HomeMy WebLinkAboutStaff Report 7253
City of Palo Alto (ID # 7253)
City Council Staff Report
Report Type: Consent Calendar Meeting Date: 10/4/2016
City of Palo Alto Page 1
Summary Title: Gas Master Agreement with Sequent Energy Management
Title: Adoption of a Resolution Authorizing the City Manager or his Designee
to Approve a Base Contract for Sale and Purchase of Natural Gas with
Sequent Energy Management, LP, and to Purchase a Portion of the City’s
Natural Gas Requirements under Specified Terms and Conditions During
Calendar Years 2016 through 2022
From: City Manager
Lead Department: Utilities
Recommendation
Staff recommends that the City Council:
1. Approve the attached resolution (Attachment A) approving the Base Contract for Sale
and Purchase of Natural Gas with Sequent Energy Management, LP (Sequent Master
Agreement);
2. Approve the attached resolution (Attachment A) authorizing the City Manager or his
designee to purchase a portion of the City’s natural gas requirements from Sequent
Energy Management, LP (Sequent) pursuant to specified terms and conditions under the
Sequent Master Agreement during calendar years 2016 through 2022, inclusive, subject
to the following limitations:
a. The date for natural gas delivery for each transaction shall not exceed 36 months
from the date the transaction is executed;
b. The delivery date for any transaction shall not extend beyond December 2022;
c. The maximum aggregate transaction limit under this Master Agreement shall be
$100 million;
d. All transactions are subject to the Palo Alto Municipal Code; and
3. All transactions are subject to the City’s Energy Risk Management Policy, Guidelines and
Procedures; 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
4. Delegate to the City Manager, or his designee, the authority to execute on behalf of the
City the Sequent Master Agreement.
City of Palo Alto Page 2
Executive Summary
An active set of creditworthy counterparties is essential to ensure that the City of Palo Alto
Utilities meets its obligation to meet customers’ natural gas demands. Council approved an
ordinance modifying the Municipal Code to streamline the purchase and sale of wholesale
utility commodities and services. Subsequently, Council approved a Standard Form Master
Agreement available to all financially strong natural gas suppliers for execution with non-
substantive changes.
Sequent has agreed to become one of the City’s gas counterparties under the Council-approved
Standard Form Master Agreement. The proposed Master Agreement with Sequent (Attachment
B) is the Council-approved Standard Form Master Agreement with non-substantive negotiated
changes and executed by Sequent. The proposed resolution authorizes the City Manager to
purchase natural gas under the agreement with Sequent within a maximum expenditure and
transaction term limits.
Background
Approved Counterparties
On May 16, 2016, Council approved a set of gas Master Agreements (Staff Report 6802,
Resolution 9586) enabling the City to transact for natural gas and gas-related products. The
approved Master Agreements are with the following counterparties:
1. BP Energy Company;
2. ConocoPhillips Company
3. Mercuria Energy Gas Trading L.L.C.
4. Powerex Corp; and
5. Shell Energy North America (US), L.P.
Under Resolution 9586, Council delegated authority to the City Manager to transact under the
Master Agreements subject to certain conditions and restrictions including a $100 million
expenditure limit applied to each Master Agreement. The cost of natural gas purchased under
the Master Agreements is a function of market prices and the City’s actual gas use. The City’s
expected gas commodity cost is $8.3 million in fiscal year (FY) 2017 and is forecasted to
increase to $12.6 million by FY 2025, however gas prices are volatile and unpredictable and
actual costs incurred and passed through to ratepayers could be different.
On August 15, 2016, Council approved an ordinance modifying the Municipal Code to
streamline the purchase and sale of wholesale utility commodities and services and to explicitly
allow for a Council-approved standard form agreement (August 15 City Attorney Report). A
second reading of the ordinance was on August 29, 2016, and it went into effect on September
29, 2016. On October 4, 2016, Council will consider approval of a resolution to approve the
Standard Form Master Agreement (Staff Report 7252), which would be available to all
financially strong natural gas suppliers for execution with non-substantive changes.
City of Palo Alto Page 3
Discussion
All transactions under the Master Agreement with Sequent will be executed by staff in
accordance with the Council-approved Energy Risk Management Policy. Council is provided
with an update of all executed transactions under the Master Agreements in the quarterly
Energy Risk Management reports.
While Sequent will be the sixth enabled gas supplier, it is likely that most transactions will be
executed with the two or three active suppliers. Staff recommends a maximum transaction
limit of $100 million for Sequent, the same as each of the City’s other Master Agreements.
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. Sequent’s parent company, Southern Company Gas, 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 criteria, then that parent must provide a parent guarantee for potential credit
exposure the City may incur with the supplier.
Resource Impact
Approval of the recommendation will not impact the FY 2017 budget.
Policy Implications
Authorizing the City Manager to buy and sell natural gas to meet load obligations under the
Sequent Master Agreement conforms to the Council-approved Energy Risk Management Policy
and the Palo Alto Municipal Code. Further, the recommendation is consistent with the Council-
approved GULP Objectives and Utilities Strategic Plan objective to manage supply cost by
negotiating supply contracts to minimize financial risk.
Environmental Review
Council’s approval of the Sequent Master Agreement and authorization for the City Manager to
purchase natural gas from Sequent under the Sequent Master Agreement does not meet the
definition of a project for the purposes of the California Environmental Quality Act, under Public
Resources Code Section 21065 and CEQA Guidelines Section 15378(b)(5), because it is an
administrative governmental activity which will not cause a direct or indirect physical change in
the environment.
Attachments:
Attachment A: RESO Sequent Gas Master Agreement (PDF)
Attachment B: NAESB Base Contract Sequent (PDF)
Attachment C: NAESB Special Provisions Sequent (PDF)
Attachment D: NAESB CSA Sequent (PDF)
City of Palo Alto Page 4
Attachment E: Sequent Parental Guarantee (PDF)
NOT YET APPROVED
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Resolution No. _____
Resolution of the Council of the City of Palo Alto Authorizing the City Manager to
Approve a Base Contract for Sale and Purchase of Natural Gas with Sequent
Energy Management, LP and to Purchase a Portion of the City’s Natural Gas
Requirements from Sequent Energy Management, LP Under Specified Terms and
Conditions during Calendar Years 2016 through 2022, Inclusive
RECITALS
A. On April 23, 2012, the Council adopted Resolution 9244 amending the Gas
Utility Long-Term Plan (GULP) Objectives, Strategies, and Implementation Plan to discontinue
the laddering purchase strategy and implement gas supply rates that change monthly
according to market prices
B. In accordance with GULP, the City must purchase and, incidental to purchases,
sell gas to meet the needs of its gas customers by contracting for terms varying from less than
one month to one month. The City's Energy Risk Management Policies provide that the City
will purchase only that quantity of gas meeting its load requirements at the time a transaction
is executed.
C. By an ordinance adopted August 15, 2016, Council approved changes to the
Municipal Code specifically streamlining the purchase and sale of wholesale utility
commodities and services and explicitly allowing for standard form master agreements.
D. The natural gas standard form master agreement is based on the North
American Energy Standards Board, Inc. (NAESB) Base Contract for Sale and Purchase of Natural
Gas 2006 version and includes Special Provisions and a Credit Support Addendum (Master
Agreement).
E. By Resolution 9586 adopted May 16, 2016, Council authorized the City
Manager 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
2025, inclusive.
F. The City intends to purchase natural gas from one or more prequalified
suppliers for delivery during calendar years 2016 through 2022, inclusive, so long as the
supplier with whom the City negotiates a specific purchase transaction continues to be
qualified and otherwise eligible to transact with the City.
ATTTACHMENT A
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E. Sequent Energy Management, LP (Sequent) desires to execute a Master
Agreement with the City (Sequent Master Agreement) in order to be a supplier for delivery
during calendar years, 2016 through 2022, inclusive, so long as Sequent continues to be
qualified and otherwise eligible to transact with the City. Sequent is not publically rated and is
a subsidiary of Southern Gas Company, an investment grade company.
NOW, THEREFORE, the Council of the City of Palo Alto RESOLVES as follows:
SECTION 1. The Council hereby approves the Sequent Master Agreement.
SECTION 2. The Council hereby authorizes the City Manager or his designee, the
Director of Utilities, to purchase a portion of the City’s natural gas requirements from Sequent
Energy Management, LP by negotiating one or more individual transactions under the Sequent
Master Agreement, including, but not limited to, contracts, addenda, confirmations, and
transactions, subject to Section 3.
SECTION 3. The purchases negotiated under the Sequent Master Agreement shall
conform to the following requirements:
a.The maximum expenditures shall be $100 million;
b.The maximum term of any individual transaction shall not exceed three years,
commencing on the delivery date of the transaction. The sentence preceding
notwithstanding, the City may enter into a transaction greater than three
years, if the Council grants prior approval to such transaction; and
c. No transaction shall extend beyond December 31, 2022.
SECTION 4. 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 5. The Council delegates to the City Manager, or his designee, the
authority to execute on behalf of the City the Sequent Master Agreement.
SECTION 6. The Council hereby finds and determines that the adoption of this
Resolution does not meet the definition of a project for the purposes of the California
Environmental Quality Act, under Public Resources Code Section 21065 and CEQA Guidelines
/ /
/ /
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Section 15378(b)(5), because it is an administrative governmental activity which will not cause
a direct or indirect physical change in the environment.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSTENTIONS:
ABSENT:
ATTEST:
_____________________________ _____________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
_____________________________ ______________________________
Senior Asst. City Attorney City Manager
______________________________
Director of Administrative Services
______________________________
Director of Utilities
ATTACHMENT B
ATTACHMENT C
ATTACHMENT D
ATTACHMENT E