WATER AND
POWER
Energy Risk
Management Policy
City Council
October 17, 2023
Energy Risk Management Policy
2 • Is a framework for decision
making
• Sets objectives
• Sets high-level guidelines &
controls
Price
Capacity
Operational
Locational
Credit
Regulatory
Background
• Initially adopted in 2003; updated in 2022
3 • Addresses changing market conditions
• Establishes best practices
• Retail customer strategies
Hedging
Plan and
Procedures
Credit Policy
BWP’s mission:
Reliability,
Affordability,
Sustainability
Energy Risk Management
Policy
Energy Risk Management Policy
4 Energy Risk Management
Organizational Structure
Risk Oversight Committee
(ROC)
7 voting members
Front Office
Traders and
Schedulers
Middle Office
Finance (Risk)
Back Office
Finance
(Accounting)
Advisory
City Attorney
6 Segregation of Duties & Functions
Front Office
Identify potential counterparty
Monitor market for opportunities in retail and wholesale Trade and schedule energy
7 Segregation of Duties & Functions
Middle/Back Office
Evaluate creditworthiness and assign credit limit
Negotiate master agreement and obtain credit support
Confirm energy transactions
Report violation
Process payment and send invoice
Hedging Plan and Procedures
8 Defining risk
tolerance
Hedging guidelines
Risk analysis and
reporting
Mitigation strategies
Hedging plan and procedure
• Roadmap for risk mitigation
• Buying natural gas or
electricity and related
products
Retail Hedging Transaction Limits
9 • Hedge more when market
opportunities arise
Opportunistic
driven
• Hedge a minimum of 90% before new
fiscal year and 60% the following year
Time driven
• Trigger by a 10% exceedance of current
year fuel and power supply budget
Budget stop loss
Historical Natural Gas at Citygate
10 Opportunistic Driven Hedging
11 (1) FY0 is current fiscal year; (2) FY1 is planning year 1; (3) FY2 is planning year 2, etc.
Price Decile FY0 (1) FY1(2) FY2(3) FY3 FY4
50th Decile 100% 95% 80% 75% 70%
40th Decile 100% 95% 80% 75% 70%
30th Decile 100% 95% 90% 85% 80%
20th Decile 100% 95% 90% 85% 80%
Credit Risk Policy
• Provides a guideline to a standardized credit
evaluation process
• Mitigates counterparty credit risks:
• Credit pre-qualification and evaluation
• On-going credit monitoring and evaluation
12 Counterparty Credit Evaluation
13 Front office:
Submit credit
review request
Back office:
Credit evaluation
and recommend
credit limit
CFO approval
Credit Evaluation Methodology
14 Long-Term Credit Rating Risk
Level
Notional
Credit
Limit (max)
Transaction
Tenure (max)
Aggregate
Credit
LimitS&P Moody’s
AAA Aaa Low $ 6.0M 5 year
None
required
AA+ Aa1 Low $ 5.0M 5 year
AA Aa2 Low $ 4.0M 5 year
AA- Aa3 Low $ 3.5M 5 year
A+ A1 Low $ 3.0M 5 year
A A2 Low $ 2.5M 5 year
A- A3 Low $ 2.0M 5 year
BBB+ Baa1 Moderate $ 1.5M 4 year
$15 MilBBB Baa2 Moderate $ 1.0M 4 year
BBB- Baa3 Moderate $ 0.5M 4 year
BB+ and
lower
Ba1 and
lower
High $ 0 Short-term purchase
only $ 0
No rating High $ 0 Short-term purchase
only $ 0
Investment
Grade
BWP’s Counterparty Credit Profile
15 Low risk
41 Moderate risk
27 High risk
0 Not rated
24 Low risk: AAA to A-
Moderate risk:
BBB+ to BBB-
High risk: below investment
grade
Not rated:
Purchase onlyTotal: 92
counterparties
Credit Risk Mitigation
16 Mitigation:
weekly in lieu of
monthly
payment
3non
rated
Short-term
purchase only
21 Non-
rated
Federal agency,
private company
with no debt,
joint power
agency
3 Non-
rated
17 CONTACT
Joseph Lillio
Chief Financial Officer
[email protected]
818-238-3739 office