MEA gets flat-rate deal with Hilcorp; members to save $3M in first year

Matanuska Electric Association’s latest natural gas supply contract has two unique characteristics designed to benefit the utility.

The contract with Hilcorp Energy, the dominant producer in Cook Inlet, is for all of MEA’s projected gas demand from April 2018 through March 2023. At an estimated annual demand of a little more than 6 billion cubic feet, or bcf, of gas per year, the contract covers about 32 bcf of gas sales over the five-year term.

It was submitted to the Regulatory Commission of Alaska April 19 and is a tentative deal pending the commission’s approval.

MEA General Manager Tony Izzo highlighted in an interview that the $7.55 per thousand cubic feet, or mcf, of gas price not only should save the co-op utility’s members $3 million in the first year, but also that the price is consistent regardless of how much gas MEA needs on a given day.

“What I’m excited about in this contract is I pay $7.55 for everything. I have no swing gas premium,” Izzo said. “Our customers will pay that price for the lowest demand day and the highest demand day.”

It has basically been standard practice for recent Cook Inlet gas supply contracts to include a base load price for the majority of a utility’s demand. Additional gas needed mostly during cold weather and dark winter months is then sold at a premium price that can be as much as 50 percent higher than the base load price for emergency, or needle peak, supply.

Hilcorp Energy declined to comment on the terms of the gas supply contract with MEA.

Enstar Natural Gas Co., the region’s largest natural gas buyer, agreed to a contract in February through early 2023 with Hilcorp for a first year weighted average price of $7.56, which includes premium sales.

That deal will save Enstar customers $14 million in the first year of the contract.

Izzo said MEA’s deal provides price certainty to its customers who won’t see feedstock fuel prices go up at the same time they are using more electricity.

The cost savings are the result of a price drop from the $8.03 per mcf base load price MEA and most Cook Inlet gas customers will be paying under contracts with prices set by the 2012 Consent Decree that expires at the end of 2017.

The Consent Decree deal was reached by the Attorney General’s office and Hilcorp and capped Inlet gas prices through 2017, thus allowing Hilcorp to purchase gas and oil interests from Marathon and Chevron and become the majority gas supplier in the basin in late 2012.

MEA and Hilcorp agreed to a 2 percent annual price escalator after the first year $7.55 per mcf price. The Consent Decree allows for a 4 percent annual price increase.

The deal also gives MEA a partial “out clause” that it can exercise on up to 20 percent of its gas demand.

“For about 20 percent of my supply, if the market changes and hopefully (another producer adds supply) and the price is attractive I can notify Hilcorp at any time before or during this contract and say, ‘I’m going to exercise the turndown option,’” Izzo said.

However, he noted the price from a new supplier would have to be substantially less than the current contract price because Hilcorp has the right to add 25 cents per mcf to MEA’s remaining contracted demand if the turndown option is used.

Similar to what Enstar officials said when their contract went to the RCA in February, Izzo said the five-year term is a compromise between supply security and encouraging diversity among producers. He thanked Hilcorp for its work to increase gas supply from mature Inlet fields and noted that just a few years ago utilities couldn’t any contracts for longer than two years.

The leaders of both utilities said Hilcorp was willing to agree to longer-term contracts.

“I’m real happy with the price but at the same time I really want the market to grow; I want to have an alternative supplier; I want to diversify the portfolio and I want to see prices go down so how do I do that?” Izzo surmised. “I stick with a five-year term. It’s not forever but I was able to get this turndown option and hopefully one of these (other producers) will get some cash flow off that.”

Elwood Brehmer can be reached at [email protected].

Updated: 
04/26/2016 - 10:19am