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Report to: General Committee Report
Date: May 17, 2010
SUBJECT: 2009 Hedging Contract
Results
PREPARED BY: Mark Visser, Manager of Financial Strategy
& Investments
RECOMMENDATION:
1) THAT the
report dated May 17, 2010
entitled “2009 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
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.
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 10% 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).
In 2009, the total savings of the Electricity Procurement
Strategy were $217,000. Because each of
the Town’s 147 electricity accounts is different, the overall strategy
identifies the optimal procurement method for each account based on consumption
patterns. Currently, part of this
strategy involves hedging for future electricity usage. The net cost of the hedge was $86,000 which
is incorporated into the $217,000 net savings. The details are as follows:
Volume of Hedging
Contract = 3,584 MWh (Megawatt Hours)
Average Dollar
Amount of Hedging Contracts = $60.85 per MWh
Average On-Peak
Spot Market Price = $37.78 per MWh
Cost of Hedge =
$86,267 [3,584 * ($60.85 - $37.78)]
In 2009, the Town
extended the Electricity Procurement Strategy and Wattsworth
purchased hedges on behalf of the Town through to April 2011. Town staff will re-evaluate this strategy in
the first quarter of 2011.
Not
Applicable
Not Applicable
Not
Applicable
Not
Applicable
RECOMMENDED BY:
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