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Resolution No. 8916 1 2 3 RESOLUTION NO. 8916 4 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF VERNON APPROVING AND ADOPTING A CREDIT RISK & COUNTERPARTY CONTROL POLICY FOR THE CITY OF VERNON 5 6 WHEREAS, by Resolution No. 7276 adopted on February 16, 1999, 7 the City Council of the City of Vernon approved a Resource Procurement 8 Plan and Credit Risk Management Policy for the Light & Power Department 9 in order to enable the Department to plan, execute and control the 10 management of a variety of risks inherent in power resource procurement 11 in the deregulated power market; and 12 WHEREAS, by Resolution No. 7489 adopted on February 15, 2000, 13 as amended by Resolution No. 7728 on March 21, 2001, the City Council 14 of the City of Vernon approved a Strategic Direction and Risk Tolerance 15 for Resource Procurement policy to establish a plan that enabled the 16 Light & Power Department to provide low cost power and optimize its 17 resource portfolio while managing and mitigating risk; and 18 WHEREAS, the functions and responsibilities for managing the 19 resource portfolio has been transferred to the Finance Department; and 20 WHEREAS, the Finance Department has prepared a Credit Risk & 21 Counterparty Control Policy (the "Policy") establishing a wholes~le 22 credit policy to govern the financial interactions of the City and its 23 wholesale counterparties, whether buying or selling power, natural gas, 24 transmission, or ancillary services ("Products"); and 25 WHEREAS, the Policy will also manage the risk of non- 26 performance in paymeht for Products and delivery or receipt of such 27 Products; and 28 WHEREAS, the Finance Director recommends the approval of the 1 Policy in order to establish a wholesale credit policy; and 2 WHEREAS, the Policy will support and operate in conjunction 3 with all other policies and strategies of the City of Vernon. 4 NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE 5 CITY OF VERNON AS FOLLOWS: 6 SECTION 1: The City Council of the City of Vernon hereby 7 finds and determines that the recitals contained hereinabove are true 8 and correct. 9 SECTION 2: The City Council of the City of Vernon hereby 10 approves and adopts the Credit Risk & Counterparty Control Policy, a 11 copy of which is attached hereto as Exhibit A and incorporated by 12 reference. 13 SECTION 4: The Acting City Clerk of the City of Vernon 14 shall certify to the passage of this resolution, and thereupon and 15 thereafter the same shall be in full force and effect. 16 APPROVED AND ADOPTED this 7th day of December, 2005. 17 18 ~;7u~ . ,,~- LEONIS.C. MA BURG, Mayor 19 20 21 ATTEST: ~ ~ 22 BRUCE V. MALKENHORST, JR. Acting City Clerk 23 24 25 26 27 28 - 2 - . ' 1 STATE OF CALIFORNIA 2 ss COUNTY OF LOS ANGELES 3 4 I, BRUCE V. MALKENHORST, JR., Acting City Clerk of the City of 5 Vernon, do hereby certify that the foregoing Resolution, being 6 Resolution No. 8916, was duly adopted by the City Council of the City 7 of Vernon at a regular meeting of the City Council duly held on 8 Wednesday, December 7, 2005, and thereafter was duly signed by the 9 Mayor of the City of Vernon. 10 11 12 BRUCE V. MALKENHORST, JR. Acting City Clerk 13 14 15 16 (SEAL) 17 18 19 20 21 22 23 24 25 26 27 28 - 3 - EXHIBIT A CREDIT RISK & COUNTERPARTY CONTROL POLICY City of Vernon recognizes the need to manage credit risk as an essential component of the diligent management of its business. In addition to the existing retail credit policy' governing the financial interactions of the City and its customers, we hereby establish this Wholesale Credit Policy to govern the financial interactions of the City and its wholesale counterparties, whether buying or selling power, natural gas, transmission, or ancillary services. To the risk of non-performance in payment for these products, the City must also add the risk of non-performance in the delivery or receipt of such products. To that end, the following policies regarding wholesale credit will be adhered to in the daily course of business at the City of Vernon: 1. The Marketing Division will trade only with approved counterparties. The City Council grants authority to the Credit Risk Mitigation Committee "CRMC" function to approve or disapprove of counterparties who are proposed by the Marketing Group. 2. For each counterparty, the City Council grants the CRMC the authority to establish individual levels of unsecured credit exposure commensurate with each CP's ability to perform in and remit payment for the wholesale trading activity it undertakes with the City. Those unsecured Credit Limits will be derived from the application of documented and replicable credit analysis. From time to time, but no less than once every 12 months, the Credit Limits for the City of Vernon counterparties will be reviewed and updated. Counterparties falling in the lowest credit risk category will be given a de minimus unsecured credit limit. 3. The credit exposure to each counterparty will be calculated to include payables and receivables in each month as well as the mark-to-market of any forward contracts open across the next 24 months with each counterparty. These will be kept evergreen and reported to the Director of Finance by the CRMC. 4. The maximum uncollateralized credit exposure to anyone counterparty across the same period will be capped according to counterparty "Class" Counterparty Class and the corresponding maximum unsecured credit extended to counterparties in each class are listed in the Credit Procedures document. That amount of unsecured credit will be extended beyond the specified unsecured maximum only to the organizations having the highest credit ratings and assessments that are recognized as trading partners of strategic value to the City and with whom the City has traded in large enough volumes and over long enough time for the development of confidence in the counterparty's performance. The CRMC and the Director of Finance shall be the judge of satisfaction of these terms. 5. Credit agreements will be negotiated with all existing counterparties to provide mechanisms for collateralization, should a counterparty exceed its credit limit; to establish protections required by the City in the event of counterparty bankruptcy; and to formalize and document credit activities between the parties. These agreements will be reviewed by the CRMC and signed by the Director of Finance. Prior to conclusion of such. agreements, counterparties will be held to 250ercent of its recommended credit limit. 6. The management of Credit Procedures, counterparty limits, and credit agreements will be vested wholly in the CRMC, consistent with this policy. 7. The City will not engage in credit intermediation (sleeving) transactions without approval of the City Council. 8. Trading in options will only be conducted with approved, Tier I counterparties unless approved by the Director of Finance. 9. The only exception to these policies and the associated procedures is in the event of the need to trade with counterparty in real-time to balance the City ofVemon system. CREDIT PROCEDURES A. Counterparty Approval 1) The City will consider all existing Counterparties ("CP's") (those with currently open forward contracts and/or those with which the City has historically done business) as "conditionally approved" until such time as such parties can be assessed for credit worthiness by the CRMC and assigned a Credit Limit. 2) The existing counterparties will be assessed for credit worthiness and assigned a Credit Limit by the CRMC. That limit will be based on the counterparty's assessment score. With some latitude allowed for the strategic significance of the Counterparty to the Cities business, those limits will be consistent with the limits and assessments of other trading partners in the same Class. Any additional credit (the "latitude") assigned the counterparty will be requested by the trading organization, recommended by the CRMC and approved by the Director of Finance. 3) For each new counterparty proposed by the Marketing Division, prior to trading with that counterparty, the CRMC will assess the credit worthiness of the proposed counterparty and establish a Credit Limit consistent with those of the Cities other trading partners in the same Class. 4) Trading with the counterparty may begin after credit approval by the CRMC. The CRMC will inform the Director of Finance of the addition of a new counterparty. 5) The credit extended will be limited to 25% of the proposed Credit Limit until such time as credit agreements are completed between the City and the counterparty. B. Credit Assessment 1) Credit assessment will be carried out by the CRMC using the workbook tool currently employed. 2) That tool provides for the introduction of both quantitative and qualitative measures related to the counterparty's credit worthiness. The CRMC will maintain documentation of the reason for the scores given each CP in the section containing qualitative scores. 3) From time to time, the CRMC may perceive the need to alter the tool or change its weighting functions. He will reassess all CP's with the modified tool. He will document those changes and report them to the City Council, along with any changes in Credit Limit suggested by the new assessment. C. Establishment And Maintenance Of Credit Limits 1) Counterparties will be divided into three qualitative categories. All entities with a credit assessment of greater than 3.00 will be deemed Class lor "high quality" credits. CP's with ratings between 2.00 and 3.00 will be deemed Class II or "good" credits. All counterparties scoring below 2.00 will be deemed Class III or "questionable" credits. 2) Class I and II credits will be assigned individual Credit Limits consistent with their assessment ratings. The maximum single exposure for Class I counterparties is $10.0mm, while the maximum single exposure for Class II counterparties is $3.5mm. Should the order of the Credit Limits differ from one consistent with the order of assessment scores, the CRMC will document reasons for the discrepancy and report them to the Director of Finance. 3) Class III credits will be extended no unsecured credit beyond a de minimus amount of $25,000 assigned for purposes of convenience. 4) Class. III credits will be limited to real-time and preschedule trading. Forward contracts will not be entered into with Class III credits. 5) Credit Limits will be reassessed a minimum of every 12 months for Class I credits, a minimum of every 6 months for Class II credits, and as often as the CRMC deems useful and practical for Class III credits. 6) It will be the responsibility of the CRMC to remain current regarding significant financial changes among the Cities counterparties. In particular, CP's will be reassessed upon any downgrade or upgrade by a major credit rating organization or any material change in the counterparty's status. 7) Additional credit, beyond the unsecured credit limits defined above, may be negotiated with any approved counterparty. Acceptable forms of credit enhancement include letters of credit where the issuing institution must be rated "A" or better, prepayment, parental guarantees or other forms of acceptable collateral as determined by CRMC. D. Exposure Calculation And Reporting 1) Daily credit reports will be made available to all stakeholders prior to the opening of business the next day. 2) Credit Exposure for each counterparty will be defined as the [discounted] sum of payables, receivables and the mark-to-market for all forward contracts, power and natural gas, having final delivery beyond the preschedule period for the day of the report out to 24 forward months. 3) These amounts will be netted and offset to the extent that the City has credit contracts in place with the counterparty enabling such treatment. Otherwise, credit exposure will be defined in each month as the sum of pay abIes and positive mark-to-market. 4) The daily change in payables and receivables will be estimated between each monthly accounting book closing for the City. 5) After each monthly closing, the estimated payables and receivables will be updated to be consistent with the Cities books. 6) After receivables and payables are exchanged according to the terms of the contracts, Treasures office will notify the CRMC of changes to payables and receivables. 7) Finance will immediately notify the CRMC of any failure of a CP to make payments due. The CRMC will immediately notify both the trading organization and the City Council. Any counterparty that fails to make a scheduled payment beyond the core period agreed to for the resolution of disputes will be considered to have exceeded its Credit Limit. Further transactions with the CP will be suspended until the arrears are paid in full. E. Credit Agreements 1) The CRMC will undertake to negotiate mutual netting, set-off and collateral agreements with all the current counterparties and such CP's as the cities list of approved trading partners. 2) Those agreements may be chosen from one of several agreements available and in common use such as WSPP and/or EEl for physical trades, ISDA for financial derivatives. 3) Prior to the completion of such contracting, counterparties will be held to 25% of its full credit line. F. Credit Watch And Credit Limit 1) When a CP reaches 80% of its Credit Limit, it will be designated on the Credit Report as being on Credit Watch. Authority for transactions with the CP will then be shifted one level of authority higher than the Cities base trading authorities matrix. 2) When counterparty goes on Credit Watch, the Director of Finance must decide what course of action to take regarding the CP should it eventually pass its Credit Limit. These actions will be limited to: a. Increasing the Credit Limit; b. Demanding collateralization per the Cities agreements with the counterparty; c. Ending trading with the counterparty and/or requesting that offsetting trades be entered into with that same CP - . 4) When a CP reaches 90% of its Credit Limit, transactions will be restricted to no more than 25 MW's (total volume) and no more than one forward month in duration. 5) When a CP reaches its Credit Limit the Cities determined response at thebeginning of the Credit Watch would be implemented.