las natural gas program overview - escribe meetings

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LAS Natural Gas Program Overview

Edison Energy | Proprietary and Confidential 2EdisonEnergy.com 2EdisonEnergy.com

LAS Natural Gas Program Overview• About LAS

• About Edison Energy

• LAS Natural Gas Program Overview

• LAS Natural Gas Program Services

• Risk Management

• Market Analysis

• Gas Acquisition

• Financial Services

• Budgeting

• LAS Natural Gas Program Performance

• LAS Natural Gas Program - Looking Ahead

• Natural Gas Market Update

• Carbon Tax


About LAS

LAS is a corporation of the Association of

Municipalities of Ontario (AMO)

• Offers competitively-priced and sustainable

business services to Ontario municipalities and

the broader public sector

• Programs & Services based on the principles

of “aggregation” & “group buying power”

Regularly host and/or attend the following:

• Information Sessions & Workshops

• Municipal Conferences

LAS’ Mandate

• Save Money, Make Money & Solve Capacity

Commodity Procurement

Electricity

Fuel

Natural Gas

Investments

High Interest Savings Account

(HISA)

Money Market Bond

Corporate Bond

Equity

Energy & Asset Management Energy Planning Tool

Energy Training & Workshops

Fleet Management Service

LED Streetlight Service

Recreation Facility Lighting

Roads Assessment Service

Administration

Closed Meeting Investigations

Group Benefits

Home & Auto Insurance

Municipal Risk Management

Sewer & Water Line Warranty

Edison Energy | Proprietary and Confidential 4EdisonEnergy.com

About Edison Energy• Edison Energy is a leading international provider of customized energy

management services for large energy end-users. The team is united by the

shared belief that in order to solve complex energy problems, leading

companies and institutions must consider procurement, sustainability, capital

investment, energy efficiency projects, and renewable energy as one

interconnected portfolio.

• Edison’s team of experts has been servicing the Ontario and Canadian markets

for over 20 years.

• Edison Energy is not affiliated with any gas marketer, trader or broker,

LDC or pipeline, and does not buy or sell energy or assets for its own

account. Positioned to perform the asset management and advisor roles,

Edison is an independent and objective agent for all its clients.

• Not to be confused with purchasing facilitators, Edison’s energy managers have a strong reputation for providing thorough, accurate service

by understanding pricing, contracts and energy markets. By actively communicating with customers, Edison strives to educate and engage all

levels of the organization, to assist in making informed decisions regarding their energy portfolio.

• Edison manages close to 100,000 GJ/day of natural gas for customers in all deregulated markets across Canada in a variety of industries.

The current client base includes: property management, government, school boards, hotels, restaurants, retail, grocery chain, movie theatres,

food production, packaging, refining, steel coating, brick production.

• Edison has been the administrator of the LAS program since 2007. LAS has a Master Services Agreement in place with Edison to continue

their role as administrator until 2024.


LAS Natural Gas

Program Overview

• The program follows a 4-year natural

gas hedging strategy that offers budget

stability by making use of aggregated

program tenders and a combination of

fixed and indexed pricing contracts.

• 80 to 90% of the program volume for

the current year (Nov 2020-Oct

2021)

• 40 to 60% of the program volume for

years 2 and 3 (Nov 2021 and Nov

2022)

• 10 to 20% for the 4th year (Nov

2023)• Union Gas

• Enbridge

• City of Kitchener

• EPCOR

•Shell

•Campus Energy

•BP

•DTE

•Direct Energy

•Twin Eagle

•LCBO

•York

•Lambton Kent DSB

•Guelph

•Vaughan

•Oakville

•Delivery obligations at Dawn, Parkway, and Empress

•65% of the portfolio volume purchased at Dawn

~11,000 GJ/day

(106,000,000 m3/year)

~11,000 GJ/day

(106,000,000 m3/year)

176 Members (163

Municipalities & 13 BPS

Organizations)

176 Members (163

Municipalities & 13 BPS

Organizations)

~3,400 Enrolled

Utility Accounts

~3,400 Enrolled

Utility Accounts

6 Approved Wholesale Suppliers

6 Approved Wholesale Suppliers


LAS Natural Gas Program Overview

• The LAS program has three fundamental objectives:

• Cost Certainty – the LAS program sets prices for a one-year period (November –October); as a result, program

members can accurately and confidently budget for natural gas costs each year.

• Competitive Prices – LAS seeks to provide a reliable supply of natural gas using only credit-worthy counterparties

and seeks to do so at a price that is competitive with market gas rates and utility gas options.

• Maximize Purchasing Power – LAS leverages economies-of-scale in securing natural gas from credit-worthy

counterparties. The program hedges 80-90% of required gas for each program year through aggregated

competitive tenders. The remainder gas is procured at typically competitive spot market rates.

• With the expertise of Edison’s strategies and recommendations for forward purchasing, LAS has achieved:

• Stable pricing for its members

• Reduction of disconnect from spot market

• Year over year cost reductions

• Price protection against potential market volatility


LAS Natural Gas Program - Services

• Review of natural gas requirements.

• Assessment of corporate purchasing objectives

and risk tolerance.

• Provide procurement strategies consistent with

LAS’ risk tolerance and purchasing objective.

• Recommend competitive and credit worthy

wholesale suppliers with which to transact.

• Assist with reviewing the supplier’s contracts.

• Call tender and choose supplier(s).

• Execute the hedging strategies with the

supplier(s).

• Enroll/de-enroll the accounts with the Utilities.

• Monitor gas consumption/deliveries and recommend load

balancing strategies.

• Nominate gas deliveries with suppliers, pipelines, and

Utilities.

• Verify the monthly invoices from the suppliers and

arranging payments.

• Utility distribution rate analysis.

• Maintenance and reconciliation of LAS reserve account.

• Annual consumption reports for program members.

• Budget assistance.

• Keep program members informed as to important market

and regulatory developments


Services – Risk

ManagementEdison provides different variations of hedging strategies to

customers based on their individual purchasing goals and risk

tolerance. Edison assists customers in reviewing the components

below to determine an energy procurement strategy that fits best,

ranging from aggressive to conservative:

Risk Appetite and Tolerance

How much usage can be exposed to market fluctuations

How much to lock in at certain price

Over what period to lock in a price

Ability to absorb the fluctuations of energy costs or pass them on to

customers

Business Objectives and Priorities

Managing energy consumption and costs

Mitigating market price risks and exposures

Looking for the stability and predictability of a guaranteed price or the

flexibility of a variable price

Budget Constraints

Band width that actual costs can go beyond or under the budget

How much time to invest in managing

• The LAS natural gas program follows a 4-year natural gas hedging strategy that

offers budget stability by making use of aggregated program tenders and a

combination of fixed and indexed pricing contracts.

• LAS purchases incremental gas contracts at various points each year with a goal

of building a total hedge portfolio of 80-90% of program requirements for the

current gas year, with remaining consumption settling at prevailing market rates.


Services – Risk Management

*Sample Natural Gas Strategy


Services – Market Analysis

• Edison Energy provides a variety of bulletins and pricing reports that give thorough insight into the energy industry:

• Monthly Canadian Energy Report

• Weekly Storage Report

• Daily Energy Report

• Customer specific market updates and purchasing strategies

• Edison utilizes a variety of publications and pricing forecasts, to provide comprehensive procurement strategies and hedging recommendations to its

customers:

• New York Mercantile Exchange (NYMEX)

• Intercontinental Exchange (ICE)

• US Energy Information Agency (EIA)

• Natural gas suppliers, marketers and Canadian banks - daily/weekly/monthly bulletins

• Gas Daily (Platt’s publication)

• North American energy reports from Bentek Energy

• North American weather outlook (NOAA)

• Natural Gas Inventory levels for North America

• Economic Growth data

• Edison also assists LAS with quarterly bulletins, blogs, webinars, etc. to keep members regularly updated on market/program developments.


Services – Market Analysis

*Sample Natural Gas Bulletins


Services – Gas Acquisition

• Natural gas strategies provide LAS with recommendations and targets regarding volumes, terms, and prices for both the commodity and

deregulated transportation by delivery point. These targets are detailed on an Authority to Transact document that is provided with the

natural gas strategy. Once LAS executes and returns the Authority to Transact, Edison monitors the market for a window within the

recommended price targets.

• Once prices are within target, Edison calls tender between all LAS’ approved suppliers, requesting pricing for the recommended

volumes and terms. Upon the deadline, Edison reviews the quotes, and transactions are executed with the winning supplier(s). Results

of the tender are provided to LAS for record keeping purposes. Edison Energy will only receive quotes from suppliers that are actively

contracted with LAS through a GasEDI or NAESB. This is to ensure that received quotes can be transacted at the time of the tender, as

natural gas prices move on a minute-by-minute basis, removing the potential of losing a possible purchasing opportunity due to the

necessary contracts not being in place.

• As an independent consultant, Edison works with, but is not affiliated with, multiple suppliers for natural gas. Edison Energy

does not have any direct supply agreements in place nor take title to any energy commodities. Customers are therefore set up

with credit-worthy and price competitive suppliers.

• When a transaction has been executed, a confirmation email is sent to the necessary contacts outlining the details of the completed

transactions.

• If a target cannot be met due to market conditions, Edison then provides LAS with an updated strategy with revised targets. The number

of strategies sent per year is determined by the market conditions and potential buying opportunities, these are also influenced by the

forward purchases that LAS already has in place.


Services – Financial Services

Natural Gas Price Components

• The price of the gas itself

• Deregulated in all provinces

• North American continental market with prices set on NYMEX in US$/MMBtu

• AECO (in Alberta) is the major reference price point in Canada

• Represents approx. 35% of gas costs.

Commodity

(Managed through the LAS program)

• The price to move the gas from the supplier to the local utility

• Partially deregulated

• In some cases, there is a regulated transportation cost, which is billed by the utility to move the gas into the franchise area

• Represents approx. 20% of gas costs (15% deregulated, 5% regulated).

Transportation

(Managed through the LAS program)

• The price to move the gas from the local utility to the end use site/meter.

• Regulated in all provinces

• Distribution cost also includes the carbon tax as of Apr 1/19

• Represents approx. 45% of gas costs.

Distribution


Services – Financial Services• The LAS program is currently on an Agent Billing & Collection

(ABC) billing methodology with the various utilities. Through this

billing method, program members pay their utility (Enbridge)

invoices as normal for commodity, transportation and distribution

charges. Funds are then collected by the utility and remitted to an

LAS reserve account which is managed by Edison. The utility

remits funds based on deliveries and collects funds based on actual

consumption. Remitted funds are used to pay the supplier (i.e.

Shell, BP, etc.) invoice for the commodity and deregulated

transportation, which is facilitated by Edison.

• The commodity and transportation prices on the individual utility

invoices for the sites are set annually by Edison, with approval from

LAS, and stay in place for the term of the gas year (Nov-Oct). The

prices set are a reflection of the commodity and transportation deals

in place with the various suppliers, as well as incorporating the

program fees and contingency to cover any potential volatility in the

market or financial impacts from load balancing.

• Financial reconciliation of funds collected and disbursed is tracked monthly, and financial true ups with the utility are completed at contract year end. Following an annual

review of the program and based on the health of the program’s reserve fund, LAS will often provide rebates to program members based on the difference of the forecast

price at the beginning of a program year and the actual price at the end of the year. Rebates are based on an individual member’s usage as a percent of the total program

volume.

• All services are provided to program members at a very competitive price, due to the large volume and number of members in the LAS program. All fees collected through

the LAS program will be based on account-level consumption and will be collected via the ABC method using an all-inclusive per m3 fee. The current program fee of

$0.10/GJ (or $0.0038/m3) is incorporated into the annual program commodity price that appears on member’s end use utility invoices. By using this approach there are no

additional invoices for program members.


Services – Budgeting

• Edison can provide annual budget assistance for customers. The price forecast encompasses all elements influencing the forward price

for natural gas, including:

• Forward NYMEX

• Forward basis (AECO, Dawn, etc.)

• Forward exchange rates

• Any forward commodity hedges in place

• Any forward deregulated transportation deals in place

• Regulated utility transportation charges

• Regulated utility distribution charges

• Applicable carbon tax

• GST/HST

• The budget is customized to meet the requirements of the customer and includes elements such as volumes, hedges, and total cost

calculations. The report is updated as required by the customer, depending on volatility, and any major changes are communicated to

the customer immediately in order to plan accordingly for budget purposes.


Services – Budgeting


Services – Summary

• Financial strength, resources, and expertise makes LAS/Edison an ideal partner for the delivery of high-quality, high-

value energy management services such as:

• analysis and advice for structuring optimum natural gas supply arrangements

• assessing risk tolerance and corporate purchasing objectives, ensuring strategies are aligned

• supplier portfolio development and contracting

• evaluating pipeline and utility contract parameters

• contract administration and facility management

• buying or selling natural gas, and coordinating the scheduling of gas deliveries with suppliers

• monitoring imbalances relative to tolerances and mitigating those, as well as providing 24/7 on-call support

• reporting of costs and cost allocation, invoice verification, and reporting of actual cost vs budget, performance

tracking, etc.

• Edison provides the full suite of services for both advisory and operational management of a customer’s natural gas

portfolio.


LAS Natural Gas Program Performance

• LAS program price includes commodity, deregulated transportation, and regulated utility (Enbridge) transportation where applicable.

• Enbridge price includes commodity and regulated utility transportation

• Rates do not include regulated utility distribution or carbon tax, as these cost items are applicable regardless of the LAS program or Enbridge supply.

• Rates do not include LAS rebates.

• The above is an example to show the historical trend of the LAS program rate versus the regulated utility.

Nov 13-Oct 14 Nov 14-Oct 15 Nov 15-Oct 16 Nov 16-Oct 17 Nov 17-Oct 18 Nov 18-Oct 19 Nov 19-Oct 20 Nov 20-Jan 21 Average

LAS Average Rate ($/m3) 0.207$ 0.245$ 0.224$ 0.204$ 0.180$ 0.174$ 0.161$ 0.150$ 0.198$

Enbridge Average Rate ($/m3) 0.215$ 0.220$ 0.168$ 0.166$ 0.151$ 0.163$ 0.134$ 0.144$ 0.173$

Rate Differential ($/m3) 0.008-$ 0.025$ 0.056$ 0.038$ 0.029$ 0.011$ 0.027$ 0.006$ 0.025$


LAS Natural Gas Program Performance

• In comparison, for Nov 2013 to current, the LAS program rate has averaged approx. $0.025/m3 higher compared to the regulated utility, a slight premium.

These prices include applicable transport, both deregulated and utility regulated. The objective of the LAS program is not to beat the utility or market, but

to provide stable pricing for budget purposes, as well as trying to achieve year over year cost reductions.

• The most significant bump up in rates, mainly the utility rate, came during the winter of 2013/14 where we were hit by the extreme cold temperatures of the

Polar Vortex, which caused an increase in heating demand and natural gas inventories to hit record lows. The LAS program rate remained relatively unfazed

during this period due to the hedges in place.

• Since the Polar Vortex, natural gas prices have remained relatively stable/low due to increased natural gas production as well as a couple back-to-back winters

of milder temperatures. With the downward pressure in the natural gas markets over the past few years, the LAS program has been able to layer in new

hedges to work down the weighted average program price and continue the trend of YOY rate reductions.

• We saw a bump up in natural gas prices through the winter of 2018/19. The bump up in pricing is mainly due to natural gas inventories entering last winter at

13-year lows, as well as the spike in heating demand due to prolonged colder temperatures this winter. The LAS program rate remained unfazed due to the

hedges in place.

• Based on the forward hedges currently in place for Nov 20-Oct 25 as well as the forward market outlook, the LAS program is positioned to continue its

downward/stable trend over the next few years.

• By taking a layered approach to hedging, LAS has positioned itself to close the price gap with the utility over the next few years and keep rates relatively

stable, especially with the significant upward movement we’ve seen in the markets through 2020. Going into 2021, members will be seeing another year over

year rate reduction of approx. $0.01/m3, even though the market is moving up, giving some good price protection going into this winter. With natural gas

production remaining low, a direct result of the pandemic and global oil collapse, there is concern heading into the winter regarding potential supply/demand

imbalances, which has put significant upward pressure on the market. LAS members are positioned to be well protected from volatility this year heading into a

winter surrounded by uncertainty.


LAS Natural Gas Program – Looking Ahead

• The graph/table above provides insight as to how the program price is shaping up for the next few years based on transactions completed to date as well as forward market

outlook.

• Forward spot market is based on current market conditions + a buffer of approx. 10% to account for potential upward market volatility.

• Prices are for commodity only, does not included deregulated transportation.

• Prices are subject to change based on additional hedges added to the program and changing market conditions.

Feb 21-Oct 21 Nov 21-Oct 22 Nov 22-Oct 23 Nov 23-Oct 24 Nov 24-Oct 25 Average

LAS Projected Rate ($/m3) 0.101$ 0.093$ 0.097$ 0.100$ 0.101$ 0.098$

Spot Market Projected Rate ($/m3) 0.103$ 0.099$ 0.087$ 0.088$ 0.095$ 0.094$

Rate Differential ($/m3) 0.002-$ 0.006-$ 0.010$ 0.012$ 0.006$ 0.004$


Natural Gas Market Update

• Canadian natural gas production has been holding steady around 15 BCF/day and is expected to continue this trend into 2021 (a drop from the over 16 BCF/day in production

seen in 2019). Canada’s overall active rig count is currently 93 (49 oil, 44 gas). This represents a year over year decrease of 37 compared to the same time last year

• Commercial gas demand sees reductions in the near term under the assumption that restaurants and other food establishments, as well as other retail end users will see a

particularly high number of closings or modified work schedules in order to help control the spread of COVID-19.

• Industrial demand will decrease due to the weakening economic outlook, leading to a lower forecast in natural gas-weighted manufacturing.

• Wildcards going into the winter continue to be weather and how that will fare against lower gas production (winter supply/demand imbalance), and how the

“Second Wave” of COVID-19 will impact demand entering another round of economic shutdowns.

• End users need to be aware of the potential for increasing gas costs heading into 2021 given the uncertainty on how the pandemic will be resolved and the extent

of the economic impact on commodity markets.

• Natural gas inventories at healthy levels heading into the winter (slow start to winter).

• US natural gas inventories currently at 3460 BCF, 251 BCF ahead of last year.

• Canadian natural gas inventories currently at 731 BCF, 154 BCF ahead of last year.

• With oil prices in the $40 US/barrel range due to the supply surplus caused by COVID-19 (limited

global oil demand), global cutbacks in oil production have affected the associated gas that is produced,

thus putting upward pressure on natural gas prices. Expectations are for this trend to continue into

2021, which has led to concerns surrounding the potential supply/demand imbalance come this winter

once heating demand comes into play, as well as potentially impacting natural gas inventories heading

into the winter of 2021/22.

• Looking ahead to 2021, US natural gas production expected to average 88 BCF/day, a significant drop

from 91 BCF/day in 2020 and the 93 BCF/day in 2019. After hitting a record 97 BCF/day in December

2019, monthly production is expected to hit a low of 87 BCF/day in April 2021 before increasing

slightly.


Natural Gas Market Update

• The market has been very “touchy” over the past couple of months, depending on weekly storage injections/withdrawals as well as changes in the short-term weather forecast.

• Colder temperatures dominated the end of the shoulder season, keeping upward pressure on natural gas prices in the forward market.

• Some pull back in pricing due to the slow start to winter.

• Risk continues to be once we start to see some sustained cold weather in the forecast, which would likely push prices back up given the potential for lower gas production heading into Q1 2021.


Carbon Tax

• In 2019, the federal government announced that it would impose carbon tax in provinces and territories with no adequate emissions pricing plans of their own, as a means to reduce

Greenhouse Gas Emissions. The fuel charge assigns a value to each tonne of GHG emissions beginning at $20/tCO2e in 2019 and increasing by $10 annually to $50/tCO2e in 2022. The

federal carbon tax applies to fuel producers and distributors, who will pass on the costs to consumers. See below table for sample Federal Fuel Charge Rates for 2019-2022.

• The plan was met with heavy push back from the provinces of Alberta, Ontario, Saskatchewan and Manitoba.

• Following a Liberal minority government win in the October 2019 federal election, the carbon tax would live to see another day. The federal carbon tax remains in place for the provinces for

Ontario, Manitoba, Saskatchewan and Alberta that previously did not have a pricing plan of their own.

• The provinces of Alberta, Ontario, Saskatchewan and Manitoba continue their fight in court with feds regarding the future of the carbon tax.

• The federal government recently released an updated strategy to dramatically reduce greenhouse gas emissions by 2030 — with the primary focus being a gradual hike in the federal carbon

tax on fuels to $170/tonne by that year.

• The tax is currently $30/tonne this year and was already expected to hit $50/tonne in 2022. With this new initiative, the tax will now increase by $15/tonne each year for the next eight years

in order to wean consumers off fossil fuels in favour of cleaner energy sources.

• At $170/tonne, this equates to roughly $0.32/m3 (or $8.45/GJ) for natural gas.

• Like the current plan in place, it is expected to be met with aggressive push back on the provincial level.

Federal Fuel Charge Rates

Type Unit

($ per)

April 2019

($20/tonne)

April 2020

($30/tonne)

April 2021

($40/tonne)

April 2022

($50/tonne)

Marketable natural gas m3 0.0391 0.0587 0.0783 0.0979

Gasoline litre 0.0442 0.0663 0.0884 0.1105

Heavy fuel oil litre 0.0637 0.0956 0.1275 0.1593

Light fuel oil litre 0.0537 0.0805 0.1073 0.1341

Propane litre 0.0310 0.0464 0.0619 0.0774

las natural gas program overview - escribe meetings

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