Loading...
HomeMy WebLinkAbout20030926Gas Supply Risk Mgt. Program.pdfEXECUTIVE OFFICES RECEIVED INTERMOUNTAIN GAS COMPANY FILED 555 SOUTH COLE ROAD. P.O. BOX 7608 . BOISE, IDAHO 83707 . (208) 377~ "-f.~7-€Mf\ \: 14-LUUj ;)\.-r L\a 0 ". " ' ' ~HU t'UtLh- UT\LIT IES COt1t1ISSIOH September 26, 2003 Jean D. Jewell Commission Secretary Idaho Public Utilities Commission POBox 83720 Boise, I D 83720-0074 Re:Intermountain Gas Company IPUC Order No. 29277 Case No. INT-03- Dear Jean: Intermountain Gas Company hereby files with this Commission a copy of its Gas Supply Risk Management Program. The attached Program embodies those ongoing practices employed by Intermountain since the mid 90's when our Board of Directors first authorized the use certain risk reducing transactions. We appreciated the opportunity to describe to those in attendance at the recent public meeting several of the concepts contained herein. Should anyone have any questions regarding the attached , please contact me at 377-6168. Respectfully yours Director Market Services and Regulatory Affairs MPG/slk Attachment INTERMOUNTAIN GAS COMPANY GAS SUPPLY RISK MANAGEMENT PROGRAM OBJECTIVES, POLICY GUIDELINES & PROCEDURES II. III. IV. VI. INTERMOUNTAIN GAS COMPANY GAS SUPPLY RISK MANAGEMENT PROGRAM OBJECTIVES, POLICY GUIDELINES AND PROCEDURES TABLE OF CONTENTS PROGRAM OBJECTIVES ..... ............ .................... .... .......... ................ 0 R G ANIZA TI 0 N AL S TR U C TURE ..................................................A. BOARD OF DIRECTORS ..................................................B. PRESIDENT ................ ............ ...... ... ....... ........... ........... ..... C. GAS SUPPLY RISK MANAGEMENT COMMITTEE.......... ADEQUATE AND RELIABLE NATURAL GAS SUPPLIES STORATE AND TRANSPORTATION ........................................ MITIGATE THE ADVERSE IMPACT OF COMMODITY PRICE RISK INHERENT IN THE MARKET ............................... CREDIT RISK ............................................................................. FINANCIAL RISK MANAGEMENT EXECUTION ....................... APPENDIX A:IlEDGE POLICY BOARD RESOLUTION ....................................... APPENDIX B:GAS SUPPLY RISK MANAGEMENT COMMITTEE MEMBERS..... APPENDIX C:CURRENTLY APPROVED FINANCIAL COUNTERP ARTIES .......... APPENDIX D:RISK MANAGEMENT INSTRUMENT EXAMPLES ....................... Paae PROGRAM OBJECTIVES The objectives of Intermountain Gas Company s ("Intermountain or the Company Gas Supply Risk Management Program ("Program ) are: a) help insure adequate natural gas supplies, transportation and storage are available for its customers needs b) to mitigate the adverse impact that significant price movements in the natural gas commodity can have on the Company s supplies, customers and other operations, and c) minimize the credit risk inherent in the implementation of certain price risk reducing strategies. The measures employed in meeting these objectives include the use of operational measures as well as the effectuation of risk-reducing financial instruments. The Program objectives acknowledge that natural gas is a commodity and that fundamental elements of a free market commodity include its price is largely influenced by actual, as well as perceived, market and supply imbalances and that its intermediate and longer term price should trade around the commodity's cost of production. It is not the objective of this program, as more fully explained herein, to realize the lowest cost of actual natural gas purchases for delivery to its customers. SPECULATION IS PROHIBITED UNDER ANY CIRCUMSTANCE. Speculation is defined as using financial instruments based on expected price trends without being matched to a physical natural gas purchase requirement. II.ORGANIZATIONAL STRUCTURE Board of Directors The Board of Directors of the Company recognizes the need for management to use certain risk mitigation tools to reduce risk and its corporate governance obligation inherent in risk management. In 1995 , the Board of Directors adopted by Board Resolution a Risk Management Policy dealing with Hedging that provides policy guidance to this Program. Such resolution is attached hereto as Appendix A. President The President of Intermountain is responsible for the development of the strategic direction for the Company and as such is responsible for the establishment of and overseeing the structure, direction, conduct and control of the Company s Gas Supply Risk Management Program. A Gas Supply Risk Management Committee Committee ) has been established to assist the President in these responsibilities. Gas Supply Risk Management Committee The Gas Supply Risk Management Committee consists of senior level management team (see Attachment B), established by the President, responsible for developing and implementing the Company s Gas Supply Risk Management Program. The performance of this function will include and incorporate the elements of: a) adequate and reliable natural gas supplies b) adequate and reliable natural gas transportation and storage c) customer price stability in light of the price risk inherent in the commodity markets d) appropriateness and accessibility of certain risk-reducing financial instruments e) credit risks inherent in the implementation of the above noted elements. The Committee shall recognize that timely information and prompt management attention are also important elements in the realization of the Program objectives and, in that regard, the Committee will hold regularly scheduled, as well as on an as needed basis, meetings in the performance of their duties. Minutes will be kept for each meeting, which will serve as documented Committee authorizations and actions. III.AD EQ U A TE AND RELIABLE NATURAL GAS SUPPLIES, TRANSPORTATION AND STORAGE To help insure that this Program objective is met, the Committee will perform an assessment of long-term (one to five year) natural gas demand supply, transportation and storage on a regular basis. This assessment incorporates the same elements found in the Company s Integrated Resource Plan filed Bi-annually with the Idaho Public Utilities Commission. This demand forecast will be reviewed in aggregate form as well as a Load Duration Curve that examines the daily gas requirement needs during the winter and shoulder month periods. The demand forecast will be viewed in light of the available transportation, storage, and contracted gas supply resources to identify any deficits in the available delivery or supply volumes. Supply resource deficits typically take the form of 1) base load deficits that can be supplied with annual supply contracts, 2) shoulder month deficits that can be met with a combination of storage and seasonal supply contracts , and 3) needle peaking deficits that, although generally met with storage mayor economically should require short-term or spot market purchases. The Company may use an outside representative to help it carry out its gas supply responsibilities. Currently Intermountain has under contract, IGI Resources , Inc. IGI" - a BP Energy Company) who is directed by the Committee to solicit on Intermountain s behalf the necessary supply, transportation and or storage resources to meet any projected needs and deficits. The Committee will ensure that no gas supply, transportation or storage contract either long-term or short-term, is consummated without due diligence as to it's need or the related aspects of security, reliability, credit risk and price. The Committee will recognize and place emphasis on the value in longer term contractual arrangements when implementing the Company s supply, transportation and storage portfolios and insure that these arrangements are staggered as to their renewal date in such a way as to enhance the Company s ability to renegotiate the same. Once the supply portfolio is in place, it will then be managed on a day-to-day basis matching the supply resources to the daily needs of Intermountain s customers. The Company s Gas Control Department will provide IGI with a "one month ahead" look at its anticipated demand. This forecast will embody the aforementioned Load Duration Curve as well as, inter alia, the latest outlook for the weather. IGI will again match this shorter-term, updated demand forecast against the contracted supplies already in place to determine if existing supplies are adequate, whether or not additional short-term supplies are necessary, opportunities for off-system sales and opportunities for short-term transportation acquisitions or releases. Additionally, a daily requirements forecast will be performed by Intermountain Gas Control Department and transmitted to IGI at least 24 hours in advance of the gas day which will "fine tune" Intermountain s daily gas needs and incorporate the most up-to-date weather outlook. IV.MITIGATE THE ADVERSE IMPACT OF COMMODITY PRICE RISK INHERENT IN THE MARKET Another of the objectives of the Company s Gas Supply Risk Management Program is to mitigate the adverse impact that significant price movements in the natural gas commodity can have on the Company s customers and other operations. If, in the determination of the Committee, there is a material likelihood that projected wholesale prices will rise significantly from current levels the Committee will begin to consider the effectuation of certain risk-reducing transactions to include, but not limited to, those outlined in Appendix D attached hereto. On a regular basis, the Committee will review the actual and anticipated natural gas commodity prices (Weighted Average Cost of Gas or "W ACOG") delivered into Intermountain s system. This review will include a forecasted W ACOG price for the current as well as subsequent Purchased Gas Cost Adjustment or "PGA" periods. These W ACOG projections, with the assistance of IGI, will incorporate at a minimum 1) an outlook for the impact Intermountain s storage resources delivered during the winter heating season will have on the projected W ACOG, 2) a point in time reference to future gas prices as predicted by the futures market for those supplies currently subjected to a market index, and 3) any natural gas supplies with a fixed price secured through the employment of various financial instruments or otherwise. The Committee will then apply its judgement, based upon, inter alia market supply and demand fundamentals, in evaluating the market risk inherent in these W ACOG projections. In conjunction with the application of these supply and demand fundamentals as well as other judgmental applications, the Committee will overlay historical prices onto these projected prices as an added measure in determining the potential for future significant price increases. This Program and its Committee shall recognize that any decision by an entity as to fixing or not fixing the purchase price of its natural gas requires the exercise of considerable judgment. The decision to fix represents the entity's belief that prices are going to or likely will rise significantly in the future and protection against such a rise is desired. It can also represent the entity's desire to stabilize prices against possible future price increases at a level that is considered workable in a particular circumstance. The Committee must always remember that the ability to enter into fixed price arrangements means the counterparty (selling party) believes the price of the commodity is going to move in the opposite direction that the buying party believes the commodity will move. In other words, any entity that enters into a fixed price transaction must understand and accept the fact that the very next day and every day thereafter the decision to fix the price will likely prove to be incorrect (positively or negatively). That is why, in part, it is not an objective of this Program to realize the lowest price for its purchase requirements. Notwithstanding the above, the Committee is authorized to effectuate risk-reducing transactions in an effort to mitigate the impact of significant price movements and thereby stabilize customer prices. The application of these transactions will consider the overall fundamentals inherent in commodity pricing, and be directed towards, 1) the volatility inherent in each of the Company s supply basins and, 2) the volatility inherent in the natural gas commodity purchasing "seasons . In other words application of certain risk reducing transactions may be supply basin and season specific. IGI will supply regular reports to the Committee that summarize existing financial positions as well the corresponding W ACOG for a given PGA period(s). CREDIT RISK Credit Risk for the Company and its customers will be defined for the purposes of this Risk Management Program as: the uncertainty that a counterparty to a hedging transaction will be able to fulfill its present and future financial obligation under that transaction and the extent to which the Company existing credit capacity might be constrained do to the incremental borrowing requirements (margin calls) brought on by either rising natural gas prices or the failure of a hedging counterparty to fulfill its contractual obligation. The credit risk of each counterparty to a transaction will be researched by the Company s Treasury Department and reported to the Committee. The Committee will then determine the appropriateness of consummating a financial transaction with those counterparties given the reported risk and recommend measures to mitigate any risk delineated by the Treasurer s Report which the Committee feels can be rectified. The Treasury Department shall also report to the Committee what the "in or out of the money" status is on existing financial contracts as well as perform "stress testsor functionally equivalent tests to measure the possible credit capacity requirements of existing or contemplated transactions. VI.FINANCIAL RISK MANAGEMENT EXECUTION Intermountain will execute risk-reducing financial transactions pursuant to Hedge Policy authority provided by Board Resolution and as directed by the Committee only through its outside representative, IGI. IGI will then provide all trade documentation in a form satisfactory to the Company. Risk-reducing financial instruments will include, but may not be limited to , Over the Counter ("OTC") financial instruments, as approved by the President for use by the Committee. Examples of certain financial instruments available for the Committee s consideration and use are outlined in Appendix D hereto. The market parameters inherent in these instruments will be regularly reviewed by the Committee in helping to determine the appropriateness of their use. The Committee may also recommend that additional risk-reducing financial instruments be considered. By the approval of the President, such additional risk-reducing financial instruments may be employed by the Committee. The Committee will approve financial counterparty criteria. The selection criteria used to evaluate the attractiveness of potential and existing counterparties will include credit risk, derivative pricing, quality of execution, margin requirements back office" support, reliability, account executive, and confidentiality. Multiple counter parties may be desirable.. Appendix C hereto provides a list of currently approved financial counterparties. APPEND IX A HEDGE POLICY BOARD RESOLUTION INTERMOUNTAIN GAS COMPANY Corporate Resolution , JAMES E. SIMMERMAN, Assistant Secre~ of Intennountain Gas Company, DO HEREBY CERTIFY that the following is a true and exact excerpt from minutes of a meeting of the Board of Directors of Intennountain Gas Company held December 14 1995. In connection with the hedging transaction, the board reviewed policy and practice concerning such activity, and fonnaliy approved the described activity, ratifying acts taken consistent with the following previously adopted policy: For the purpQse of stabilizing customer prices (but not for speculation), the company is authorized to enter into valid, legally binding natural gas substitute energy commodities and related currency futures contacts and swaps, as well as related transportation basis swaps with one or more solvent, reputable and responsible fmancial institutions. The entering into and perfonnance of such futures contracts and swaps, together with necessary or convenient related agreements and activities shall be authorized, overseen and controlled by the company's Hedge Committee consisting at a minimum o~ its Chairman, President and Chief Financial Officer, and such other person or persons as the Chainnan or ' with the Chairman s prior authorization, the President may appoint in writing, which appointment shall be reported to the board of directors at its next meeting. The Hedge Committee shall designate authorized .company representatives and establish trading limits and aggregate transaction levels for each of them and the company. A review of the Hedge Program will be a part of each audit by Arthur Andersen. It is the intent of the company not to act as agent in any commodities futures contract or swap. The company will act solely as principal in the transactions and activities that comprise the Hedge Program described above except when exp~.essly approved in writing by the Chainnan or President in circumstances justifying exception to this policy and provided that acting as agent will not subject the company to registration licensing or reporting requirements or regulation under any state or federal securities or commodities law or regulation. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and the seal oflntennountain Gas Company this 13th day of February, 1996. APPEND IX B GAS SUPPLY RISK MANAGEMENT COMMITTEE MEMBERS Gas SuWly Risk Management Committee Members Chairman President Executive Vice President and Chief Operating Officer Senior Vice President, Finance and Administration and CFO Vice President, Treasurer Vice President, Marketing and External Affairs Director, Market Services and Regulatory Affairs Representative IGI Resources, Inc. Richard Hokin William C. Glynn N. Charles Hedemark Paul R. Powell Michael E. Rich Michael E. Huntington Michael P. McGrath Randy Schultz APPEND IX C CURRENTL Y APPROVED FINANCIAL COUNTERP ARTIES Currently Approved Financial Counterparties B. P. Corporation North America Deutsch Bank Prime Contact: Manager, Financial Risk Products Prime Contact: Marc Tarkington P. O. Box 3092 501 Westlake park Blvd. Houston, Texas 77079 NYC-0705 31 West 52nd Street New York, New York 10018 Phone: ((281) 366-4987 Phone: (646) 324-2218 Bank of America Prime Contact: Jon Efken 111-003-27 - 233 South Wacker Drive Chicago, Illinois 60606 Phone: (312) 234-3345 BPN Prime Contact: Rebecca Romaro The Equitable Tower 787 Seventh Avenue New York, New York 10019 Phone: (212) 841-2058 CIBC Prime Contact: Rohan DeSilva crnc WorId Markets 11 th Floor 161 Bay Street BCE Place Toronto, Ontario, Canada M51158 Phone: (416) 594-8086 APPEND IX D RISK MANAGEMENT INSTRUMENTS Following is a list and short description of certain financial instruments available to the Company for utilization in managing its commodity natural gas price risk and exposure to volatility. While this list is not all-inclusive, it represents some of the more common products utilized in the industry and available for review and approval by the Committee. The first instrument listed, the "fixed for floating swap , is the primary instrument currently utilized by the Company. As it relates to most all , if not all, of the remaining instruments, it is imperative for the Committee to include in its evaluation of the use of any such instrument (1) the potentially significant embedded incremental cost of the instrument and (2) the downside risk to the Company s and its customers ' natural gas pricing under certain price movement scenarios. Fixed for Floatim:! Price Swap The most commonly used instrument, the fixed for floating price swap provides the buyer the ability to convert its physical natural gas supply, which is being purchased at a stated monthly or daily published index price, to a fixed price for a selected period. For example, assume a buyer is purchasing its gas supply for the one year period beginning November 1 st and priced at a published first of month index price for the applicable delivery point. The current fixed price quote for such one-year period at the delivery point is $3.75. The buyer of the fixed for floating price swap therefore converts his indexed based gas price to a fixed price of $3.75 for the volume chosen for each of the twelve months beginning November 1 st Price Cap A price cap is an instrument that provides the buyer of the cap the firm assurance that his index price for the period chosen will never be higher than the cap strike price. Each month the index price for the current month is measured against the cap strike price. If the index price is higher than the cap strike price, the buyer pays the cap strike price. If the index price is lower than the cap strike price, the buyer pays the lower index price. The buyer of this instrument pays for this assurance in form of a "premium . The premium is generally paid up front when the buyer agrees to purchase the cap. When the buyer purchases the cap, it will be more expensive if the cap strike price is closer to the current market price (see example below). Also, the cap will typically be more expensive the longer the term before the option expires. For example, a buyer can purchase a $6.30 cap for a given published index (Cap Strike Price 3) for the coming winter (November through March). The buyer would be required to pay $1.08 / MMBtu for the assurance that he would never be charged more than $6.30 from November through March for volumes purchased at the delivery point. However, the premium cost for this price cap assurance if purchased for 10 000 MMBtu per day for the winter period would be approximately $1.63 million. Current Market Price (Nay-Mar)$5. Cap Strike Price 1 Cap Premium Cost $5. $1.31 Cap Strike Price 2 Cap Premium Cost $5. $1. Cap Strike Price 3 Cap Premium Cost $6. $1.08 Price Collar A price collar is an instrument consisting of both a cap and a floor. This instrument can be structured so that the buyer pays no premium (costless). The buyer gets the firm assurance that the index price will never go higher than the cap strike price and they avoid the premium cost of the cap. However, the cap premium is "funded" by the buyer providing a floor for the index price to their supplier. The buyer s price is locked into a range between the floor and the cap during the term. For example, a buyer can purchase a $6.10 cap for a given published index (Cap Strike Price 1) for the coming winter (November through March). The buyer would not be required to pay for the assurance that he would never be charged more than $6.30 for volumes he purchases at the delivery point. However, the cap is funded with a $5.32 floor the buyer provides to the supplier. In effect, the buyer guarantees that he will pay between $5.32 and $6.10 for such supplies during the winter. Current Market Price (Nay-Mar)$5. Cap Strike Price Floor Strike Price 1 $6. $5. Cap Strike Price 2 Floor Strike Price 2 $6. $5. Cap Strike Price 3 Floor Strike Price 3 $7.42 $4. Portfolio Pricin2 Portfolio pricing is a methodical process whereby the buyer determines a time frame (usually 3 to 5 years on-going) over which to periodically lock-in or fix a portion of the pricing of its annual natural gas requirements. Typically a minimum and maximum percentage of such annual requirements is identified such that at certain points in time the buyer s usage for the multi year time period has been fixed within the minimum and maximum range. The portfolio is structured such that at the beginning of year one of the period the majority of that year s usage has been fixed and a smaller percent of each subsequent year s usage has been fixed. For example, a portfolio of 5 years could be structured such that at the beginning of year one the following percentage of annual requirements would be fixed as to prICIng: Beqinninq of Period Annual Requirements Percentaqe FixedMinimum Maximum Year 1 Year 2 Year 3 Year 4 Year 5 80% 60% 40% 20% 10% 100% 80% 50% 40% 25% Extendables An extendable is an instrument that allows a buyer to lock in a fixed price substantially below the current market. The buyer gets the discounted fixed price but funds the discount by providing the supplier the option (at the supplier s sole election) to extend the term of the sale an additional year at the same fixed price. For example, a buyer can purchase gas at a given delivery point at a fixed price of $4.35 for April through October when the current market is actually $4.80. The first year fixed price discount of $0.45 is funded when the buyer allows the supplier (at the supplier s sole election) to extend the term of the sale at the same price ($4.35) and for the same volume for an additional 12 months. The notice period for the supplier to execute its right to extend is anytime up to 5 days prior to the beginning of the second year Current Market Price (Apr-Oct)$4. Fixed Price if supplier has the right to extend 1 year at the same volume and price $4. First Year Discount - $0.45 Participating Options (Double Up) double up is an instrument that allows a buyer to obtain a discount to the monthly index price. The discount is funded when the buyer provides the supplier the option to double the volume any day or days during the delivery month for any month of the term of the option. The price for any additional volume is the first- of-the month index price. For example, a buyer can purchase gas at a given delivery point at a published index minus $0.15 per MMBtu. The index discount of -$0.15 is funded when the buyer allows the supplier (at the supplier s sole election) to double the purchase volume any day or days of the month. Current Market Price $4. Index discount if supplier has the right to double volume any day during any month at the index price - $0. Discount on 1 st tier - FOM less Price of 2nd tier if sourced - $0. FOM FOM = First of Month Index Price IGI Pool The IGI Pool is a purchasing strategy developed by IGI allowing a customer to manage its price for natural gas by entrusting the pricing decisions to the IGI staff of expert traders. It works very simply. The customer can choose from up to three pricing seasons and agrees to dedicate a daily baseload quantity of gas purchased from IGI to a particular season. The seasons are: November to March November to October April to October IGI will then solely decide when to execute the various trades which ultimately establishes a final fixed price for the selected season. IGI then reports its final fixed price for the season to the customer usually within 30 days of the start of the season. IGI, through its expertise, timing and active participation in the daily natural gas futures market believes it can develop a fixed price favorable to the customer without the hassle of constant communication as to current pricing and the "should we or should we not" decision which often times results in a buying opportunity disappearing. The customer, however, must understand and accept the fact that IGI cannot guarantee an ultimate savings versus the index.