HomeMy WebLinkAboutStaff Report 7158
City of Palo Alto (ID # 7158)
City Council Staff Report
Report Type: Consent Calendar Meeting Date: 8/29/2016
City of Palo Alto Page 1
Summary Title: Assignment of Gas Contract with Mercuria to EDF
Title: Adoption of a Resolution Approving an Assignment, Assumption and
Consent Agreement With Mercuria Energy America Inc. and EDF North
America LLC, and Finding That the Agreement's Approval is not a Project
Requiring California Environmental Quality Act Review
From: City Manager
Lead Department: Utilities
Recommendation
Staff recommends that Council adopt a resolution (Attachment A) to:
1. Approve an Assignment, Assumption and Consent Agreement (Assignment Agreement)
with Mercuria Energy America Inc. (Mercuria) and EDF North America, LLC (EDF), making
a finding that the Assignment Agreement's Approval is Not a Project Requiring California
Environmental Quality Act Review;
2. Waive the application of investment-grade credit rating requirement of section
2.30.340(c) of the Palo alto Municipal Code, which applies to energy companies that do
business with the City; and
3. Delegate the City Manager or his designee, the authority to execute on behalf of the
City the Assignment Agreement with Mercuria and EDF effectively assigning the Base
Contract for Sale and Purchase of Natural Gas (Master Agreement) with Mercuria to
EDF.
Executive Summary
The City of Palo Alto has been doing business with Mercuria since the City’s contract with J.P.
Morgan was assigned to Mercuria in September 2015. Council adoption of the attached
resolution will authorize the City Manager to execute the attached Assignment Agreement
causing the Master Agreement and all outstanding transactions to be assigned to EDF as of
September 1, 2016.
Background
In 2007, the City executed a number of Master Agreements including one with J.P. Morgan to
enable gas commodity and related services transactions. The Master Agreements utilize the
North American Energy Standards Board template with some additional special provisions.
City of Palo Alto Page 2
In 2012, Council approved amendments to the Gas Utility Long-term Plan Objectives, Strategies
and Implementation Plan (Resolution 9244), which amendments established the practice of
purchasing all gas volumes at monthly and daily index-based market prices and implementing
monthly market price-based gas commodity rates for all Palo Alto gas customers effective July
2012.
In October 2014, JP Morgan Chase and Company sold to Mercuria a portion of its physical
commodities trading business including the entity with which the City engaged in natural gas
transactions. In September 2015, Council adopted Resolution 9545 authorizing the City
Manager to execute and an agreement causing the Master Agreement to be assigned to
Mercuria.
On May 16, 2016, Council adopted Resolution 9586 authorizing the City Manager or his
designee to purchase a portion of the City’s natural gas requirements from certain prequalified
natural gas suppliers under specified terms and conditions during calendar years 2016 through
2022, inclusive, subject to the following limitations:
1. The date for natural gas delivery for each transaction shall not exceed 36 months from
the date the transaction is executed;
2. The delivery date for any transaction shall not extend beyond December 2022;
3. The maximum aggregate transaction limit under each Master Agreement shall be $100
million;
4. All transactions are subject to the Palo Alto Municipal Code; and
5. All transactions are subject to the City’s Energy Risk Management Policy, Guidelines and
Procedures.
Discussion
The City engages regularly with Mercuria in natural gas transactions. In August 2016, EDF will
purchase the West Coast gas and energy trading operation from Mercuria.
Council adoption of the attached resolution will authorize the City Manager to execute the
attached Assignment Agreement causing the Master Agreement and all outstanding
transactions to be assigned to EDF as of September 1, 2016 and will enable the City to enter
into new business transactions with the new entity.
According to Palo Alto Municipal Code section 2.30.340(c), gas counterparties “shall obtain and
maintain during the term of the contract the minimum credit rating established as of the date
of the award of the contract of not less than a BBB- credit rating established by Standard &
Poor’s and a Baa3 credit rating established by Moody’s Investors Services”. Because the entity
with which the City is contracting is not publically rated, a waiver of this requirement is
requested. EDF’s parent company, EDF Trading Limited, is investment grade and is providing a
parental guarantee for payment. This meets the requirements in the City’s Energy Risk
Management Guidelines which state that if the parent of the counterparty meets the financial
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criteria, then that parent must provide a parent guarantee for potential credit exposure the City
may incur with the supplier.
Resource Impact
There is no resource impact resulting from adoption of the proposed resolution. All gas is
purchased at monthly and daily index-based market prices through a competitive bidding
process involving all Council-approved gas counterparties, and the gas commodity rate varies
monthly with the market price.
EDF’s financial health is superior to Mercuria’s. Because Mercuria is not a publically-rated
company, the City relied on a Letter of Credit to cover any financial risk to which the City may
have been exposed. EDF’s parent company is investment grade and is providing a parental
guarantee to the City. The level of financial risk for the City is very low due to the short-term
nature of the City’s natural gas purchases.
Policy Implications
Adoption of the attached resolution is in conformance with the Utilities Strategic Plan to
negotiate supply contracts to minimize financial risk.
Environmental Review
Adoption of the resolution approving the Assignment Agreement does not constitute a project
for the purposes of the California Environmental Quality Act, under Public Resources Code
Section 21065, because approval of the Agreement will not cause a direct or indirect physical
change in the environment.
Attachments:
Attachment A: Resolution Aproving an Assignment, Assumption, and Consent
Agreement with Mercuria Energy America Inc. and EDF LLC (DOCX)
Attachment B: Assignment, Assumption, and Consent Agreement (PDF)
Attachment C: Guarantee (PDF)
ATTACHMENT A
* NOT YET APPROVED *
Resolution No. _________
Resolution of the Council of the City of Palo Alto Approving an
Assignment, Assumption, and Consent Agreement with Mercuria
Energy America Inc. and EDF North American Trading LLC
R E C I T A L S
A. In October of 2014, JPMorgan Chase & Company sold to J.P. Morgan Ventures Energy
Corporation to Mercuria Energy Gas Trading LLC.
B. In September 2015 the Palo Alto City Council adopted Resolution 9545 approving the
Assignment, Assumption, and Consent Agreement with J.P. Morgan Ventures Energy
Corporation and Mercuria Energy Gas Trading LLC.
C. As of August 1, 2016, Mercuria Energy Gas Trading LLC was merged with Mercuria
Energy America Inc. (Mercuria)
D. Mercuria has been an active counterparty transacting gas commodity and gas
commodity-related services with the City.
E. The City purchases gas for the portfolio at month and daily index-based prices and
changes retail rates monthly to reflect those market prices.
F. In August 2016, Mercuria sold its West Coast gas trading business to EDF Trading North
American LLC (EDF).
G. EDF is not publically rated and is a subsidiary of EDF Trading Limited, an investment
grade company.
The Council of the City of Palo Alto does RESOLVE as follows:
SECTION 1. The Council approves the Assignment, Assumption and Consent Agreement
(Assignment Agreement) with Mercuria and EDF.
SECTION 2. The Council waives the application of the investment-grade credit rating
requirement of section 2.30.340(c) of the Palo Alto Municipal Code, which applies to energy
companies that do business with the City.
SECTION 3. The Council delegates to the City Manager or his designee, the authority to
execute on behalf of the City the Assignment Agreement with Mercuria and EDF effectively
assigning the Base Contract for Sale and Purchase of Natural Gas (Master Agreement) with
Mercuria to EDF.
SECTION 4. The Council’s approval of this Assignment, Assumption and Consent Agreement
does not meet the definition of a project under the California Environmental Quality Act
(CEQA), pursuant to Public Resources Code Section 21065.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
___________________________ ___________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
___________________________ ___________________________
Senior Deputy City Attorney City Manager
___________________________
Director of Utilities
___________________________
Director of Administrative Services
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FORM_EDFT PG (City of Palo Alto) FORM_EDFT PG (EDFTNA-Obligor) v10-14
GUARANTEE
EDF Trading North America, LLC (“Obligor”) and City of Palo Alto (“Beneficiary”) have entered into a NAESB Base Contract for the Sale and Purchase of Natural Gas dated March 12, 2007 , (as amended from time to
time, the “Master Agreement”), pursuant to which Obligor and Beneficiary have entered and/or anticipate entering
into one or more transactions (“Transaction” or “Transactions”), the Confirmation of each of which supplements, forms part of, and will be read and construed as one with, the Master Agreement (collectively referred to as the “Agreement”). For value received, and in consideration of the financial accommodation accorded to Obligor by
Beneficiary under the Agreement, EDF TRADING LIMITED, a corporation organized and existing under the laws
of England and Wales (“Guarantor”), hereby agrees to the following:
(a) Guarantor hereby unconditionally guarantees to Beneficiary the due and punctual payment of all amounts payable by Obligor in connection with each Transaction when and as Obligor’s obligations thereunder shall become due and payable in accordance with the terms of the Agreement (whether at maturity, by acceleration or
otherwise) with such amounts not to exceed five million U.S. Dollars (US$5,000,000.00) in the aggregate. Guarantor hereby agrees that within ten (10) business days of written demand by Beneficiary, Guarantor shall pay or
cause to be paid any such amounts that are due and payable to Beneficiary.
(b) Guarantor hereby agrees that its obligations under this Guarantee constitute a guarantee of
payment when due and not of collection.
(c) Guarantor hereby agrees that its obligations under this Guarantee shall be unconditional, irrespective of the validity, regularity or enforceability of the Agreement against Obligor (other than as a result of
the unenforceability thereof against Beneficiary), the absence of any action to enforce Obligor’s obligations under
the Agreement, any waiver or consent by Beneficiary with respect to any provisions thereof, the entry by Obligor and Beneficiary into any amendments to the Agreement, additional Transactions under the Agreement or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor (excluding
the defense of payment or statute of limitations, neither of which is waived) provided, however, that Guarantor shall be entitled to exercise any right that Obligor could have exercised under the Agreement to cure any default in respect of its obligations under the Agreement or to setoff, counterclaim or withhold payment in respect of any event
of default of Beneficiary, but only to the extent such right is provided to Obligor under the Agreement. Guarantor acknowledges that Obligor and Beneficiary may from time to time enter into one or more Transactions pursuant to the Agreement and agrees that the obligations of Guarantor under this Guarantee will upon the execution of any
such Transaction by Obligor and Beneficiary extend to all such Transactions without the taking of further action by
Guarantor.
(d) This Guarantee shall remain in full force and effect until the earlier of: (i) December 31, 2022, (ii)
receipt by Beneficiary of a written notice of termination from Guarantor, or (iii) the date on which the Agreement shall have terminated and none of the obligations of Obligor thereunder remain outstanding. Termination of this
Guarantee shall not affect Guarantor’s liability hereunder as to obligations incurred or arising out of Transactions entered into prior to the termination hereof.
(e) Guarantor further agrees that this Guarantee shall continue to be effective or be reinstated, as the case may be, if at any time, payment, or any part thereof, of any obligation or interest thereon is rescinded or must
otherwise be restored by Beneficiary upon an event of default as set forth in the Master Agreement affecting Obligor.
(f) Guarantor hereby waives (i) promptness, diligence, presentment, demand of payment, protest, order and, except as set forth in paragraph (a) hereof, notice of any kind in connection with the Agreement and this
Guarantee, or (ii) any requirement that Beneficiary exhaust any right to take any action against Obligor or any other person prior to or contemporaneously with proceeding to exercise any right against Guarantor under this Guarantee.
(g) Guarantor shall have no right of subrogation with respect to any payments made under this Guarantee until all obligations of Obligor under the Agreement are paid in full.
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(h) Guarantor represents and warrants (which representations and warranties shall be deemed to have
been made by Guarantor on the date of each Transaction) that:
i. Guarantor is a corporation duly incorporated, validly existing and in good standing under the laws of England and Wales;
ii. Guarantor has the legal capacity and the legal right to execute and deliver this Guarantee and to perform Guarantor’s obligations hereunder;
iii. no consent or authorization of, filing with, or other act by or in respect of, any governmental authority and no consent of any other person (including, without limitation, any creditor of
Guarantor) is required in connection with the execution, delivery, performance, validity or enforceability of this Guarantee;
iv. this Guarantee has been duly executed and delivered by Guarantor and constitutes a legal, valid and binding obligation of Guarantor enforceable in accordance with its terms, except as enforceability
may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws;
v. the execution, delivery and performance of this Guarantee will not violate any provision of the certificate of incorporation, by laws or other organizational documents of Guarantor, or any law, treaty, rule or regulation or determination of an arbitrator, a court or other governmental authority,
applicable to or binding upon Guarantor or any of its property or to which Guarantor or any of its property is subject; and
vi. Guarantor qualifies as an “eligible contract participant” as such term is defined in Section 1a(18) of the Commodity Exchange Act, as amended (7 U.S.C. § 1a(18)).
(i) No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege, and no waiver by Beneficiary of any right or remedy hereunder on any one occasion shall be construed as a bar to any right or remedy which Beneficiary would otherwise have on any future occasion. No failure to exercise, nor any delay in exercising, any right, power
or privilege hereunder shall operate as a waiver thereof. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law.
(j) If any term, provision, covenant, or condition of this Guarantee, or the application thereof to any party or circumstance, shall be held to be illegal, invalid or unenforceable (in whole or in part) for any reason, the
remaining terms, provisions, covenants and conditions hereof shall continue in full force and effect as if this Guarantee had been executed with the illegal, invalid or unenforceable portion eliminated, so long as this Guarantee
as so modified continues to express, without material change, the original intentions of the parties as to the subject matter of this Guarantee and the deletion of such portion of this Guarantee will not substantially impair the
respective benefits or expectations of the parties to this Guarantee.
(k) Any demand, notice or other communication in respect of this Guarantee may be given in any
manner set forth as follows to the address or number below and will be deemed effective as indicated: (i) if in writing and delivered in person or by courier, on the date it is delivered; (ii) if sent by facsimile transmission, on the
date that transmission is confirmed electronically if received before 5:00 p.m., otherwise on the next business day; or (iii) if sent by certified or registered mail (airmail, if overseas) or the equivalent (return receipt requested), on the
date that mail is delivered or its delivery is attempted.
As to Obligor or Guarantor:
Address: EDF Trading North America, LLC 4700 W. Sam Houston Parkway N.
Suite 250 Houston, TX 77041
Attention: Credit Department Fax: 281-653-1550
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FORM_EDFT PG (City of Palo Alto) FORM_EDFT PG (EDFTNA-Obligor) v10-14
With a copy to:
Address: EDF Trading Limited 80 Victoria Street 3rd Floor, Cardinal Place
London, England SW1E 5JL Attention: Robert Quick
As to Beneficiary:
Address: City of Palo Alto
250 Hamilton Avenue, 3rd floor Palo Alto, CA 94301 Attention: Director of Utilities
Phone: (650) 329-2326
(l) This Guarantee is governed by and construed in accordance with the laws of the State of New York without regard to conflicts of laws principles. All capitalized terms not defined in this Guarantee, but defined in the Agreement, shall have the meanings assigned thereto in the Agreement. Guarantor and Beneficiary, by its
acceptance of this Guarantee, irrevocably submits to the non-exclusive jurisdiction of the United States District Court for the Southern District of New York located in the Borough of Manhattan, New York, or, if such court declines to exercise or does not have jurisdiction, in any New York State court in the Borough of Manhattan, and to
service of process by certified mail, delivery to the party at the address indicated in the Guarantee. Further,
Guarantor and Beneficiary, by its acceptance of this Guarantee, waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in respect of any proceedings relating to this Guarantee. Nothing in the Guarantee precludes either party from bringing proceedings in any other jurisdiction in order to enforce any
judgment obtained in any proceeding referred to in this paragraph, nor will the bringing of such enforcement proceedings in any one or more jurisdictions preclude the bringing of enforcement proceedings in any other jurisdiction.
IN WITNESS WHEREOF, Guarantor has caused this Guarantee to be executed in its corporate name by its duly authorized officer as of the date set forth below.
EDF TRADING LIMITED
By: _________________________________
Name: Ronan Lory
Title: Chief Financial Officer
Date: _________________________________