(12)AR 090407 Natural Gas Supply (SCPPA)

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ITEM #12 CITY OF COLTON AGENDA REPORT FOR COUNCIL MEETING OF SEPTEMBER 4, 2007 TO: Honorable Mayor and City Council FROM: Jeannette Olko, Electric Utility General Manager SUBJECT: Approve a resolution authorizing participation in the Southern California Public Power Authority (SCPPA) Prepaid Natural Gas Program and approving the Natural Gas Supply Agreement with SCPPA for the Purpose of Securing a Reliable Supply of Natural Gas DATE: August 6, 2007 BACKGROUND: The Electric Utility has a need to secure a reliable supply of natural gas that is purchased at a reasonable price relative to the market to meet the fuel requirements of its share of the Magnolia Power Plant and the Agua Mansa Power Plant. In fulfilling this need, the Utility is taking the approach of developing a natural gas portfolio that will be a combination of long-term, mid-term, and short-term supply contracts from a variety of suppliers that will in the end provide a diversified gas supply. Thus, the Utility secured a portion of its long-term requirements through its participation in SCPPA's acquisition of Pinedale gas reserves in Wyoming in June 2005, and Barnett gas reserves in Texas in November 2006. These reserves provide up to 1,000 MMBtu of natural gas at an average cost of $5.35 per MMBtu. As a reference, spot prices for natural gas over the last several months have averaged between $6.00 and $7.00 per MMBtu. DISCUSSION/ANALYSIS: To continue building a diversified portfolio of natural gas supply, the Electric Utility recommends entering into a natural gas supply agreement with SCPPA that will provide a discounted supply of gas over the next 30 years to the participating members. The transaction is known as a prepaid natural gas transaction, whereby SCPPA borrows money at lower tax-exempt rates and uses the proceeds to pay a gas supplier a one-time payment for delivery of fixed volumes of gas over a specified period of time. This agreement is structured such that the financial arrangement is between Goldman Sachs and SCPPA, with J. Aron supplying the gas through SCPPA. The discounted price that SCPPA offers to the participants is primarily the result of the difference between SCPPA's lower tax-exempt rates and the higher taxable cost of funds of the gas supplier. As a participant, Colton's risk is limited and protected as it has a "take -and -pay", non-recourse gas supply agreement with SCPPA which means that Colton is generally obligated to pay (at an index price minus a discount) only for the gas it receives. If Colton cannot use the quantity of gas it has contracted to purchase, the gas is remarketed to other customers, which in most cases should prevent Colton from having to pay for the gas. If no gas is delivered because of unavailability of gas or a failure in the supply chain, no payment is required or made. If, for whatever reason, the agreement is terminated because J. Aron can no longer fulfill its obligation to supply gas, Goldman Sachs and J. Aron are responsible for paying the remainder of the principal of the bonds; not SCPPA nor any of the participants. In the worst case scenario (early termination),