TITLE
Recommendation to authorize City Manager to enter into a Physical Gas Commodity Option Agreement pursuant to the International Swap and Derivatives Association (ISDA) Master Agreements to provide 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 $8.00 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 on behalf of its customers, monthly gas bills are exposed to large fluctuations if gas purchases are not protected by risk management practices. 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 in 2000 through 2001.
On February 17, 2009, to increase LBGO’s market flexibility, the City Council approved entry into International Swap and Derivatives Association (ISDA) Master Agreements (Agreements). Counterparties to the Agreements currently include Merrill Lynch, Freepoint, J. Aron (Goldman Sachs), BP Energy, and ConocoPhillips. Under these Agreements, LBGO can enter into Physical Gas Commodity Option Agreements to financially hedge the price paid for physical gas deliveries. Current low-priced market conditions offer very favorable opportunities for utilities to ensure customers are protected against significant price increases. LBGO proposes to hedge its winter season gas purchases when customer gas demand peaks and, therefore, has the greatest vulnerability to high gas prices.
Authorization is requested to enter into one or more Physical Gas Commodity Option Agreements for up to a three-year term, price indexed to the Southern California Border, and a market price ceiling of no more tha...
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