In a move that pretty much eliminates its potential as a direct buyer of future liquefied natural gas (LNG) should it show up in California, the City of Long Beach's municipal gas utility closed a 30-year pre-pay supply deal last Thursday that will satisfy 80-90% of its 12-13 Bcf annual load with terms that will keep its retail rates below the surrounding Sempra Energy utilities for the next three decades, according to its general manager.

"As the only municipal gas utility in the state this gives us a huge advantage," said Chris Garner, head of Long Beach's oil/gas department during an interview with NGI Friday. The deal with Merrill Lynch Commodities Inc. also is unique in that it is not priced just to the California-Arizona border prices for natural gas, Garner said.

Instead, the municipal gas utility's 30-year, $900 million deal carries a discount of 94.2 cents/MMBtu that is applied to half the annual volumes using the Southern California Gas Co. weighted average cost of gas (WACOG) and the other half to the California border price index, said Garner, who is operating the city's public works department on an interim basis in addition to overseeing municipal gas, street lighting,water and power generation for the city's facilities.

The Long Beach Utility Department received authorization from the city council in August to proceed with the pre-pay deal. With more than 400,000 residents about 25 miles southeast of Los Angeles, the port city has an annual natural gas load of up to 13 Bcf.

This is the first deal Long Beach has done with Merrill, which has done a similar pre-pay with another muni in another region of the country, according to Garner. Coral Energy, Long Beach's past supplier, will provide some hedging deals to lock in ceiling and floor prices for the city-run utility, he said.

An estimated annual saving on gas costs of $7.5 million for the life of the 30-year deal will allow Long Beach to step up its improvements of its aging pipeline distribution system, most of which dates back to the 1940-60 period. "We're going to reinvest those savings -- in excess of $225 million -- in our system," Garner said.

"Like any other indexed gas supply, we will hedge the pre-pay deal to establish price ceilings and floors." In response to a question, Garner said the ceiling will be about $10.50/MMBtu and the floor $5.50/MMBtu. "With a 94.2-cent discount, if the price goes to $14 or $15/MMBtu as it did in 2001, our customers will have a price of no more than $10.50, and we still get the 94.2 cents deducted off of that."

Supplies in the pre-pay deal could come from wherever Merrill Lynch can get them and guarantee they can get into the Sempra/SoCalGas transmission system, to which Long Beach's distribution system is connected.

The longevity and discounts make it unlikely that Long Beach would need to buy from any of the proposed LNG facilities along the Southern California coast, including the one slated for Long Beach Harbor that was rejected earlier this year by its port commission. Merrill, of course, ultimately could buy some of Sempra's LNG supplies coming into the state from the Costa Azul facility along the Pacific Coast of North Baja California in Mexico.

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