Council adopts natural gas prepay ordinance

Published 8:48 am Friday, July 20, 2018

The Austin City Council approved an ordinance that allows Austin Utilities to enter into a natural gas prepayment agreement during its regular meeting on Monday.

Mark Nibaur

According to AU General Manager Mark Nibaur, AU was approached by BP, who provides AU with its natural gas supply, about the prepay program in 2017. BP has successfully completed prepay transactions over the recent years and is currently working with the Public Energy Authority of Kentucky (PEAK) to provide this opportunity to AU.

Nibaur said that AU has been hoping to participate in a program like this for several years.

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“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 in April. “We’ve been looking for opportunities to prepay, but they’re not that common.”

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

Under the program, AU will 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 exempt.

The natural gas will be remarketed 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. The discount cannot fall below $0.20, but could go higher.

The only risk, according to AU Energy Resources and Utility Operations Director Alex Bumgardner, is being too long on the prepay volume commitment should natural gas consumption in Austin drastically reduce. Should that happen, there are remarketing provisions in the agreement.

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.

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.