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
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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.