Report to: General Committee                                                          Report Date: June 1, 2009

 

 

SUBJECT:                          2008 Hedging Contract Results

PREPARED BY:               Mark Visser, Manager of Financial Strategy & Investments

 

 

 

RECOMMENDATION:

 

1) THAT the report dated June 1, 2009 entitled “2008 Hedging Contract Results” be received.

 

2) And that Staff be authorized and directed to do all things necessary to give effect to this resolution.

 

 

EXECUTIVE SUMMARY:

 

Not applicable

1. Purpose   2. Background   3. Discussion   4. Financial  

 

5. Others (Environmental, Accessibility, Engage 21st, Affected Units)   6. Attachment(s)

 

 

PURPOSE:

 

Pursuant to Regulation 653/05 Section 7, the Municipal Act requires the Treasurer to prepare and present to the municipal council, once in that fiscal year, a detailed report of all commodity price hedging agreements.

 

The Town had only one hedging agreement in 2008 which was for electricity procurement.

 

 

BACKGROUND:

 

In December 2007, Council approved an “Electricity Procurement Strategy for the Corporation of the Town of Markham” that was brought forward by the Markham Energy Conservation Office with assistance from Wattsworth Consulting.  The strategy involved altering the way the Town purchases electricity in an attempt to lower total costs and minimize financial risk.  

As part of the strategy, Wattsworth Consulting recommended entering into a hedging contract to minimize potential risk of spot market price fluctuations.  A hedge is merely a financial agreement that fixes the price to be paid by the municipality for the future delivery of a commodity.  A hedge is typically used to reduce cost fluctuations and provide cost certainty.

The Town agreed to hedge approximately 5% of its total electricity requirements as most of the Town’s electricity purchases are at a fixed amount or demand patterns dictate another strategy (i.e. street lights are kept on the spot market because of low non-peak rates). 

OPTIONS/ DISCUSSION:

 

In 2008, the total savings of the Electricity Procurement Strategy were $362,000.  The net cost of the hedge was $18,000 which is incorporated into the $362,000 net savings. The details are as follows: 

Volume of Town’s Hedging Contract = 1,825.2 MWh (Megawatt Hours)

Average Dollar Amount of Town’s Hedging Contracts = $72.27 per MWh

Average On-Peak Spot Market Price = $62.33 per MWh

 

Therefore, the cost of the hedging contacts to Town was $18,148 [1,825 * ($72.27 - $62.33)].  As previously mentioned, hedging contracts are not intended to generate savings.  While they do have the ability to reduce costs in the short term (depending on market conditions), they are intended to provide cost certainty.  In this case, the Town entered into hedging contracts to greater ensure the cost savings that were predicted by Wattsworth under the new electricity procurement strategy.

 

Looking ahead, the Town extended the hedging strategy into 2009 as electricity rates were comparatively low at the time and were expected to rise as the economy recovered. 

 

FINANCIAL CONSIDERATIONS AND TEMPLATE: (external link)

 

 

ENVIRONMENTAL CONSIDERATIONS:

 

Not Applicable

 

ACCESSIBILITY CONSIDERATIONS:

 

Not Applicable

 

 

ENGAGE 21ST CONSIDERATIONS:

 

Not Applicable

 

 

BUSINESS UNITS CONSULTED AND AFFECTED:

 

Not Applicable

 

 

RECOMMENDED

                            BY:    ________________________          ________________________

                                      Barb Cribbett, Treasurer                     Andy Taylor, Commissioner,

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