Gas Synopsis

Gallatin exercised an option to non-appropriate payments for its natural gas lease for FY 2004. The lease contained a non-appropriation clause which gave the city the right, when budgeting for the next fiscal year, to terminate the lease by not making money available for payments of principal and interest. The city signed an operational agreement with the Bank of New York, effective Jan. 1, 2004, to continue operating the gas system on behalf of the investors. All revenue above actual operating expenses will be paid to the investors.

The Legalities Involved:

The Missouri constitution limits the amount and the means in which a public entity may go into debt. Gallatin’s natural gas system cost $5 million to build in 1995. A project that large for this community normally could only be financed by a revenue bond, which requires a vote of the people. To avoid the time-consuming process of a bond issue during circumstances of an immediate industrial opportunity (hog farm construction by Continental Grain Company), the gas system was financed with a lease-purchase agreement. This means that the city does not own the natural gas system, but is leasing it with an option to buy at the end of the lease term. In order for the lease-purchase to be constitutionally legal, two provisions must be met. First, the entire $5 million as a lump sum is not considered “debt;” only the $450,000 annual payments (called an expense) are considered debt. Secondly, the city retains the right to terminate the lease at the beginning of any fiscal year. This is the “non-appropriation clause” which the city invoked preceding FY2004.

What the New Agreement Means to the City:

The most important aspect of the new operational agreement is that there is no disruption of service to our customers. This also means no change in service for natural gas customers in Hamilton (the Hamilton system hooks onto the Gallatin system at a metering station located along Highway 13 south of Gallatin). The new agreement means business as ususal. The city can maintain it’s insurance, and city employees Kenneth King and Darren Stanley will continue the work of system maintenance for commercial customers (including Premium Standard Farms) and residential customers. The agreement gives both the city and the Bank of New York time to explore other options to resolve the situation.

Why the City Did It:

The reason Gallatin chose the drastic route of non-appropriation was simple. Since 1996 the city has spent $2 million subsidizing the natural gas system. This money came from other departments (mainly water and electric revenue) within the city. The money transfer meant street repair and resurfacing has not occurred as needed, water line replacement has been ignored, and other aspects negative to the city’s infrastructure have occurred. The city lost approximately $190,000 on the natural gas system this year and expected to lose approximately $160,000 next year. Reserve funds are depleted. Realistically, city leaders had little choice but to deny principal and interest payments to investors in Gallatin’s natural gas system.

Why the System Never Met Projections:

Gallatin’s natural gas system is performing below expectations because it has never met sales projections. The city makes money on every cubic foot of gas it sells, but the city is not selling enough gas even to break even on the original repayment schedule. Without debt service, the system would have generated $260,000 in profits this year; however, with a debt service of $450,000 on terms set in 1995, the city lost $190,000 this year.

The Future of the Gas System:

The new operating agreement allows time for the city to work with the Bank of New York to possibly find a buyer for the system. City Administrator Toby Dougherty points to a few different entities expressing serious interest in purchasing the gas system from the present investors. In most scenarios, the city would still maintain and operate the system on behalf of the owners. In almost all scenarios, it will be years before the city realizes any profit from the natural gas system. An entity that purchases the system from the present investors would first recover their purchase investment before splitting any profit with the city. Thus, the City of Gallatin will probably be willing to forfeit any potential profit that might be gained in the short term should the system be sold in exchange for not losing money year after year until the terms of the original lease-purchase agreement are completed.