TITLE
Recommendation to authorize City Manager to enter into an International Swap and Derivatives Association (ISDA) Master Agreement that provides natural gas price protection with terms that meet or exceed the following conditions: 1) a term of no more than three years; 2) pricing terms indexed at the Southern California border; and 3) a market price ceiling of not greater than $10.50 per MMBtu and/or a fixed price of no greater than $8.20 per MMBtu. (Citywide)
DISCUSSION
Natural gas is sold and purchased in an extremely volatile commodity market. Because Long Beach Gas and Oil (LBGO) purchases its natural gas supply in this unstable market, its customers may be exposed to large fluctuations in the commodity price component of their monthly gas bill. Therefore, one of LBGO's primary gas supply objectives is to ensure that LBGO's 500,000 customers are adequately protected from large price swings.
For a perspective of this potential exposure, Long Beach residents and businesses experienced a nearly $70 million increase in their natural gas bills during a six-month period during the California energy crisis of 2000/01. Since that time, LBGO has successfully put price hedge structures in place that have protected its customers from exposure to price increases of that nature. The current price hedge agreement, with Shell Energy North America (Shell Energy), terminates March 31,2009.
To replace the existing Shell Energy agreement, LBGO has solicited interest from the major energy-trading providers. Respondents were British Petroleum (BP), Goldman Sachs, J.P.
Morgan, Merrill Lynch, Royal Bank of Canada (RBC), RBS/Sempra, and Shell Energy. By February 6, 2009, LBGO had met with each of the respondents for in-depth discussions on hedging strategies and potential pricing structures. Each of the companies stressed that the dramatic downswing in oil and natural gas prices from last summer's peak makes the current market a strategic time to lock in very favorable pri...
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