CMS Marketing, Services and Trading announced yesterday it wasthe winning bidder for a pre-paid $139 million 12-year gas salesagreement with the Ohio Schools Council (OSC). Under the contract,CMS will deliver 44 Bcf of gas to 111 school districts in northernOhio through Oct. 31, 2011 (including the last three months of thisyear).

“By utilizing municipal bond financing, OSC has received andwill provide to its participants a firm, long-term supply ofnatural gas with a single up-front payment to CMS,” said TamelaPallas, president of CMS Marketing, Services and Trading. The gaswill be delivered to OSC via Columbia Gas Transmission and CNGTransmission, Pallas said.

OSC, an Ohio governmental agency, financed the gas pre-paymentthrough a taxable municipal bond transaction. “We are delighted tocomplete this innovative gas supply arrangement with CMS. Thousandsof students in Ohio will benefit from our and CMS’s efforts in thistransaction,” said Joseph A. Lesak, executive secretary of the OhioSchools Council.

“This seems to be a win-win because these schools get a prettygood value for the gas when all is said and done,” said CMS’sAndrew Coppola. “They’re getting firm supply, and theoreticallythey are getting a discount because the are committing to it for along period of time. On the other hand it’s good for the supplierbecause it gives us access to a market for a long period of timeand a commitment for a long period of time, which is very solid forus. …And the way these are done on a pre-paid basis it eliminatessome of the credit risk that we would normally take on amonth-to-month pay-as-you-go type of deal.”

The transaction is similar to several other pre-paidtransactions completed this year, including one CMS completed withTennergy Corp., a Jackson, TN-based energy acquisition corporationthat represents 17 municipalities in western Tennessee andKentucky. Under that contract, CMS agreed to supply 135 Bcf of gasover a 10-year period. The Tennessee deal included the use oftax-free bonds for financing.

However because of increased scrutiny by the Internal RevenueService into these kinds of transactions, the Ohio schools haveopted to use taxable bonds. The IRS decided earlier this year itneeded to more closely examine whether tax-free municipal bonds arebeing used in accordance with the tax code or if they are beingused as an arbitrage tool in violation of the code. There aredifferent interest rates for taxable and tax-free bonds andtherefore different costs associated with completing major gaspurchase transactions with tax-free bonds rather than taxablebonds. However because of the increased IRS scrutiny, tax-free bonduse in these deals has declined significantly.

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