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Municipals Paying Now For Gas Later

Municipals Paying Now For Gas Later

For municipal gas buyers, the stars are lined up just right for striking a deal on supply. Low interest rates on municipal bonds and low gas prices have led to a rash of long-term prepaid transactions.

Last week, Columbia Energy Services and the Municipal Gas Authority of Mississippi (MGAM) signed a 10-year gas supply contract that calls for MGAM to buy 10 billion Btu/d, or about 10 MMcf/d. "This acquisition provides firm economic supplies for our participating municipal gas systems and will assist them in meeting the needs of their customers," said Neil Davis, MGAM general manager. MGAM, which represents 20 public agencies, provides gas supply and related services to municipalities that own and operate gas distribution systems in Mississippi.

The deal was funded by the issuance of tax-exempt bonds. It is one of an increasing flood of pre-paid deals involving government agencies that are taking advantage of both low interest rates and low gas prices. Aquila Energy earlier this year announced a $24 million deal for 10 years with Nebraska municipals, which were issuing bonds to pay for the gas. (See NGI, Nov. 9, 1998).

Aquila also was awarded earlier this year a 10-year contract by the Municipal Gas Authority of Georgia (MGAG) for $125 million. Under the terms of this contract, Aquila is supplying MGAG with 20,000 MMBtu a day. MGAG prepaid the entire contract. In January 1997, MGAG did a similar deal with Coral Energy Resources for long-term, firm supplies. Under that agreement, MGAG paid Coral $58.6 million for about 38 trillion Btu over 10 years. "I think long-term transactions, on balance, are more complicated, particularly in light of business practices today. People are geared up more for short-term transactions," MGAG President Arthur Corbin said at the time. "I think there will be more [deals like these]. I don't see an explosion, but I think there will be more."

"Columbia Energy is pleased to have the opportunity to enter into structured transactions such as the MGAM transaction," said Phillip M. Glaessner, senior vice president of energy trading and supply for Columbia Energy. "These types of transactions demonstrate the sophistication and flexibility that Columbia Energy is offering to its municipal customers. It is one of several similar long-term arrangements that Columbia Energy has entered into recently."

Also last week, Williams Energy said it signed a 10-year agreement to supply more than 16,000 Dth/d of pre-paid gas to Florida Gas Utility for distribution to its members, consisting of 15 Florida LDCs. Williams Energy began supplying Florida Gas Utility Dec. 1. Historically, Florida Gas Utility bought gas using short-term (less than one month) and medium-term (up to three years) contracts.

Tom Coleman, senior account director for Williams Energy Marketing and Trading group, said the agreement with Florida Gas Utility opens the door to Williams in the southeastern part of the United States. "We plan to show potential customers in the southeastern part of the United States how we can offer them creative ways to package energy, which will offer them long-term cost savings."

Participants in Florida Gas Utility's pre-paid supply transaction include the cities of Blountstown, Chipley, Fort Meade, Homestead, Jay, Lake City, Lake Worth, Lakeland, Marianna, Starke, Vero Beach and Williston. Other members are Kissimmee Utility Authority, Fort Pierce Utilities Authority and Florida Municipal Power Agency. Of its members, seven use gas for electric generation, eight are municipal gas distributors and one has both electric generation and provides gas distribution services.

"This is a very complex deal, so it's going to involve players that understand the market and the dynamics to be able to put a deal like this together," Coleman said. "This is our first deal that's been structured this way. To my knowledge, this is the first deal that's been structured where we've been prepaid all of the up-front cash." Coleman said he's working on a similar deal with a contract term of 12 years. The southeastern United States is an area Williams is focusing on for deals of this sort as the region has many municipally run gas utilities who can sell bonds at attractive rates.

Joe Fisher, Houston

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