Natural Gas Contract In The Air
The Marfa city council has one item of business at tonight's meeting. Here is the agenda item:
This is a very complicated deal involving a 20 year contract for a supply of natural gas with many different entities involved in the deal. Marfa should not take any action to endorse a contract until the city has obtained independent expert legal advice on the pros and cons of the deal. An uniformed vote is unlikely to be a wise vote.
I am trying to describe a complicated contract involving natural gas, tax law, prepaid energy contracts, bond sellers, bond buyers, gas producers, gas distributors, our gas company with seven entities (including Marfa and Alpine). I am sure I will get some of this wrong. Don't take any of this as fact, merely my attempt to make sense of it all. If I get something wrong, please post a comment so that it can be corrected. Let's look at some background. First, who are the players?
SWTMG: Southwest Texas Municipal Gas Corporation is a non-profit business jointly owned by the cities of Marfa and Alpine.
WTG: West Texas Gas Marketing is a natural gas distributor that owns the gas pipeline that feeds into SWTMG. They charge a fee for transmission and are regulated by the Railroad Commision of Texas.
MuniGas: Municipal Gas Acquisition and Supply Corporation is a company involved in prepaid gas contracts and cooperative gas purchases. Their website is under development but lists Tony Allison and Bob Murphy as contacts. Tony Allison is the person working with SWTMG.
BP Energy: British Petroleum
City of LaGrange: A customer of MuniGas with a 40-year contract from what I have heard.
The Big Bend Sentinel covered this situation in the current issue in an article by Megan Wilde. According to the paper, David Lanman and Rudy Garcia voted against the contract. Bud Powers, Ken Whitley and Hal Craig voted for the contract. The meeting last Wednesday was the last meeting for Whitley and Powers who are now off the board.
What is the contract? The contract appears to be a form of prepaid energy contract executed by a company that buys and sells gas with no real assets. MuniGas has a contract to purchase a large amount of natural gas from a producer and is selling it to municipalities. MuniGas sold tax-exempt bonds to raise money to buy the gas. A trustee oversees the bond to make sure that the bond holders get their money back. MuniGas must line up buyers for the gas in order to satisfy the bond holders. MuniGas has described the city of LaGrange as a sponsor of the gas contract. The meaning of "sponsor" is not clear. It appears that we are signing on to a deal that LaGrange has with MuniGas.
MuniGas is only allowed to work a deal with municipalities. SWTMG is a non-profit corporation. In order for MuniGas to enter into a contract with SWTMG, Marfa must give SWTMG the authority to enter into a contract on our behalf. That is the point of the agenda item tonight. Without this authority, MuniGas is not selling to a municipality, and the tax exempt status of their bonds is in question. This is a deal breaker for MuniGas.
Because we purchase gas from WTG, WTG must also be involved in this deal. BP Energy and Merrill Lynch Commodities are backers of the bonds in some way that I do not understand. The price of gas today on the New York Stock Exchange is $7.55 per MCF according to Melvin Davis. If SWTMG initiated a contract with WTG today, the price to SWTMG might be about $9.10 once all the transmission fees are included. SWTMG says that the deal with MuniGas would produce a 5% price break. Today, SWTMG pays WTG for the natural gas. Under this contract, SWTMG would pay MuniGas the discounted rate, and BP would make some payment to WTG for the transmission cost. MuniGas has a contract to purchase gas at $4-$5 per MCF.
The Texas legislature passed a law that allows for companies like MuniGas to buy and sell gas to municipalities without paying the 7.5% natural gas production tax to the state. This severance tax is paid to the state for minerals extracted in the state of Texas. If Marfa purchased directly from a gas producer, we would not pay the tax because we are tax-exempt. WTG is not tax-exempt. They pay the tax and pass that cost on to us.
Because Munigas is dealing in sales to tax-exempt municipalities, they are able to sell tax-exempt bonds to finance the gas purchases. Financial institutions that purchase the bonds get tax breaks. There is an industry conference on this type of deal. It is called the Bond Buyer’s 2nd Prepaid Energy Contracts - A Finance Conference and is being held in New Orleans this May. MuniGas was a participant last year. The conference covers the "benefits and risks of these innovative and exciting transactions." The website states that "the road to a deal is long – involving complex tax-law considerations, derivatives, and gas-supply decisions – and education is crucial."
Robert Murphy, Executive Director of MuniGas, will participate in a session called "Structuring the Deal: Inside Issues." This session is described this way: "Prepaid gas contracts are among the most complex transactions in the municipal bond market today - and it seems like every investment bank has its own 'twists'. Hear from end users about how they're making the deals work, including: where the savings comes from; how to line up supply contracts, and the role of interest-rate swaps." The other two speakers are from Bank of America Securities and UBS Investment Bank.
MuniGas a non-profit corporation in Texas that incorporated on June 17, 2004. Their agent is Municipal Energy Resources Corporation, based in Houston, Texas. The Secretary of State lists three directors: Janet Moerbe, Harvey Bush and Glen Pape, all of LaGrange, Texas. Glen Pape is a financial consultant in LaGrange. Janet Moerbe is the mayor of LaGrange. Harvey E. Busch is a councilmember of the city of LaGrange. Moerbe and Busch are also directors of the LaGrange Economic Development Corporation. Has SWTMG disclosed that the mayor of LaGrange is a director of MuniGas? Is LaGrange getting a better deal than Marfa? Is Marfa subsidizing LaGrange?
The address for MuniGas on file with Texas Secretary of State is 155 E Colorado Street La Grange, TX. This is also the address for La Grange City Hall. [CORRECTION: The address on file with the Secretary of State for Ms. Moerbe and Mr. Bush is La Grange City Hall. The entity address is 3 Riverway, Suite 1375, Houston TX, the same address as Municipal Energy Resources Corporation.]
Over the last few years, MuniGas has provided a 5% savings to customers such as Boerne, Brenham and Fort Stockton. The contract does not appear to guarantee Marfa a better price for the gas, only a guaranteed supply. Of course, that guarantee is only as good as the company. The company incorporated less than three years ago and is a paper company with no real assets. [UPDATE: According to Melvin Davis, MuniGas has been in business since 1998 and this current corporation is something akin to MuniGas2.]
Marfa will be guaranteed a supply, but will be unable to negotiate a price because they cannot switch suppliers without getting out of the contract. According to the Sentinel, "Davis says there is no cost for joining or leaving the program." That may not be true. There is an opt-out clause that involves a complicated formula. It appears that Marfa might need to find somebody else to take their place if they opted out. Melvin Davis thinks that the contract is easy to get out of with 45 days notice. That would be good news. Confirmation from an independent attorney would be a good thing. Melvin believes that the SWTMG attorney has been with them for 25 years and is also an attorney for WTG.
MuniGas is promising an immediate price break of 5% today but makes no promises about the next 20 years. If natural gas prices rise and supplies tighten, it seems like this contract would guarantee a supply and a reasonable price. If natural gas prices fall, we might end up paying a higher price without a way to exit the contract. This could be a good deal for the city. It could be a bad deal for the city. We do not have enough information today to lock us into a 20 year contract.
It is unreasonable to expect a Marfa council member to understand a complicated 50-page gas contract. This contract is outside the field of expertise of our city attorney. Marfa should slow down and hire an expert in the field to study the contract and provide a brief summary in lay terms. If Marfa wants to get out of this contract in the future, it will need to hire an attorney to look at the contract. The time to hire an attorney is today, before the contract is approved.
MuniGas is describing this as a "no-risk" deal and is pushing Marfa to sign ASAP. We should not rush into a 20 year deal on the salesman's promise of no risk. That is a recipe for a disaster. If this is a good deal and MuniGas is a solid company, then they should encourage us to take our time to get legal advice and examine the deal carefully. We should not feel the pressure of a car dealer showroom for this 20 year contract with a 2+ year old company. [UPDATE: The Secretary of State information is quite curious. One of the MuniGas directors
Information is power. If an uninformed city enters into a contract with an informed seller, the city is going to be the loser. We should not execute any contract unless we understand the benefits AND the risks.
Caveat Emptor.
- DISCUSS, CONSIDER AND TAKE APPROPRIATE ACTION-07-16 AFFIRMING THAT SOUTHWEST TEXAS MUNICIPAL GAS CORPORATION HAS AUTHORITY AS AGENT FOR THE CITY TO EXECUTE GAS CONTRACTS AND ADDENDUMS WITH CITY OF LAGRANGE, MUNIGAS, BP ENERGY AND WTG GAS MARKETING, INC. (REQUESTED BY DR. AVINASH RANGRA BOARD PRESIDENT AND MELVIN DAVIS JR.)
This is a very complicated deal involving a 20 year contract for a supply of natural gas with many different entities involved in the deal. Marfa should not take any action to endorse a contract until the city has obtained independent expert legal advice on the pros and cons of the deal. An uniformed vote is unlikely to be a wise vote.
I am trying to describe a complicated contract involving natural gas, tax law, prepaid energy contracts, bond sellers, bond buyers, gas producers, gas distributors, our gas company with seven entities (including Marfa and Alpine). I am sure I will get some of this wrong. Don't take any of this as fact, merely my attempt to make sense of it all. If I get something wrong, please post a comment so that it can be corrected. Let's look at some background. First, who are the players?
SWTMG: Southwest Texas Municipal Gas Corporation is a non-profit business jointly owned by the cities of Marfa and Alpine.
WTG: West Texas Gas Marketing is a natural gas distributor that owns the gas pipeline that feeds into SWTMG. They charge a fee for transmission and are regulated by the Railroad Commision of Texas.
MuniGas: Municipal Gas Acquisition and Supply Corporation is a company involved in prepaid gas contracts and cooperative gas purchases. Their website is under development but lists Tony Allison and Bob Murphy as contacts. Tony Allison is the person working with SWTMG.
BP Energy: British Petroleum
City of LaGrange: A customer of MuniGas with a 40-year contract from what I have heard.
The Big Bend Sentinel covered this situation in the current issue in an article by Megan Wilde. According to the paper, David Lanman and Rudy Garcia voted against the contract. Bud Powers, Ken Whitley and Hal Craig voted for the contract. The meeting last Wednesday was the last meeting for Whitley and Powers who are now off the board.
What is the contract? The contract appears to be a form of prepaid energy contract executed by a company that buys and sells gas with no real assets. MuniGas has a contract to purchase a large amount of natural gas from a producer and is selling it to municipalities. MuniGas sold tax-exempt bonds to raise money to buy the gas. A trustee oversees the bond to make sure that the bond holders get their money back. MuniGas must line up buyers for the gas in order to satisfy the bond holders. MuniGas has described the city of LaGrange as a sponsor of the gas contract. The meaning of "sponsor" is not clear. It appears that we are signing on to a deal that LaGrange has with MuniGas.
MuniGas is only allowed to work a deal with municipalities. SWTMG is a non-profit corporation. In order for MuniGas to enter into a contract with SWTMG, Marfa must give SWTMG the authority to enter into a contract on our behalf. That is the point of the agenda item tonight. Without this authority, MuniGas is not selling to a municipality, and the tax exempt status of their bonds is in question. This is a deal breaker for MuniGas.
Because we purchase gas from WTG, WTG must also be involved in this deal. BP Energy and Merrill Lynch Commodities are backers of the bonds in some way that I do not understand. The price of gas today on the New York Stock Exchange is $7.55 per MCF according to Melvin Davis. If SWTMG initiated a contract with WTG today, the price to SWTMG might be about $9.10 once all the transmission fees are included. SWTMG says that the deal with MuniGas would produce a 5% price break. Today, SWTMG pays WTG for the natural gas. Under this contract, SWTMG would pay MuniGas the discounted rate, and BP would make some payment to WTG for the transmission cost. MuniGas has a contract to purchase gas at $4-$5 per MCF.
The Texas legislature passed a law that allows for companies like MuniGas to buy and sell gas to municipalities without paying the 7.5% natural gas production tax to the state. This severance tax is paid to the state for minerals extracted in the state of Texas. If Marfa purchased directly from a gas producer, we would not pay the tax because we are tax-exempt. WTG is not tax-exempt. They pay the tax and pass that cost on to us.
Because Munigas is dealing in sales to tax-exempt municipalities, they are able to sell tax-exempt bonds to finance the gas purchases. Financial institutions that purchase the bonds get tax breaks. There is an industry conference on this type of deal. It is called the Bond Buyer’s 2nd Prepaid Energy Contracts - A Finance Conference and is being held in New Orleans this May. MuniGas was a participant last year. The conference covers the "benefits and risks of these innovative and exciting transactions." The website states that "the road to a deal is long – involving complex tax-law considerations, derivatives, and gas-supply decisions – and education is crucial."
Robert Murphy, Executive Director of MuniGas, will participate in a session called "Structuring the Deal: Inside Issues." This session is described this way: "Prepaid gas contracts are among the most complex transactions in the municipal bond market today - and it seems like every investment bank has its own 'twists'. Hear from end users about how they're making the deals work, including: where the savings comes from; how to line up supply contracts, and the role of interest-rate swaps." The other two speakers are from Bank of America Securities and UBS Investment Bank.
MuniGas a non-profit corporation in Texas that incorporated on June 17, 2004. Their agent is Municipal Energy Resources Corporation, based in Houston, Texas. The Secretary of State lists three directors: Janet Moerbe, Harvey Bush and Glen Pape, all of LaGrange, Texas. Glen Pape is a financial consultant in LaGrange. Janet Moerbe is the mayor of LaGrange. Harvey E. Busch is a councilmember of the city of LaGrange. Moerbe and Busch are also directors of the LaGrange Economic Development Corporation. Has SWTMG disclosed that the mayor of LaGrange is a director of MuniGas? Is LaGrange getting a better deal than Marfa? Is Marfa subsidizing LaGrange?
The address for MuniGas on file with Texas Secretary of State is 155 E Colorado Street La Grange, TX. This is also the address for La Grange City Hall. [CORRECTION: The address on file with the Secretary of State for Ms. Moerbe and Mr. Bush is La Grange City Hall. The entity address is 3 Riverway, Suite 1375, Houston TX, the same address as Municipal Energy Resources Corporation.]
Over the last few years, MuniGas has provided a 5% savings to customers such as Boerne, Brenham and Fort Stockton. The contract does not appear to guarantee Marfa a better price for the gas, only a guaranteed supply. Of course, that guarantee is only as good as the company. The company incorporated less than three years ago and is a paper company with no real assets. [UPDATE: According to Melvin Davis, MuniGas has been in business since 1998 and this current corporation is something akin to MuniGas2.]
Marfa will be guaranteed a supply, but will be unable to negotiate a price because they cannot switch suppliers without getting out of the contract. According to the Sentinel, "Davis says there is no cost for joining or leaving the program." That may not be true. There is an opt-out clause that involves a complicated formula. It appears that Marfa might need to find somebody else to take their place if they opted out. Melvin Davis thinks that the contract is easy to get out of with 45 days notice. That would be good news. Confirmation from an independent attorney would be a good thing. Melvin believes that the SWTMG attorney has been with them for 25 years and is also an attorney for WTG.
MuniGas is promising an immediate price break of 5% today but makes no promises about the next 20 years. If natural gas prices rise and supplies tighten, it seems like this contract would guarantee a supply and a reasonable price. If natural gas prices fall, we might end up paying a higher price without a way to exit the contract. This could be a good deal for the city. It could be a bad deal for the city. We do not have enough information today to lock us into a 20 year contract.
It is unreasonable to expect a Marfa council member to understand a complicated 50-page gas contract. This contract is outside the field of expertise of our city attorney. Marfa should slow down and hire an expert in the field to study the contract and provide a brief summary in lay terms. If Marfa wants to get out of this contract in the future, it will need to hire an attorney to look at the contract. The time to hire an attorney is today, before the contract is approved.
MuniGas is describing this as a "no-risk" deal and is pushing Marfa to sign ASAP. We should not rush into a 20 year deal on the salesman's promise of no risk. That is a recipe for a disaster. If this is a good deal and MuniGas is a solid company, then they should encourage us to take our time to get legal advice and examine the deal carefully. We should not feel the pressure of a car dealer showroom for this 20 year contract with a 2+ year old company. [UPDATE: The Secretary of State information is quite curious. One of the MuniGas directors
Information is power. If an uninformed city enters into a contract with an informed seller, the city is going to be the loser. We should not execute any contract unless we understand the benefits AND the risks.
Caveat Emptor.
posted by RobC at 10:34 AM
5 Comments:
Whoa! Is this one of Marfa's sacred cows that everybody is going to say "we've always done it this way?" Have we signed one of these puppies before?
You know what might be ironic. The Marfa Basin is being touted by gas exploration companies as being maybe the new bonanza for natural gas.
You know what might be ironic. The Marfa Basin is being touted by gas exploration companies as being maybe the new bonanza for natural gas.
Isn't the Financial Consultant for Marfa, Larry Skiles, an expert on stuff like this, bonds, etc? And we have a bond attorney from his firm in Dallas. This of course is for the TWDB loan. Where are these experts when you need them?
What is the status of this?:
Anonymous said...
Lest we get complacent:
The water loan must have public hearings held and receive citizens' approval to accept the loan by March 29. It was approved by the TWDB on Feb. 27.
3/13/07 2:30 PM
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