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Municipals Find Discounts in Large Reserves Purchases

In order to avoid the volatile spot market and lock in a discount on gas supply, Public Gas Partners, Inc. (PGP), a non-profit gas agency formed a year ago by seven southeastern municipal utilities, said Tuesday that it purchased 115 Bcfe of proved natural gas reserves (73% proved, developed and producing) and 30 Bcfe of probable and possible reserves in four gas transactions at a total cost of about $330 million.

"There really aren't many opportunities to buy a long-term gas contract, particularly at any other price than spot that is priced monthly as the gas is delivered, and no discounts are available on that supply because it is a commodity," noted PGP President Susan Reeves, who also is CFO at Municipal Gas Authority of Georgia (MGAG), which acts as the day-to-day manager of PGP.

"What we are doing is trying to take more control over our supply chain by actually going further down into the supply chain to reserves in the ground," she said in an interview with NGI. "We are doing that to create more certainty and reliability in our supply and also to create discounts to market pricing."

Current production from the properties totals about 35 MMcfe/day and is 75% natural gas. The transactions include long-term agreements with experienced partners for the management and future development of the properties. The combined assets represent a diverse portfolio of properties, with working interests in over 2,000 predominantly gas wells located in nine states. The wells are primarily located in the Midcontinent region with some in the Appalachian region as well.

Reeves said it is hard to estimate the discount PGP has been able to lock in, but it probably is in the range of 5-10% over the project's life. "We're buying property interests and producing wells, so depending on what kind of well [the life of the reserves] is going to be anywhere from 15 to 30 years. We have some coalbed methane wells, and they can produce 30 years. I would say these wells will produce for in excess of 20 years" with slowly declining production rates.

"Through the contract we hope to participate in additional development as well." She said PGP will probably enter into delivery contracts to take its share of the production at more convenient locations.

The reserves purchased only represent only about 25% of the portfolio that has been authorized by PGP's members, which include MGAG, Florida Municipal Power Agency, Florida Gas Utility, Lower Alabama Gas District, Patriots Energy Group, The Southeast Alabama Gas District, and Tennessee Energy Acquisition Corp. And the portfolio represents only a small portion of the member's overall gas supply needs.

"The seven members have really only dipped their toes in the water as far as what they have authorized PGP to do because PGP has only been in existence for a year," said Reeves. She said about 20% of MGAG's annual gas supply needs have been covered by PGP. "As we fill up the portfolios and prove up the idea, all of us expect to put more of our long-term needs into PGP."

Reeves said these transactions are the first reserves purchases that PGP has made, but more transactions are planned and the agency also has some other options as well. "The structure of the company is very flexible so that if we wanted to do some other kind of project, like jointly own storage facilities or some kind of joint LNG project, we could do those in the future, but right now the primary thing we are focusing on is the purchase of gas reserves.

"It's such a challenge" to secure gas in today's market, she noted. "This is an industry that needs some change. It's a tough world out there."

PGP Chairman Roger Fontes called the transactions "an important first step in meeting the long-term supply needs of our members, and the citizens they serve, at stable, economical prices.

"We need to protect our customers from the continuing high price levels of natural gas and the volatility of those prices," he said. "The development of this venture is an important tool for all PGP's members in reaching this goal."

Through its member organizations, PGP serves more than 180 cities. Mitchell Energy Advisors acted as buy-side advisor to PGP in one of the transactions.

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