Loading...
HomeMy WebLinkAbout2004-11-08 City Council (11)City of Palo Alto City Manager’s Repor TO:HONORABLE CITY COUNCIL FROM:CITY MANAGER DEPARTMENT: AMINISTRATIVE SERVICES DATE:NOVEMBER 8, 2004 CMR: 454:04 SUBJECT:C!TY OF PALO ALTO’S ENERGY TRANSACTION ACTIVITY REPORT FOR THE FIRST QUARTER, FISCAL YEAR 2004’2005 This is an information report and no action is required. BACKGROUND ¯ The purpose of this report is to inform the City Council of the status of the City’s energy portfolio as of the end of the first quarter of Fiscal Year 2004-05 as it relates to transactions executed with energy suppliers. The City’s Energy Risk Management policy requires that staff report-to Council on: 1) the City’s energy portfolio composition compared to Council-adopted policy, 2) the City’s credit and market risk profile, 3) portfolio performance, and 4) other key market information. DISCUSSION Open Transactions as of September 30, 2003 Open transactions, are commitments that the City has made to purchase either electricity or gas, but for which supplies have not been delivered. Electricity. Since the last quarterly report, CPAU has continued diversified purchases of blocks of forward supplies under the Council-.approved Electricity Master Agreements (CMR 510:03). While 55% of annual electricity supplies will be supplied by the Western Area Power Authority (WAPA) and the Calaveras Hydroelectric Project for calendar year 2005, the City is increasingly purchasing supplies from private sector entities.Figure 1 illustrates the sources of electricity supplies by month for the next 36 months. CMR:454:04 Page 1 of 12 120,000 100,000 80,000 60,000 ,40,000 20,000 0 -20,000 Figure 1. Electric Load Resource Balance ap-04 Nov-04 Jan-05 Mar-0!4ay-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 JWestern 13Calaveras rlForward Purchase/Sales []Planned Wind [Planned Landfill g3Spot Market Exposure ] Figure 2 presents the current purchases of yet to be delivered supplies (i.e. open positions) l~y the City by monthly delivery by volume (MWh). Figure 2. 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Electricity Foward Purchase Volumes IN Duke [] BP CMR:454:04 Page 2 of 12 The City currently holds 72 open positions in the energy market with four private sector power providers: Coral, British Petroleum, Sempra and Duke. The total Mark to Market ¯(MTM) value of these transactions has increased by .nearly 35% during the quarter from $8.8 million to $11.9 million as a result of an increase in forward prices which are linked to increasing oil prices. Figure 3 presents the mark to market positions for each supplier by month. Figure 3. Electric Mark to Market by Counterparty $900 ._. $800 ~ $700 ~ S600 $500 $400 ~,~ $300 ~ $200 $1oo $- $(Ioc -’ -: " []Sempra Forward prices for calendar year strips of 6 by 16 (6 days a week, 16 hours a day) electricity delivered at North Path 15 (NP15) are presented in Figure 4. North Path 15 represents an aggregate, price for. electricity delivery within the Northern California region. The figure .shows the t~.’end for increasing prices of power throughout the quarter for forward delivery. CPAU open transactions are scheduled for delivery either at the California Oregon Border (COB) or North Path 15. CMR:454:04 Page 3 of 12 Figure 4. Forward Electricity Prices During Quarter Forward Electricity Prices for Calendar Year (CAL) NP15 $64.00 $62.00 $60.00 $58.00 $56.00 $54.00 $52.o0 Delivery at ~CAL ’06 CAL ’07 ~ CAL ’08 As noted in previous reports, the Mark to Market (MTM) value represents the difference in price between the current market value of the contracted supply and the original contracted price. A positi3ze MTM value indicates an increase in the value of the purchase, which would be realized only if the transaction was liquidated. A positive MTM value represents the City’s credit exposure with the supplier. In other words, should a counterparty default on delivery of. supply, the City would need to purchase replacement energy on the open market when prices could be higher. A negative MTM represents the supplier’s credit exposure with the City. Natural Gas. The Council-approved Gas Master Agreements (CMR:482:03) have allowed staff to expand the number of approved suppliers from two to five and diversify counterparty risks. The currem gas portfolio consists of 123 open transactions .(transactions for which commitments have been made but gas has yet to be delivered) over the next 36 months as of September 30, 2004. The contract volume of these transactions is 4.4 million MMBtu, with total commitments of $21.86 million and an average price of $4.95 per MMBtu. The open commitments for natural gas by month and by supplier are presented in Figure 5. CMR:454:04 Page 4 of 12 Figure 5. 400,000 350,000 ~ 300,000 ~250,000 200,000 150,000 100,000 5O,O0O Forward Gas Purchase Volumes The current MTM value of these transactions is $4.6 million. The current MTM represents a slight decline over last quarter. The forward prices for gas delivery in the next 4 years are presented in Figure 6. ~ $7.00 Figure 6, Forward Gas Prices (NYMEX) I =2005 Strip ~2006 Strip ~2007 Strip 2008 Strip $6.50 $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 CMR:454:04 Page 5 of 12 Figure 7 below present the pool purchases made for each month over the next three years compared to estimated pool load. The figure illustrates the gas laddering purchasing strategy in relation to the total estimated load. Under the laddering strategy, CPAU purchases up to 100% of forecasted load for the upcoming 18 months, up to 75% of load for 9 months out to 29 months out, and 50% of load for 27 to 36 months out. As a result, the amount of pool exposure to the market is low in the near term, but increases further out in the future. -Figure 7. Gas Load-Resource Balance 500,000 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 [] Pool Exposed to Market [] Market-Rate Customers [] Hedged Volumes Value at Risk The "riskiness" of the energy portfolio is measured through the "value at risk" (or VaR). The VaR measures the risk that adverse market conditions could force CPAU to use reserves to cover costs on future purchases over what is charged to ratepayers. Specifically, VaR measures how much projected 12-month net revenue could change in one-week, due to a potential market change. In compliance with the Risk Management Guidelines, the Utilities’ staff and the Energy Risk Manager monitor the VaR and ensure that its value remains below 10% of the projected end of year supply rate stabilization reserve levels for both electricity and gas. CMR:454:04 Page 6 of 12 Currently, the VaR for the electricity portfolio is 0.4%, a decline of 0.5% frolrl last quarter. This decline is due to the City purchasing a greater portion of its load in fixed price, long term contracts. The VaR for the gas portfolio is 2.1% compared to 5.7% from the previous quarter. The historic levels of the VaR values for electricity and gas are presented in the Figures 8 and 9 respectively. Please note that in Figure 8, gaps in the graph indicate missing data. CMR:454:04 Page 7 of 12 ,~12% 10% o.6% ~4% ¯2% ¯0% Figure 8. Gas Value at Risk I 12% 10% 8% 6% 4% 2% O% Figure 9. Electric Value at Risk History Jan-03 Jul-03 Jan-04 Jul-04 Sep-04 Month CMR:454:04 Page 8 of 12 Credit Risk As reported previously report, staff has enhanced the City’s credit oversight policies and procedures. As part of this process, staff wiI1 regularly report on major credit rating agency’s (S&P and Moody’s)scores, and, in addition, the "estimated default frequency" using the Moody’s KMV CreditEdge© system. The EDF is an estimated probability that a count~rparty will default in the next 12 months (e.g., a 0.2 EDF indicates a chance of 2 in 1000 that the firm will be in default in the time period). Thus a higher EDF represents a higher credit risk for the Citv. Electricity. Currently, CPAU’s electric supplier counterparty exposure, and their credit ratings, are as follows: Electricity Suppliers Counterparty Credit Exposure BP Coral Duke Sempra Total *Coral is owned b2 Shell (70%) and Bechtel (50%). $10,672 $10,802,799 $639,042 $533,442 $ 11,985,955 - Credit S&P Ranking AA+ A- BBB BBB+ Exposure Moody’s Ranking N/A N/A Baal Baal and Credit Ratings Expected Default Frequency .02 .03* .56 .34 and lntergen (30%). Intergen is owned by Shell (50%) CPAU’s largest exposure, in excess of $10 million is with an A- rated company with a 0.03 percent default rate. While this exposure is relatively large, the counterparty is financially strong and highly rated by rating agencies. ¯ The expected value (i.e. cost) of default for this contract is only $3,240. Natural Gas. As the next table shows, the City has exposure to four counterparties totaling $4.6 million over the next 36 months. The highest exposure with a single supplier is $3.0 million with a BBB+ company, with the remainder of the exposure distributed among three other counterparties. The expected value of default for this contract is $10,430. CMR:454:04 Page 9 of 12 Counterparty BP ConocoPhillips .Coral Duke Sempra Total Gas Supplier Credit Exposure and Credit Rating Credit Exposure $ 848,786 $132,763 $556,601 $-20,769 $3,067,570 $4,584,952 S&P RanMng AA+ A- A- BBB BBB+ Moody’s Ranking N/A A3 N/A Baal Baal Expected Default Frequency .02 .02 .03* *Coral is owned by Shell (70%) and Intergen (30%). Intergen is owned by Shell (50%) and Bechtel (50%). Credit Quali _ty of Suppliers. Overall, the City has continued to improve the credit quality of its suppliers. Figure 10 shows how the EDF of CPA’s current suppliers have declined (i.e. improved credit) over the past three years, and that the EDF scores for CPA suppliers are well below (i.e. better credit rating) industry averages. Additionally, CPA suppliers have either maintained or improved their credit rating since the last quarter. As a group, CPA suppliers are lower credit risks than the average energy supplier for gas or electricity in the United States. CMR:454:04 Page 10 of 12 Figure 10 Suppliers a~ainst Utility Indicies in last 6 months. j- US Energy Group 07-~r-O421-#r.O~5.~y-OlO./,~y.O~2-Jun.O416.Jun.O~O-Jun.O41~Jul.04 28-Jul-O411-~g-O~5.~g.O~]8.Sep-O~2.Sep.04 Median Expected Default Rate of CPAU ~ 0 0.80 0 0.54 0.41 3.28 ?.02 ¯ ,B+ -BBB Worst Credit Best Credit ATTACHMENTS: A) Consolidated Marl{ to Market Report of All Open Gas Transactions as of September 30, 2004 B) Consolidated Mark to Market Report of All Open Electric Transactions as Of September 30, 2004 CMR:454:04 Page 11 of 12 PREPARED BY: DEPARTMENT HEAD APPROVAL: CITY MANAGER APPROVAL: KARL G. VAN ORSDOL Energy Risk Manager Director, A~inistrative Services / SON Assistant City Manager CMR:454:04 Page 12 of 12 ~~ ~ ~ ~ 0 0N 0 6 0 0 0 N ~I 0 0 0 0 0 0 0 Oi 0 0 0~ 0 0 0 0 0 0 OiO 0oooo oo oo "~ ~ 0 0. 0 0 ~ 0 ~i0 0 0 ~ ~ 0 0 ~ 0 ~ ~ 0 0 0 0 0 ~i0 ~ 0 0 0 ~ 0 0 0 ~ 0 0 ~ 0 >, o ,- 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 00~0 0 0~o~o~o~o~o~o oo o o o o ~o o ~ o o o~ o o~ o o o o ~ o ~0 o ~ o ~ o ~ o ~ o o o o~ ~o o ~ °o° c~°° ~ 0 ~ ~,~ ~ ~ ~ 0 0 ~ ~ 0 0 0 0 O! 0 0 0 0 0 0 0 0 0 00’ 0 0 0 0 0 0 EiE E E E E E E E E EIE E E E E E E ~000 0000 OOOO 0 0 0 000 X X X X X X!X X X X X X X X X X X X~X X X X ~ X X X X X X X X ~ X zzz zzzizzzzzz~zzizozzozzozzzozz~z ~zz o!~oo~o~oo~o~oo~oo~oo~oo~o~ 0 00 IO Oi~ ~ ~ ~ ~ 0 ~ ~ 0 ~ ~ 0 0 0 0 ~0 0 ~!0 0 0 ~ 0 0 © © 0 0 0 Ouj Z Z Z 0 ZiO Z Z!O Z Z © Z Z 0 Z 0 Z 0 Z Z zLz z z z Z z z z z~z z!z ¯ o> oooo~!oooooooo999o9ooo!~ ,~ 9!~,oo ~ o, o o9o, ¯ - 0 00~000 XX!XXX zzz~zz Zr~