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CMS Scores 10-Year Prepaid Municipal Supply Deal

CMS Scores 10-Year Prepaid Municipal Supply Deal

CMS Marketing, Services and Trading (CMS-MST), has jumped on the bandwagon of offering municipal customers prepaid gas supply to take advantage of low municipal bond interest rates.

The company, a subsidiary of CMS Energy Corp., recently completed a major gas sale to Tennergy Corp., a Jackson, TN-based energy acquisition corporation for 17 municipalities in western Tennessee and Kentucky. The contract is for 10 years. Under the agreement, Tennergy has pre-paid CMS-MST for 135 Bcf of gas to be delivered from May 1, 1999 through April 30, 2009.

"This transaction locks in ten-year supplies of natural gas at favorable market pricing for the benefit of the people and businesses in the 17 different municipalities served by Tennergy Corp.," said William W. Schivley, executive vice president of CMS-MST of Dearborn, MI. "By utilizing tax-exempt municipal bond financing and today's low interest rates, Tennergy has received and will provide to its customers a firm supply of natural gas, with a single up-front payment to CMS." The gas supplies will be delivered to Tennergy via several interstate pipelines out of the U.S. gulf coast production area.

Schivley said CMS has done other prepaid supply deals but none for terms as long as this one with Tennergy. "Because of the length of the contract, individually it's probably one of the largest contracts we've done." He said CMS is looking to do more deals of this type. The company works with about 51 individual municipal customers. Schivley said CMS has looked for opportunities to aggregate some of these municipals for a supply deal, but geographic and other concerns make that difficult.

Tennergy completed a $234 million tax-exempt municipal bond transaction with Bank of America to finance the gas purchase. "This deal is one of the most complex transactions that we have handled, but it will provide our 17 customers a reliable, competitively-priced gas supply for ten years," said Tennergy President John W. Williams. Tennergy evaluated several competitive bids received as a result of a request for proposals.

As energy buying becomes more complicated in a deregulated environment, Schivley said innovative deals that bring gas suppliers behind the city or plant gate will become more popular. Clearly, prepaid deals have been of interest to several players over the last year.

Last year UtiliCorp United's Aquila Energy was awarded a long-term contract to supply 14,418,850 MMBtu over 10 years to Lincoln, NE-based Energy America for a prepaid amount of $24.3 million. Energy America resells gas obtained from Aquila to the municipal organizations making up the Nebraska Public Gas Agency (see NGI April 6, 1998).

California is putting together a pre-paid deal for about 35% of state facilities' gas demand (see NGI Dec. 28, 1998). Natural Gas Services, a unit of the state's Department of General Services (DGS), was planning to take supplier bids June 7, but the state ran into trouble arranging financing for the deal.

Now, bids are expected to be sought in the next 100 to 150 days, said Marshall D. Clark, manager of the DGS Natural Gas Services Program. He said the state knows how to fix its financing problem and the delay stems from the fact that putting together the prepaid deal was interfering with work for the state's annual gas supply bidding process. California intends to seek about 20 Bcf delivered at rates of 3 to 5 Bcf/year over five years in its prepaid deal.

"We were very encouraged by the interest of the gas industry," Clark said. "We had a number of gas suppliers come and talk to us and make suggestions about how to structure the deal, which we appreciate." Clark said about 10 companies visited his office and there were lengthy phone discussions with about another six. "We always assumed from the way people were talking we would get at least three or four [bids]."

California recently released its RFQ for annual gas procurement for the period July 1, 1999 through June 30, 2000. Bids will be due June 9. For information, call Marty Sengo, (916)323-6295. Joe Fisher, Houston

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