AU seeks to enter natural gas prepay agreement; Hopes to get council approval on May 21

Published 8:18 am Tuesday, May 1, 2018

Austin Utilities is hoping to enter into a natural gas prepay agreement with the Public Energy Authority of Kentucky (PEAK). The decision needs approval from the AU Board of Directors and the Austin City Council.

According to AU General Manager Mark Nibaur, AU has been seeking an opportunity like this for several years.

“We purchase gas in advance out to five to seven years, a portion of our total gas consumption portfolio, and that’s very common for utilities to do that,” he said. “We’ve been looking for opportunities to prepay, but they’re not that common.”

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“I think it’s important to hedge our gas,” he added.

In 2017 BP, who supplies AU with natural gas, approached AU about the opportunity. BP has successfully completed prepay transactions over recent years and is working with PEAK in providing this opportunity to AU.

Under the program, AU would enter into a 30-year agreement that would offer a minimum discount of $0.20 on the volumes AU purchases. For example, if the price of natural gas is $3.20 per thermal unit (MMBTU), AU will pay $3 per MMBTU. Approximately 30 percent of AU’s daily natural gas volumes will be converted to prepay.

Because the program is for municipal utilities, PEAK is able to get the natural gas tax exemption.

“’Prepay,’ I think, gives a notion that we’re pre-buying all of this gas and we’re fronting a significant chunk of money, which is not the case at all,” said Alex Bumgardner, energy resources and utility operations director for AU. “We’re just a participant and we have committed to taking those volumes, but we pay for them on a monthly basis just like we do today with any of our other gas purchases. The only difference is, it’s a longer commitment.”

Bumgardner said the natural gas will be remarketing every 5-7 years and the discount can change at that point, based on market conditions and interest rates. AU would then have the option to continue in the program with the new rates or withdraw from the agreement. Nibaur said the discount can not fall below $0.20, but could go higher.

Nibaur and Bumgardner said any risk involved is minimal.

“If gas consumption drastically reduces in Austin, there is the risk of being too long on this prepay volume commitment, but there’s remarketing provisions in the agreement,” Bumgardner said. “PEAK and BP will remarket that and the risk of them not being able to remarket it is next to nothing. We see such a slight risk of getting into that situation.”

Bumgardner also said the program will allow AU natural gas customers to see a slight price reduction on their bills, estimating $100,000 annually in savings to the customers.

Nibaur and Bumgardner said should the AU Board approve the plan, they hope to get council approval during the council’s regular meeting on May 21.

If approval is granted, AU will be the third utility provider in the state, along with companies in New Ulm and Hutchinson, to join a natural gas prepay program.