Lehman failure leaves natural gas supplier searching

Wall Street’s chaos reached Main Street in Georgia this week.

Really.

Main Street, an affiliate of the Municipal Gas Authority of Georgia, lost a $709 million, 30-year gas supply contract.

The contract was with a subsidiary of Lehman Brothers, the investment bank which collapsed last week.

Main Street now has to find new gas to replace the low-priced supplies that Lehman was supposed to deliver in Georgia and Florida.

The new gas will almost certainly cost more.

The Lehman gas was for Georgia cities who buy gas through the municipal gas authority and the city of Tallahassee.

The Georgia gas authority will have to replace about 5 percent of its supply for this year, said Arthur Corbin, CEO of both the authority and Main Street.

Tallahassee is in more trouble: The city now needs to replace about 20 percent of its supplies, Corbin said.

Main Street’s investors are the hardest hit of all.

The nonprofit sold tax-exempt bonds to raise the $709 million it paid Lehman in April.

Main Street was to pay bondholders with revenue its participating cities paid for the gas Lehman delivered.

Lehman’s commodity subsidiary failed to deliver gas last week, defaulting on its obligations: Main Street terminated the contract Wednesday.

Lehman Brothers Holding Inc. guaranteed its subsidiaries obligations, but payment isn’t likely.

Credit agencies slashed their ratings on Main Street’s Lehman bonds sharply last week.

Fitch dropped its rating again Tuesday, to C, saying that the agency believed the bonds would be in default.

The state General Assembly formed the Georgia Municipal Gas Authority in 1987 to help municipal gas companies join forces to buy gas. The authority has 76 member gas companies in five states that serve 243,000 customers, according to its Web site. Its largest Georgia customers are Lawrenceville and Warner Robins. The authority formed the Main Street company two years ago, specifically to do the kind of prepaid natural gas contracts it had with Lehman.

Main Street has similar arrangements with J.P. Morgan and Merrill Lynch, contracts that are not in trouble, Corbin said.

Fitch analyst Karl Pfeil said the authority put together Main Street to participate in prepaid gas transactions with other utilities. “Gas systems or electric utilities could enter into these together and receive economies of scale.”

The prepaid gas transactions are tax-exempt structured financing, he said. They’re more complex than traditional municipal gas utility bonds. The transactions include multiple counterparties, all of whom have to meet their obligations in order for bondholders to be paid in full, he said. The commodity supplier and its guarantor are the most important.

Corbin said institutions such as Lehman like the prepaid gas transactions because “from their perspective, they value getting paid up front. And that meant the discount they gave us was very good.”

“The savings that Main Street could generate for its customers were very attractive,” he said.

Corbin said Main Street would replace this year’s Lehman gas by buying it on the market every month. He said both organizations remain financially strong, although word of the Lehman debacle is already causing perception problems.

“I had a gas supplier say, hey, you guys are all caught up in the Lehman thing, I don’t want to sell to you.”

He said he told the supplier that Main Street was on the verge of credit upgrade, despite the Lehman problem.