Natural gas is typically purchased from producers and marketers in four (4) ways. First, long term purchases (Project gas) are made through specific projects, such as pre-paid transactions which require the issuance of bonds, for extended periods of time, usually for ten (10) years or longer. Second, term gas purchases, typically for a couple of years or less, are also done to “lock in” favorable prices. Third, baseload gas is purchased for a calendar month at negotiated monthly prices to meet a portion of the monthly needs of each member. Finally, swing gas is purchased, usually on a daily basis, to specifically match the expected usage of each member with the total supply acquired through the four methods described herein. FGU secures a combination of long-term, monthly, and daily purchases with numerous natural gas suppliers and analyzes a variety of member-specific requirements, including:
- Member-specific pricing objectives
- Long-term market opportunities
- Optimal receipt and delivery point utilization
- Pricing forecasts
- Imbalance resolution
In addition to optimizing such factors, FGU is able to provide low cost, reliable natural gas to its members by maintaining a large supplier base. (In fact, FGU currently maintains contracts with more than 70 gas producers, marketers and suppliers!)
Furthermore, members are allocated their proportionate share of FGU’s aggregated monthly purchases, and typically blend some amount of monthly and daily acquisitions to comprise the FGU “system supply”. FGU’s weighted average cost for system supply is consistently below relevant market benchmarks.
Long-Term Gas Supply
Natural gas supply projects are periodically created to secure long-term supply at below market prices. The following two examples offer specific insights as to what such endeavors might entail.
Gas Supply Acquisition Project #1 (GSAP#1)
Under FGU’s GSAP #1 contract, FGU issued $115,590,000 in tax-exempt revenue bonds to finance the prepayment of a ten-year supply of natural gas at a below-market price. Participants in the project began taking deliveries in December 1998, and were contracted for the delivery of over 5.9 million Dth of gas per year at a discount of $0.19 per Dth (compared to Florida’s standard first-of-the-month price index), resulting in cumulative cost savings in excess of $11 million compared to market prices. The gas supply from the GSAP #1 project provided approximately 27% of the natural gas requirements of the GSAP #1 project participants, and final deliveries were made on November 30, 2008.
Gas Supply Acquisition Project #2 (GSAP#2)
Late in FY 2006, FGU completed GSAP#2, the second tax-exempt revenue bond financed prepayment for natural gas. Similar to GSAP#1, it provided for a 20-year supply of natural gas on a firm basis at a total cost that was below market prices. Participants contracted for an average of 21,039 Dth per day for 20 years and expected to receive the gas priced at approximately $.57 per Dth below Florida’s standard first-of-the-month price index. FGU issued $694,175,000 in tax-exempt revenue bonds to finance the prepayment to UBS AG, and GSAP#2 was expected to provide approximately 15% of the total natural gas requirements of the project, saving participants an expected average of $4.4 million each year when compared to the market price.
However, in May 2009, FGU entered into an Unwind Agreement with UBS to terminate the transaction early in consideration of settlement payments by UBS to FGU and its participants. As of the termination of the project, participants realized a cumulative savings below market price of $7.5 million. Total savings for the Project, including the early termination settlement, were over $42 million. Further details of the Unwind can be found in FGU’s 2009 Annual Report.
Numerous producers and marketers have supply and are willing to sell it at specific locations along the interstate pipeline systems. These locations are called “receipt points” on the interstate pipelines. Florida Gas Transmission (FGT) currently has about 70 operationally available receipt points in its production area. The gas trader has to constantly evaluate what gas purchases (project, term, baseload and swing) have been made, at which specific receipt points the gas is being received at and which capacity contracts are being utilized to transport the gas to the appropriate delivery point. Hence, the gas trader has to navigate a complex set of variables to determine the quantity of gas to purchase at any given time. These variables include who to purchase from, how much to purchase and at what price, at what receipt points, what length of time (long-term or a single day), type of capacity being used (primary or secondary firm) for transportation, quantity needed by the member, monthly imbalance position and other important information. Establishing and maintaining relationships with potential suppliers is very important and being “in the market” on a daily basis increases the chances that competitive and reliable gas supply is consistently achieved for members. Traders also have to be aware of, and factor into this function, conditions that limit access to the interstate pipelines, such as maintenance activity, operational orders, force majeure events and other similar situations.
In order to utilize storage assets to their fullest potential, the storage contract terms and conditions must be understood. Armed with this information, traders can effectively schedule gas into storage during times of low usage and low prices and schedule gas from storage during times of high usage and high prices. When utilized properly, storage gas can be leveraged to optimize the weighted average cost of gas (wacog) for members.
Efficient utilization of transportation entitlements is essential to achieving the lowest overall delivered price of natural gas, making it a major asset of FGU’s members. To forecast consumption and help minimize pipeline imbalances and non-compliance penalties on transporting pipelines, FGU considers numerous factors on a daily basis, including:
- Historical gas usage
- Current and predicted weather conditions
- Accumulated monthly imbalances
- Member-provided anticipated changes
Pipeline capacity is utilized to meet the requirements of FGU’s members. After such requirements are satisfied, FGU actively pursues daily, monthly, and long-term opportunities to use any remaining excess capacity, oftentimes relinquishing it to third parties. For members, this translates to significant financial benefits.
In fact, in the 2014 Fiscal Year alone, FGU members experienced a total cost savings of more than $2.1 million due to recoveries gained on sales or releases of excess transportation capacity.
Once the quantities of natural gas have been acquired, it must be nominated and scheduled on the pipelines on capacity contracts held by the Shipper. The nomination and scheduling process also includes identifying any supply cuts made by the pipeline, monitoring for changes in consumption due to electric generating units unplanned outages, changes in weather and other events that impact the amount of gas being consumed. Changes to scheduled quantities can be made at pre-determined times during the gas day through the intra-day nomination processes for each pipeline.
Pipeline imbalances create operational difficulties that often result in increased costs and other penalties. FGU works to prevent pipeline imbalances by scheduling across multiple receipt and delivery points, minimizing the “over” or “under” scheduling of gas shipments—ultimately reducing unnecessary costs and other repercussion for its members.
The primary function of the Delivery Point Operator (DPO) is to effectively manage and mitigate the potential negative effects of Operational Orders issued by the pipelines (Alert Days, Operational Flow Order’s, etc.) and month end imbalance positions. In general, the more members that belong to the same DPO account and the higher the scheduled quantities, the more likely it is to mitigate any negative impacts. Operational Orders, in its simplest definition, means daily balancing. Scheduled quantities must be within defined tolerances (over or under) when compared to measurement data from each and every delivery point (the “aggregated delivery points”) that the DPO administers for each day that an Operational Order is in effect. Failure to be within defined tolerances during an Operational Order will result in significant penalties. Similarly, month end imbalances, the difference between the amount of gas scheduled for the entire month and the amount of gas measured at the aggregated delivery points must be within established tolerances (less than 5%) in order to obtain the best cash-out prices. Of course, booking out imbalances with other Shippers is allowed and can be done to reduce the monthly imbalances below the 5% tolerances.
Relevant data must be collected, analyzed and used by the traders as a basis for decision-making of natural gas supply and capacity functions. Such data includes weather information (cooling degree days and heating degree days), measurement information, near real-time supply and capacity pricing, producer and marketer positions and supply options, and other relevant information. Pertinent reports are produced that assist the traders in the performance of their functions.