In the heart of middle America there is a pre-winter dogfight unfolding in a federal district court in Omaha, NE, pitting a trading unit at the Royal Bank of Canada (RBC) against the local public sector utility and its nonprofit natural gas buying cooperative. The dispute centers on a $719 million, 30-year gas deal the bank wants to terminate.
The long-term supply deal inked in 2009 provides Omaha-based Metropolitan Utilities District (MUD) with 15% of its gas supplies, along with serving two smaller public-sector gas utilities in Hastings, NE, and Cedar Falls, IA. If the U.S. District Court in Nebraska allows the bank to walk away from its contract, MUD will find other supplies, but the question is at what price?
A trial is scheduled to begin Dec. 1, and in the meantime, supplies under the long-term contract could be cut off on Oct. 31, utility officials warned.
"If RBC is successful in its attempt to cancel the contract, [MUD] customers would likely be subject to higher gas costs in the future," the utility said in part of its most recent annual report that noted the January RBC court filing. Based on MUD's 2012 gas volumes, it gets a little more than 4 Bcf of supplies annually from the RBC contract.
Last January RBC filed with the court to terminate its 30-year obligation to deliver gas to the MUD cooperative, Central Plains Energy Project, contending that changed international bank regulations made the five-year-old contract uneconomic.
Central Plains paid $719 million for its 30-year supplies up front, floating a series of tax-free bonds to pay for the deal and then paying off the bonds from the revenues it gets from providing gas to MUD and the other two small municipal utilities.
In its lawsuit, RBC cited a global bank regulatory reform, Basel III, as the "triggering event" under the gas supply contract that it alleges allows for cancellation of the deal. Basel III requirements force the bank to reserve more capital to ensure against prospective losses, RBC said in the aftermath of the court filing.
NGI's attempt to obtain comments from RBC and Nebraska utility officials were not immediately successful, and in the past both sides have shied away from making statements about the pending case.
Earlier in the year, utility officials were quoted in local news media as saying they disagree that the bank has the right now to terminate the gas supply deal. In March, Central Plains, the cooperative, filed a counter-lawsuit in the federal court in Omaha seeking unspecified damages from RBC, alleging a breach of the prepaid gas agreement has caused damages to the cooperative gas buyer.