y C Z i li 21^ 7 1' 6 i , r1 "�.4 t ib 7�1 i "i kli 1F -0 vl "fi Y��� k11 F Sly {i- ki(ti 4 il= 'V i if(�j �{)�61�'tK� 4 ; i f } 3 y {s-af i' l ' i f y , �'y''lyip(� i € �'�' CR.i' = ' S 7v`'�ii r � flt}i YS rs }'\{ ` ,xi f kJAif' 'T 3? S1 1 ]' ti F i { �-t `� (tjt slktn'i�i. tty �fr�� � i :;2YE i''' ,4I tt+i :,• fi%pj'jtF 1 i lc t {` hrx j'� � Electricity —III—Gas ? y r. h 41 ' - £ yi a ♦ { 3 _ t �.-r f� iy L5 � ' ;^. s i 1 � I� , t r S '0:.1,4, L� r _ pro 6 6 0'l 6 4. 0 6 c, �� �� ' .93 0C �°� Credit Risk To manage credit risk, staff reports on major credit rating agency (S&P and Moody's) scores, and the "expected default frequency" (EDF) using the Moody's KMV CreditEdge© and RiskCalc© analytical tools. The EDF is an 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 and 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. The City has no exposure to any financially -based counterparty. The City's financially -based counterparties are JP Morgan 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 CMR:145:10 Page 5 of 10 basis, largely for suppliers of renewable energy. These exceptions are approved by City Council. Table 1 illustrates 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 0.15% or lower. Table 1. Expected Default Rates and the Equivalent S&P Credit Category Credit Category AAA AA+ AA AA- A+ A A - BBB+ BBB Equivalent Median Bound Range EDF credit Credit measure Lower Upper Category 0.010/o 0.01% 0.01% BB 0.02% 0.0'1% 0.02% BB - 0.02% 0.02% 0.02% B+ 0.03% 0.02% 0.03% B 0.04% 0.03% 0.05% B- 0.05% 0.05% 0.06% CCC+ 0.06% 0.06% 0.07% CCC 0.07% 0.07% 0.08% CCC- 0.094'0 0.08% 0.'10% CC BB+ 1012% C 0.'I7% 0.'I5% 0.21% D Equivalent Median Bound Range EDF credit measure Lower Upper 0.25% 0.21% 0.33% 0.45% 0.33% 0.61% 0.83% 0.61% 1.12% 1.52% 1.12% 2.32% 3.55% 2.32% 5.42% 8.28% 5.42% 12.66% 19.35% 1266% 19.99% 20.66% 19.99% 22.07% 23.57% 22.07% 26.02% 28.72% 26.02% 35.00% 35.00% 35.00% 35.00% The City has signed Energy Master Agreements with 7 counterparties: Sumitomo, JP Morgan Chase, Sempra, ConocoPhillips, Shell, Powerex and 13P. In addition, the City has signed renewable electricity contracts with Iberdrola Renewable Holdings Inc. (formerly 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 December 31, 2009. As can be seen in Table 2, JP Morgan Chase default rates have increased by 24 basis points or three implied rating notches, while default rates other counterparties declined during the period. CMR:145:10 Page 6 of 10 Table 2. Changes in Expected Default Rates of Counterparties in the Last 90 Days EDF Credit Category Company Name Current Previous Anil Change % Change Current Previous 1 SUMITOMO CORPORATION 0,77% 1.34% -57 by -42.54% Bat B1 2 JPMORGAN CHASE & CO 0.40% 0,16% +24 by +150.00% Baa3 A3 3 IBERDROLA S.A. 0.30% 0.29% +1 bp +3.95% Baa2 Baal 4 CONOCOPHILLIPS 0.27% 0.46% -19 by -41.30% Baal Bal 5 PG&E CORP 0.25% 0.33% -8 bp -24.24% Baal Baa2 6 SEMPRA ENERGY 0.11% 0.13% -2 by -15.38% A2 A2 7 IBERDROLA RENOVABLES S.A 0.11% 0.10% +1 bp +10.00% A2 Al 8 ROYAL DUTCH SHELL PLC 0.09% 0.11% -2 by -18.18% Al Al 9 BP PLC 0.05% 0.06% -1 bp -15.67% Aa2 Aa3 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 $104,000, 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 Rates as of December 31, 2009 Counterparty Total Mark to Market S&P Ranking Current Expected Default Frequency Expected "Loss" (MTM x Expected Default Frequency) JP Morgan Chase $ - 166,079 A+ 0.40 $ 0 Shell t $ -215,143 A- 0,09 $ 0 Powerex $ 104,407 AAA 0.01 $ 10 Sempra $ - 35,567 AA- 0.11 $ 0 Total $ -312,318 $ 10 Renewable Electricity. Palo Alto's contracts for renewable "green" energy include both wind contracts with Iberdrola Renewable Holdings Inc. 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:145;10 Page 7 of 10 Table 4. 12 Month Renewable Energy Credit Exposure and Credit Ratings Marked Against the Renewable Market Price Referent as of December 31, 2009 Counterparty 12 -Month MTM Value Current Calculated Expected Default Frequency Expected "Loss" (MTM x Expected Default Frequency) Market Price Referent Ameresco, Inc. $ 3,669,329 1.15 $ 42,197 Iberdrola Renewable Holdings Inc. $ 6,269,608 0.30 $ 18,809 Total $ 9,938,937 $ 61,006 1, Iberdrola Renewable Holdings Inc is formerly known as Pacificorp Power Marketing. Credit support is by Iberdrola SA. As Table 4 shows, the City does have contracts for renewable power with counterparties whose EDF score is significantly higher than the 0.15% BBB- equivalent. One counterparty, Ameresco, a renewable power developer with whom the City has five existing contracts and four pending long-term power contracts. The City currently receives approximately 72,000 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 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. The second counterparty , Iberdrola Renewable Holdings Inc, formerly know as Pacificorp, is owned by Iberdrola SA, a global renewable energy firm based in Spain. The City has contracts for power from two wind farms and receives approximately 125,000 MWh from these projects each year. 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. Council approved entering into contracts with these vendors because they offered renewable power with the most favorable prices. 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:145:10 Page 8 of 10 Table 5. Credit Exposure and Expected Default Frequency of Natural Gas Suppliers as of September 30, 2009 Counter party Total MTM Value S&P Ranking Current Expected Default Frequency Expected Loss (MTM x Expected Default Frequency) BP Shell $ -1,841,947 $ -3,741 930 AA+ A- .05 .09 $ 0 $ 0 Powerex $ -705,651 $ -318,101 AAA .01 $ 0 Sempra AA - Total $ -6,607,630 .11 $ 0 $ 0 Reserves Assessment A key premise to the City's risk management 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 December 31, 2009 based on the City's SAP financial system. Table 6. Supply Rate Stabilization Reserve Levels for Electricity and Gas for FY2009 ($ Millions) (Preliminary unaudited figures from City's Financial System) Commodity Beginning Reserve Balance as of 6/30/09 i Mnimum Guideline Reserve Level Maximum Unaudited Guideline Reserve Level Projected Reserve Balance ($ Millions) as of 12/31/09 for FY 2010* Electricity $ 41.4 $ 38.8 $ 77.7 $ 44.5 Gas $ 8.7 $ 9,4 $20.1 $ 10.2 * Accounting activity figures to date reflect what has been booked into the City'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 current reserves for electricity are well above the minimum and well above credit, regulatory and other risks through the end of the 2010 Fiscal Year. Total risks associated with the electric supply reserve through June 30, 2010 include: $2.0 million for credit reserves; $2.7 million for hydro risk; $0.3 million for market risk of the yet -to -be -purchased positions; and $4.0 million for possible regulatory, operational and other risks. These risks total $9.0 million. CMR:145:10 Page 9 of 10 With regard to gas, the current projected reserve level of $10.2 million is within the range as set by current guidelines. Total risks to the gas supply reserve are estimated at $1.3 million. Changing market dynamics, international events, and other 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 There are no exceptions or violations during the Quarter. An exception indicates that process or procedures have not been fully adhered to in a commodity transaction or its processing. A violation occurs when a risk measure falls outside of an acceptable tolerance band subjecting the City to increased risk ATTACHMENTS Attachment A. Electric Portfolio Summary Attachment 13. Gas Portfolio Summary PREPARED BY: KARL VAN 0 Energy Risk Mana DEPARTMENT HEAD APPROVAL: LAL CITY MANAGER APPROVAL: Director, Administrative Services CMR:145:10 Page 10 of 10 Attachment A Electric Summary Report Limit report as of: 12/29/09 NO V IO LATIONS Total Number of Deals 28 Vo lu mes Counterparty Limit (Volume) FY Ending 10 (12 months) FY Ending 11 FY Ending 12 FY Ending 13 FY Ending 14 FY Ending 15 FY Ending 16 Violation Ameresoo 440,000 - - - - - - - BP 660,000 - - - - - - - ConocoPhillips 660,000 - - - - - - - JP Morgan Chase 600,000 109,200 - - - - - - Powerex 660,000 58,185 53,975 55,225 - - - - Sempra 660,000 41,850 44,180 - - - - - SENA 660,000 174,265 98,905 43,920 - - - - Total #N/A 383,500 197,060 99,145 - - - 0 #N/ A HeadRo om Counterparty Unit: MWh FY Ending 10 (12 months) FY Ending 11 FY Ending 12 FY Ending 13 FY Ending 14 FY Ending 15 FY Ending 16 Ameresco 440,000 440,000 440,000 440,000 440,000 440,000 440,000 BP 660,000 660,000 660,000 660,000 660,000 660,000 660,000 ConocoPhillips 660,000 660,000 660,000 660,000 660,000 660,000 660,000 JP M organ Chas e 490,800 600,000 600,000 600,000 600,000 600,000 600,000 Powerex 601,815 606,025 604,775 660,000 660,000 660,000 660,000 Sempra 618,150 615,820 660,000 660,000 660,000 660,000 660,000 SENA 485,735 561,095 616,080 660,000 660,000 660,000 660,000 M ark to Market Counterparty 12 M onth Fwd Credit Exposure Limit Rolling 12 Months M2M Starting in January -10 Violatio n Headroom Total Cr edit Exposure Limit Total M2M of Open Transactions Starting in January -10 Violation Headroom Ameresco $ 10,000,000 $ - $ 10,000,000 $ 25,000,000 $ - $ 25,000,000 BP $ 30,000,000 $ - $ 30,000,000 $ 60,000,000 $ - $ 60,000,000 Conoco Phillips $ 15,000,000 $ - $ 15,000,000 $ 25,000,000 $ - $ 25,000,000 JP Morgan Chase $ 10,000,000 $ (166,079) $ 10,166,079 $ 20,000,000 $ (166,079) $ 20,166,079 Powe rex $ 10,000,000 $ (356,561) $ 10,356,561 $ 10,000,000 $ 104,407 $ 9,895,593 Sempra $ 15,000,000 $ (35,567) $ 15,035,567 $ 25,000,000 $ (35,567) $ 25,035,567 SENA $ 15,000,000 $ (317,655) $ 15,317,655 $ 30,000,000 $ (215,143) $ 30,215,143 Total #N/A $ (875,862) #N/A #N/A #NIA $ (312,381) #NIA #N/A 5;225,710 2;055:200 ,3,�32.363,329.: $': 25;755.700: 3: 6507.5- 1[123;800 "S.: ". .. 8;733 573- "$,:[[ 6;470;453: 5.» (2'261;220K 4; 413; 965 .1878,470 " 1;169040 : 123,000 2,987,870 . 2,0751665::',:': ''1,878 .470" 1,169040 123,000 2,056,474 1 .1- .172678- .$` 14,660 .493: $ '; .8,196263: $ .'.:-:774,900 . €'$ • -8;399,255: $:10,857,833 -5; :7;690;669V'3,:; .:-736.94511 $ S 1.1,772,474 775-A9 ') .S.'- .(3502,860)[43 {505 595 3' (37 ,955) ,F $ : (3,923 175;. 4`54 €:.f: 15595,648 9 .' 11,276400 '1,054,400 :2153 .850 [123 000 ,:': ,'81000 - ... ..1,095400 . 345 0; 133,990 11:4751601" 12 :000 ..91,➢00 "r . - 164,000. .5:' 3744.930 -: S' (1262:895 r:;205 000 123:000 123;000: