Seven Public Gas, Power Utilities Form Gas Supply Company
In an effort to secure a long-term supply of natural gas at lower and more stable prices, seven public gas and electric utilities in five states have signed an agreement to form a gas supply agency called Public Gas Partners Inc. (PGP), which will acquire producing reserves.
By combining their buying power, the municipal utilities expect to create economies of scale and cost discounts for their customers. The utilities noted that in recent years natural gas prices have risen dramatically, doubling and even tripling in short periods of time. The price of gas, which historically moved in a narrow range around $2/MMBtu, has grown in volatility and currently is trading near $8/MMBtu for January 2005 delivery. Furthermore, over the long term, prices are expected to remain high and volatile.
As a result, the members anticipate acquiring a portfolio of long-term supplies primarily made up of producing natural gas reserves. The group favors a portfolio approach to diversify assets and mitigate risk associated with long-term supplies. PGP expects to target an initial supply portfolio capable of producing 60,000 MMBtu/d, or 219 Bcf over 10 years, yielding significant cost savings below current market prices.
"What we are going to do is buy working interests and royalty interest in producing properties, but we are not going to operate," said PGP President Susan Reeves in an interview with NGI. "So the idea is that we will partner with producers and take a non-operated minority interest in already producing fields. In effect, we are piggybacking off of the experts in the industry and are just kind of behind the scenes taking the gas we need."
Reeves also is CFO of the Municipal Gas Authority of Georgia (MGAG), which will manage the day-to-day operations of PGP under a contract with the other members.
"We believe that there is a lot of value in being a producer or being involved in the production side of our supplies as well as the distribution side," Reeves added. "We're stepping into the shoes of the producer and actually starting our supply while it's still in the ground. MGAG did this about two years ago. We also have been purchasing long-term supplies through other structures for the last 12 or 13 years."
Although MGAG manages purchasing for other municipal groups, this buying organization will be exponentially larger than what it has managed in the past. The members of PGP are MGAG, Florida Municipal Power Agency, Florida Gas Utility, Lower Alabama Gas District, Patriots Energy Group, Southeast Alabama Gas District and Tennessee Energy Acquisition Corp.
"It will provide negotiating power in the marketplace to make the acquisitions, the operating efficiencies for the level of technical expertise that we will need and will create economies of scale...," Reeves noted. "We also have complimentary loads within the organization in that we have both gas and power operations and those entities have peaks at different times of the year..."
Reeves said the 60,000 MMBtu/d, or 219 Bcf over 10 years, is the amount that has been requested by the members for the first pool of supply. "It's a small percentage of each of the members' total throughput, and we do expect that additional pools will be developed as the organization moves along."
She said the pool will be divided based on the amount initially requested by each member. Reeves couldn't estimate how much gas supply PGP may eventually end up purchasing. MGAG, which is the largest participant in the pool with about a 40% share, has a current throughput of 60 Bcf/year. MGAG serves 71 member entities in Georgia, Alabama and Florida. Its members have 203,000 gas customers. In addition, the Gas Authority also serves agencies and cities (partners) in Alabama, Mississippi, Tennessee, South Carolina, Illinois, Indiana, Pennsylvania and Connecticut on multiple eastern pipeline systems.
Roger Fontes, the newly-elected chairman of PGP, said that as PGP builds "the kind of high-quality portfolio of gas reserves we expect over the next several years, [the Florida Municipal Power Agency (FMPA)] and the other members will likely increase the amount of their long-term requirements met by PGP."
At the first official governing board meeting in Atlanta on Monday, the PGP board of directors elected Reeves as president; Fontes, CEO of FMPA, as its chairman; James H. Smith, CEO of Southeast Alabama Gas District, as its vice chairman; and Katrina Vaughan, general manager of Florida Gas Utility, as its secretary/treasurer.