Title
Incorporated County of Los Alamos Resolution No. 25-03; A Resolution Relating to the Natural Gas Supply Agreement Between the Incorporated County of Los Alamos and the New Mexico Municipal Energy Acquisition Authority, as Amended by a First Amendment and Second Amendment; Authorizing the Execution and Delivery of a Third Amendment to the Natural Gas Supply Agreement; Authorizing Action Necessary or Advisable to Obtain a Gas Discount Pursuant to the Supply Agreement, as Amended, Including the Execution and Delivery of Certificates and Agreements Relating to the Foregoing; Ratifying, Approving, and Confirming Prior Action Taken Related to the Foregoing; and Repealing Action Inconsistent Herewith
Recommended Action
I move that Council adopt Incorporated County of Los Alamos No. 25-03; A Resolution Relating to the Natural Gas Supply Agreement Between the Incorporated County of Los Alamos and the New Mexico Municipal Energy Acquisition Authority, as Amended by a First Amendment and Second Amendment; Authorizing the Execution and Delivery of a Third Amendment to the Natural Gas Supply Agreement; Authorizing Action Necessary or Advisable to Obtain a Gas Discount Pursuant to the Supply Agreement, as Amended, Including the Execution and Delivery of Certificates and Agreements Relating to the Foregoing; Ratifying, Approving, and Confirming Prior Action Taken Related to the Foregoing; and Repealing Action Inconsistent Herewith.
Utilities Manager's Recommendation
The Utilities Manager recommends that Council adopt Incorporated County of Los Alamos Resolution No. 25-03 as presented.
Board, Commission or Committee Recommendation
The Board of Public Utilities affirmed Resolution No.25-03 at their regular session on February 19, 2025 and recommends that Council adopt Resolution No.25-03 as presented.
Body
On May 7, 2019, the County Council was presented with and approved resolution No. 19-05, continuing Los Alamos County’s natural gas purchases through the New Mexico Municipal Energy Acquisition Authority (NMMEAA) for a five-year term. The end of that term is approaching, and the Department of Public Utilities (DPU) is preparing for another five-year term renewal, henceforth the “2025 renewal”. The process this time is similar to the 2019 renewal, as described in the BACKGROUND INFORMATION section below.
The 2025 renewal brings two significant recommended changes:
1. A proposed revision to the delivered gas quantities
2. A proposed 15-year extension to the term, from June 1, 2039, to June 1, 2054
The reason for the first change is to reflect recent historical gas consumption in Los Alamos County.
In 2009 the County's NMMEAA daily gas delivery quantities were selected to match 80% of the average historical monthly metered gas consumption. An updated calculation using metered month average historical monthly metered gas consumption. An updated calculation using metered monthly gas consumption over the past 5-years shows significant reductions in average monthly gas consumption for ten months and increases for two months. DPU recommends changing the NMMEAA delivery quantities to 80% of the 5-year averages, as shown in attachment B - LAC NMMEAA gas quantities for 2025. If the County approves the 2025 renewal, then the County will be able to again adjust the gas quantities as needed in 5 years when the 2030 renewal occurs.
The reason for the second change is to maximize the potential discount to the cost of gas. Extending the term increases the quantity of the bonding, and therefore directly increases the discount over the 5-year bond period. Staff recommends this change as it will increase the discount while still allowing for future reductions in future gas deliveries if needed. The other two NMMEAA participants, the City of Farmington and the City of Las Cruces, intend to proceed with the term extension. Attachment C - Third Amendment to Natural Gas Supply Agreement (Los Alamos), includes the term extension.
The NMMEAA Board held meetings in November and December to once again select The Majors Group to act as the Board’s Financial Advisor for the renewal, and to prepare and approve a NMMEAA ordinance for the renewal, with this ordinance being attached to this agenda item. Please note that the ordinance is for NMMEAA and does not bind the County. The Board of Public Utilities and County Council must approve of the renewal terms to continue participating in the 2025 renewal. The NMMEAA gas supply participants, consisting of Los Alamos County, the City of Farmington, and Las Cruces, are currently planning on considering their approvals of the 2025 renewal in February 2025. Mr. Ben Olbrich, Deputy Utility Manager for Power Supply, serves as secretary of the NMMEAA and voting member. The discount amount under the 2025 renewal will be known only immediately before the approval and may be different than the current discount of $0.295/Dekatherm.
Entering into the 2025 renewal obligates the County to buy the fixed quantities of gas for a 5-year period. The County will retain the ability to sell excess NMMEAA gas quantities at any time they are not needed, and is free to enter into additional financial hedging approaches if desired, such as fixed winter pricing agreements.
Attachment D - NMGC and LAC residential cost of gas comparison July 2012 through December 2024, provides an analysis of the cost of gas for NMGC and LAC over the past 42 months. It shows that the historical LAC residential cost of gas under the NMMEAA discount on the monthly index settlement price is usually to the customer's benefit. The period between December 2022 and April 2023 is a notable outlier, and was driven in large part by increased demand for liquefied natural gas exports from the United States to Europe at the beginning of the Ukraine war, tightening the domestic gas supply and putting upward pressure on prices.
Attachment E - NMMEAA Bond Ordinance No. 2024-01, is included for completeness. It is a NMMEAA ordinance passed by the NMMEAA Board of Directors to allow for the 2025 renewal, and is informational only.
To provide a description of the history of the NMMEAA actions over the past 15 years, the body of the staff report for the 2019 renewal presentation to Council is included below.
Background Information Copied from the 2019 County Council Agenda Item
In 2009, the Department entered into a gas prepay arrangement through the New Mexico Municipal Energy Acquisition Authority (NMMEAA) for approximately 80% of our historical gas usage. This gas is purchased at the first of the month San Juan index price, the prepay arrangement generates a discount on those purchases. NMMEAA has one gas supply contract, the special 2009 prepaid gas contract with Royal Bank of Canada (RBC). RBC has entered into an interest rate swap transaction through which RBC is able to use the rate difference between taxable and nontaxable securities to generate the discount.
Under section 7.02(c)(1) of the original Prepay Agreement, RBC was allowed to terminate the agreement upon a change to regulatory or accounting regulations which materially adversely affect the economics of the transaction. By letter to NMMEAA’s General Council dated October 1, 2013, NMMEAA received notice of RBC’s opinion that RBC had the legal right to terminate the 2009 prepayment transaction, based upon changes to the Canadian banking regulations known as the Basel III Accord. In November 2013 RBC met with NMMEAA and proposed a restructuring that would maintain the relationship and provide for a continuing discount, although somewhat more modest than the discount previously available.
The original agreement locked the participants into a set discount formula for the term of the agreement, originally 30 years. The revised agreement adopted in 2014 was for a five-year term. This gave both RBC and the NMMEAA participants the opportunity to seek other alternatives every five to seven years should market conditions change. If the revised deal is still economically viable, renewal is possible. If conditions have changed, the deal can collapse and NMMEAA or the participants can seek other market opportunities.
After conducting appropriate due diligence, the NMMEAA Board is prepared to proceed with renewal of the revised deal. Because of fluctuating market conditions, both in markets for taxable and tax exempt bonds, and in the gas commodity futures market, the exact discount available cannot be determined until a few days before the actual closing. Thus, the resolution presented includes language that the transaction will not close unless the NMMEAA Board receives written representation from the Board’s Financial Advisor on the deal, The Majors Group, that the discount offered meets or exceeds any potential alternative discount that may be obtained from other sources. The Majors Group represented NMMEAA as Financial Advisor both in the original deal in 2009 and in the restructuring in 2014 and has thorough knowledge and understanding of the industry and Gas Prepay Agreements such as this.
There is mention in the resolution of a “2019 New Money Transaction”. This is an option under investigation by RBC and the NMMEAA Board, whereby the transaction could be extended to achieve an additional discount on current and future gas purchases. This is available because interest rates in 2014 were significantly lower than in 2009 when the original bonds were issued, so more of the payments made went to principle, shortening the remaining term of the deal. Although to a lesser degree, the same has occurred with the 2014 refinancing. RBC has proposed issuing new, additional bonds, increasing the prepaid gas quantities, and extending the gas supply agreement back to the original term, which action would provide a few more cents per therm potential discount on the entire deal. The Tax Attorneys on the Bond Issue have indicated that under certain circumstances such action would not affect the tax-exempt status of the NMMEAA Bonds upon which the economics of the deal are based. NMMEAA, RBC, the Tax Attorneys, NMMEAA’s general Counsel, and The Majors Group are evaluating the proposal and would move forward only if doing so would be in the best economic interests of the participants. The language in the resolution simply provides for proceeding with the “New Money Transaction," and any requisite amendment to the Gas Supply Agreement, should such extension be determined feasible and beneficial
Alternatives
When the 2025 renewal comes before the Board of Public Utilities and County Council, should the County elect not to adopt the resolution and participate in the refinancing and potential extension, the alternative is to make a Remarketing Election, essentially withdrawing from the deal, and simply accept market prices with no discount, or pursue other potential prepay arrangements with other counterparties. However, there are no other entities in New Mexico for DPU to join that are like NMMEA to pursue a similar discount.
Fiscal and Staff Impact
While it is not possible to know the exact fiscal impact now, NMMEAA is taking steps to ensure the discount offered will be the most reasonably attainable for this type of prepay transaction.
Attachments
A - Resolution 25-03 Relating to the NMMEA Gas Supply Agreement
B - LAC NMMEAA gas quantities for 2025
C - Third Amendment to Natural Gas Supply Agreement (Los Alamos)
D - NMGC and LAC residential cost of gas comparison July 2012 through December 2024
E - NMMEAA Bond Ordinance No. 2024-01
F - Overview of NMMEAA Gas Prepay Structure