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HomeMy WebLinkAboutStaff Report 275-10TO: HONORABLE CITY COUNCIL FROM: CITY MANAGER DATE: JUNE 21, 2010 REPORT TYPE: Information DEPARTMENT: ADMINISTRATIVE SERVICES CMR: 275:10 SUBJECT: City of Palo Alto's Energy rusk Management Report for the Third Quarter, Fiscal Year 2010 This is an infonnational report and no Council action is required. EXECUTIVE SUMMARY Staff continues to purchase electricity and gas in compliance with the City's Energy Risk Management Policies and Procedures. The credit quality for the City's active counterparties remained stable 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 negative $3.3 million, meaning that current market prices are below the contract price. The 36-month mark to market (MTM) value of the City's gas purchases is negative $8.3 million. 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 $1.1 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 March 31, 2010. BACKGROUND The purpose of this report is to infonn the City Council of the status of the City's energy portfolio and transactions executed with energy suppliers as of the end of the third quarter of Fiscal Year 2010. The City's Energy Risk Management Policy (CMR 359:09) rcquires that staff report on a quarterly basis to Council the City's energy portfolio, the City'S credit exposure and market risk profile, transaction compliance, and other key market and risk infonnation. Attachments 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 tenns of forward purchase volumes, headroom (volume limit less current plJIchase volumes), and mark to market (current market price less contract price). Attachment B summarizes the gas portfolio in terms of transaction volume, market value, MTM value and limits. CMR:21S:1O 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 bas purchased supplies of electricity totaling 469,380 Megawatt hours (MWh) for delivery between April I, 2010 and March 31, 2012. The average price for all of the fixed-price purchases is $55.00 per MWh, down from $56.91 last quarter. The City contracted with four approved counterparties: Shell Energy North America (SENA), Powerex, BP 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 MTM value of the City's forward transactions for wholesale power was negative $3.3 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 quarter, is a result of the recent dceline in energy prices. Figure 1. Electric Load Resource Balance 120,000 100.000 ~ 80,000 ~ 0 :J: ! 60,000 '" I 40,000 20,000 a ~~~~~000000~~~~~~~ ##~~~~###~~~##~~~~ 1_ Western Il!l!ll Calaveras a Wind rmll Landfill 1m Wholesale ~ Total Load Non-Carbon Emitting Electricity. Staff estimates that the City will utili7£ non-carbon emitting electricity sources, including hydro power, for approximately 70.4% 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 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 CMR:275:10 Page 2 of 10 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 marketplace. Hydroeltl<:tri~ity With regard to the hydroelectric purchases, which a,re not considered renewable under the State's Renewable Portfolio Standard, the l2-month MTM value of West em hydro is $1.1 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 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 March 31, 2010 CMR:275:10 60,000 50,000 40,000 30,000 20,000 10,000 +-'~~~ $200,000 $100,000 $. $(100,000) $(200,000) $(300,000) $(400,000) Electric Foward Volumes Electric Forward Mark to Market $(500,000) +c ...• / .•. -~.,-j tJSempr • • Powerex $(600,000) t..o.~~~-""='-~~--'~~~~---1 IIlBP $(700,000) L~~~~~~~~~~~~-'====::::.J Page 3 oflO Fixed Price Forward Natural Gas. The City currently has purchased supplies of gas totaling 4.78 million MMBtu for delivery between April I, 20 I 0 and March 2013. The average price for all of the fixed-price purchases is $5.89 per MMBtu, down from $6.19 last quarter. The forward purchases have been transacted with four approved counterparties: SENA (Shell Energy), Sempra, Powerex, 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 March 31, 2010 l CMR:275:10 500,000 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 Gas Forward Volume o ~~~~~~~~~~~~~~~~~~ 'i",f 'l'>~ 'i"'><:f. 0(1 <:),,,<1 «q;/ 'i"'<<: "l'i"'>e[, 0(1 <f<1 «q;/ 'i"<:t ,,:l'1"'<:f. 0(1 <f<1 «q;/ Gas Forward Mark to Market $100,000.00 $- $(100,000.00) $(200,000.00) $(300,000.00) $(400,000.00) $(500,000.00) $(600,000.00) $(700.000.00) $(800,000.00) Page 4 oflO Figure 4 presents the mark to market history for the wholesale fixed price purchases of both gas and electricity. It shows how thc 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 V ruue of Gas and Electric Portfolio --_ ...... __ ..... _------- Gas and Electric Mark to Market History 25 20 15 -!II 10 I: .!2 -::'iE 5 -0 ::'iE 0 I- ::'iE -5 -10 -15 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. Counterparties with the highest default risk have 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 portfolios. Currently, the two eounterparties with the highest default risk are the fmancially-based counterparties JP Morgan Chase and Sumitomo. It is important to note that the City has no exposure to any financially-based counterparty. 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:275:10 Page 5 oflO 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 Ilategories. To be equivalent to a BBB-or better rating, any coutitcrparty 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 Equlvalent Median 80und Range Credit EDF credit Credll EDF credll CaleDory meRsure Lower Upper Calegory meaSure Lower Upper AM 0.01% 0.01% 0.01% BB 0.25% 0.21% 0.33% AA+ 0.02% 0.01% 0.02% BB· 0.45% 0.33% 0.61% AA 0.02% 0.02% 0.02% B+ 0.63% 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% CCC+ 8.28% 5.42% 12.06% A· 0.06% 0.06% 0.07% CCC 19.35% 12.66% 19.99% BBB+ 0.07% 0.07% 0.08% CCc. 20.66% 19.99% 22.07% BBB 0.09% 0.06% 0.10% CC 23.57% 22.07% 26.02% law ,','Oili2% ,ij@% .0.15% I C 28,72% 26.02% 35.00% BB~ 0.17% 0.15% 0.21% 0 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 Iberdrola Renewable Holdings Inc. (formerly Pacificorp Power Marketing) and Arneresco. 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 remained essentially stable and changed less than 5 basis points. Sumitomo was an exception by decreasing its default probability by 35% during the Quarter. The City has no outstanding contracts with Sumitomo. Table 2 presents analysis of the changes in default rates in Palo Alto's publically traded countcrparties in the last 90 days of trading as of March 31, 2010. CMR:275:10 Page6ofIO Table 2. Changes in Expected Default Rates of Counterparties in the Last 90 Days Define Current: 3/30110 Oefin& PrevIous: Three Mont Compan!~& per page: 100 EDF Credit Category Compnny Nomo Currenl PrevIous Amt. CIHlllgO % Change CUff6nt Previous 1 SUMITOMO CORPORATION 0.50% 0.77% -27 bp -35.06% 80'1 Sa:! 2 JPMQRGAN CHASE & CO 0-40% 0-40% Baa3 Bae3 : 3 PG&E CORP O.29'l1a 0"24% +5 bp +20.83% Bu02 Baal "" CONOCOPHILLIPS 0.26% 0.27% 4<1 bp +3.70% Baa2 Baa2 5 IBEROROLA SA 027% 0.30% -3bp -1000% Baa2 [la1l2 o SEMPAA ENERGY 0.13% 0.11% +2bp +18.18% A2 A2 7 IBEROROLA RENOVABlES S.A 0.11% 0:11% A2 A2 8 ROYAL DUTCH SHELL PLe 0.05% 0.00% -4bp -44.44% Aa2 A1 9 apPle 0.02% 0.05% -30p -60.00% Aoo A02 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. There are currently no contracts with a positive forward mark to market value. Table 3. Electricity Suppliers -Credit Exposure, Credit Ratings and Expected Default Rates as of March 2010 Current Expected "Loss" Counterparty Total Mark to S&P Expected (MTM x Expected Market Ranking Default Default Frequency Frequency) BP $ -486,177 A+ 0.02 $ 0 Shell $ -1,364,819 A-0.05 $ 0 Powerex $ -823,768 AAA 0.01 $ 0 Sempra $ -643,671 AA-0.13 $ 0 Renewable Electricity. Palo Alto's contracts for renewable energy include both wind contracts with lberdrola Renewable Holdings Inc. as well as contracts to convert landfill gas to eleetricity with Aroeresco, Inc. The credit exposure and EDF ratings for these counterparties are presented below. CMR:275:10 Page 7 of 10 Table 4. 12 Month Renewable Energy Credit Exposure and Credit Ratings Marked Against the Renewable Market Price Referent as of March 31,2010 Counterparty Inc.l I. lberdrola SA. 12-Month MTMValue Current Calculated Expected Default Expected "Loss" (MTM x Expected Default Frequency) support is by 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 seven existing long-term power contracts. The City cun:ently 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 Rene,wable 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 projeets each year. Table 4 illustrates the credit impacts of the widening variance between thc 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, MTM 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:275:10 Page 8 of 10 Table 5. Credit Exposure and Expected Default Frequency of Natural Gas Suppliers as of March 31, 2010 Counter party Total Reserves Assessment TotalMTM Value S&P Ranking Current Expected Default Frequency Expected Loss (MTM x Expected Default J;'rcquency) . $ 0 A key premise of 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 6 below summarizes the current and projected supply reserve levels for gas and electricity as of March 31, 2010 based 'on the City's SAP financial system. Table 6. Supply Rate Stabilization Reserve Levels for Electricity and Gas for FY2010 ($ Millions) (P r . d't d fi fr C't' F' . 1St ) re Immary unau 1 e Igures om~! .. l s manCia ysem : Minimum Maximum Unaudited Projected Begianing Guideline Guideline Reserve Balance Commodity Reserve Reserve Reserve ($ Millions) as of Balance as of 6/30/09 Level Level 3/31110 for FY 2010* .. ~ .. Electricity $ 41.4 • I $ 38.8 $ 77.7 $ 39.0 Gas $ 8.7 $ 9.8 $20.9 $ 5.9 . . • * Accountmg actIVIty figures to date reflect what has been booked mto 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 cufjustments 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 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 Junc 30, 2010 include: $2.0 million for credit reserves; $1.5 million for hydro risk; $0.1 million for market risk of the yet-to-be-purchased positions; and $1.5 million for possible regulatory, operational and other risks. These risks total $5.1 million. CMR:275:10 Page 9 of 10 With regard to gas, the ~urrent projected reserve level of $5.9 million is below the range as set by current guidelines. However, the City's financial system does not include revenues from the remainder of the fiscal year, although committed contract costs have been included. The end of fiscal year reserve estimate when these revenues are included is $10.0 million. Total risks to the gas supply reserve are estimated at $1.2 million, well below the expected reserve levels. Changing market dynamics, international events, and other factors outside the City's control, can have a significant and adversc impact on the adeqnacy of reserves for both gas and electricity! over a short time frame. 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 during the Quarter. ATTACHMENTS Attachment A. Electric Portfolio Summary Attachment B. Gas Portfolio Summary PREPARED BY: DEPAR1MENT HEAD APPROVAL: KARL VAN ORSDOL LAL Director, Administrative Services CITY MANAGER APPROVAL: ~LDt\cbQ IJ:i= JAMES KEENE Y City Manager CMR:275:IO Page 10 of 10 Attachment A Electric Portfolio Summary Electricity Summary As of 03130/201 0 INO \II0LATlONS I Total Number of Deals 2~ Countemartv SP ConocoPhiUios JP Men; an Chase Powerex Semora SENA Total HeadRoom Countemartv BP ConocoPhiUio5 JP Mor an Chase Powerex Sem ra SENA Lim" (Volume) 660,000 6150000 600000 660,000 660,000 660,000 #NIA Unit: MWh 12 Month Fwd Credtt Exposure Limit F"( Ending 1 0 (12 months) 6.080 109,200 58,188 41850 174,2(\5 389,580 FY Ending 10 (12 months) 653.920 660000 490,800 601,815 618,150 485.735 Starting in April- FY Ending 11 41,960 -- 75,575 44,180 123,225 284,940 FY Ending 11 618,040 660.000 eoO,OOO 564,425 615820 536,775 Violation FY Ending 12 24,640 - 109,800 43920 178,360 FY Ending 12 635,360 660.000 600.000 550.200 680,000 616,080 Headroom FY Ending 13 - -- - - - - FY Ending 13 660,000 660000 600,000 660.000 660,000 660,000 Total Credd Exposure Limit FY Ending 14 -- --- -- FY Ending 14 660,000 660.000 eoo,ooo 660,000 660,000 660.000 Total M2M of Open Transactions Starting in April-10 FY Ending 15 FY Ending 16 Violation -..::.. -- ..::.. - - -- - --#N1A FY Ending 15 FYEndlng 16 660.000 660.000 660.000 660,000 600,000 600,000 660,000 660,000 660,000 660000 6150,000 660,000 Violation Headroom Attachment B. Gas Portfolio Summary Gas Summary as of 03/301201 0