The natural gas-buying consortium led by Omaha's Metropolitan Utilities District says in a court filing that the gas supplier seeking to terminate a 30-year deal has no basis for doing so, and that ending the contract will cause hardship and expense.
The Central Plains Energy Project, a cooperative gas-buying effort by MUD and the gas utilities in Hastings, Neb., and Cedar Falls, Iowa, said in a filing in U.S. District Court in Omaha this week that Royal Bank of Canada erred when it filed a suit seeking to terminate a 30-year agreement to supply cheap natural gas.
The cooperative's filing included a counterclaim seeking unspecified damages from RBC.
“RBC cannot establish it has any legal basis to terminate the prepaid agreement and refusal to deliver further daily contract quantities of natural gas to CPEP after October 31, 2014, constitutes an anticipatory breach,” the filing says. “RBC's breach of the prepaid agreement has caused damages to CPEP consisting of lost discounts and increased acquisition costs to CPEP with respect to replacement natural gas.”
RBC, Canada's largest financial institution, has a commodities trading unit that in 2009 agreed to supply CPEP with natural gas for 30 years, in exchange for an advance cash payment of $719 million. The money was raised by selling bonds, and the transaction is supported by derivative financial instruments called commodity and interest-rate swaps.
Now, RBC wants out of the deal, citing in a January lawsuit changes to international banking standards governing the reserves of capital banks must hold for such deals. RBC said the Basel III banking accords mean more money must be kept in reserve to back the prepaid gas agreement. The RBC suit says the new standard is a material change in regulation that triggers automatic termination clauses in the supply contract.
The natural gas RBC supplies to CPEP, which in turn sells it to the group's member utilities, accounts for about 15 percent of MUD's gas supply. In exchange for the long-term deal, RBC agreed to supply the gas at a discount to pay-as-you-go rates. MUD says the CPEP arrangement saved the utility's 600,000 ratepayers about $7million last year.
RBC did not respond to email and voice-mail messages.
Jim Knight, MUD vice president of gas operations and CPEP's project manager, said CPEP's court filing in response to the suit contains a counterclaim, or an assertion raised by a defendant that could have been raised in a suit of its own had one already not been filed.
“By its counterclaim, CPEP seeks to recover damages caused by Royal Bank of Canada's breach of its contract to deliver natural gas that it sold to CPEP,” Knight said in a statement.
The damages sought by the counterclaim aren't specified. The CPEP filing also asks that RBC pay off bondholders, whose cash flows would disappear if CPEP stops selling RBC-supplied gas to the utilities, as required by contract in the event of termination.
CPEP has gas-supply agreements with one other seller, New York-based J. Aron, a unit of investment bank Goldman Sachs. J. Aron was paid $1.1billion starting in 2007 for one 20-year gas-supply agreement and one 30-year contract.