CPS Energy, which is owned by the City of San Antonio, has completed a prepaid gas supply deal that it claims is the first in Texas where a municipally-owned utility is the sole purchaser in the prepayment transaction. Gas customers of CPS stand to save more than $100 million over the next 20 years because of the prepay deal, CPS said.

On June 24, the newly created nonprofit SA Energy Acquisition Public Facility Corp. (SAEAPFC) sold tax-exempt revenue bonds and used the proceeds to prepay for a 20-year supply of natural gas. SAEAPFC in turn will sell the contracted volumes each month to CPS Energy at a discount from market prices. The volumes represent about one-third of the gas CPS customers consume annually, said Gary Gold, CPS Energy director of financial analysis and reporting. Initial deliveries of gas began July 1.

The typical CPS customer will realize savings of about $9/year over 20 years. “All savings derived through our gas prepayment transaction will be passed on directly to CPS Energy gas customers in the form of lower gas costs,” said Bob Ankersheil, CPS manager of gas supply.

In April the San Antonio City Council approved creation of SAEAPFC and named its board of directors.

“Tax-exempt-funded natural gas prepay transactions were authorized by Internal Revenue Service (IRS) regulations in 2003 and through legislation in 2005,” said Gold. “Gas purchased using tax-exempt bond proceeds can be used only by municipally owned utilities like CPS Energy. The cost of natural gas in prepay transactions is discounted because CPS Energy’s tax-exempt borrowing rate is lower than the supplier’s discount rate for the prepayment.”

Earlier this year, CPS received proposals from firms interested in being investment banker and supplier for the transaction. Goldman, Sachs & Co. and its commodity subsidiary, J.Aron, were selected.

“A natural gas prepay transaction represents a diversification in supply and a cost-savings opportunity that fits well within our established gas procurement program,” Ankersheil said. “Currently, we have the ability to purchase gas from 64 different suppliers, allowing us to take advantage of the best price the market has to offer. We obtain about 10% of our gas supply from minority suppliers, and we will maintain that percentage in the prepay transaction.”

Tax-exempt municipal bond-financed prepaid gas supply deals — popular during the late 1990s — have been growing again in popularity because of a clarification in IRS rules (see Daily GPI, Dec. 12, 2006).

CPS is the country’s largest municipally owned energy company providing both bas and electric service. It was acquired by the City of San Antonio in 1942 and now serves about 670,000 electric customers and more than 316,000 gas customers. CPS said its bills rank the lowest of utilities serving the nation’s 20 largest cities.

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