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TO: |
Board of Trustees |
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THROUGH: |
Jay Fox, Executive Director |
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FROM: |
Bill Greene, Chief Financial Officer |
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PRESENTER(S): |
Troy Bingham, Comptroller |
TITLE:
title
UTA Policy - UTA.02.09 - Fuel Price Risk Management Program
end
AGENDA ITEM TYPE:
UTA Policy
RECOMMENDATION:
Adopt UTA.02.09 - Fuel Price Risk Management Program.
BACKGROUND:
Currently, UTA utilizes about 5-6 million gallons of diesel annually to operate its buses and commuter rail. Pricing for fuel is set by the daily rack price on the day the fuel is delivered. This method of fuel pricing leaves UTA susceptible to price swings in the market. UTA currently estimates annual fuel prices during the budget process based on the best information available. This sets a fixed price per gallon for the budget year.
Fuel hedging is a risk mitigation mechanism that protects fuel purchasers like UTA from price volatility. Fuel hedging is common in transit agencies throughout the United States. By buying or selling forward priced heating oil contracts, UTA limits the impact of price variances in the future.
UTA will continue to purchase and have fuel delivered per current practices. Future contracts will be traded, and the net value of these transactions will provide offsets to variances in the price of fuel purchased.
DISCUSSION:
Due to the complexity of the fuel derivatives market UTA will take two steps:
1. Establish a contract with an expert in transit fuel hedging to advise the CFO on all hedging practices.
2. Establish this policy for fuel hedging that establishes the following criteria:
a. Instruments that can be purchased
b. The maximum hedging ratio (Gallons of Fuel Purchased Monthly/Gallons of Heating Oil Hedged in Forward Purchase)
c. Duration of hedge instrument
d. Strategy on how the program objectives will be achieved
e. Execution, monitoring & reporting
ALTERNATIVES:
If this policy is not adopted, no other policy providing similar functions is in force and UTA would continue business operations as normal.
FISCAL IMPACT:
In 2020 UTA budgeted $2.50 per gallon for diesel fuel and ended up spending $8.2 million less than budgeted due mostly to less consumption due to the COVID-19 pandemic.
In 2021 UTA budgeted $2.25 per gallon for diesel fuel and ended up spending $467,000 more than budgeted.
In 2022 UTA budgeted $2.75 per gallon for diesel fuel and YTD is spending $3.2 million more than budgeted.
ATTACHMENTS:
Policy: UTA.02.09 - Fuel Price Risk Management Program