A Nebraska-based issuer this week will join the recent surge in municipal prepaid natural gas bond deals
The Central Plains Energy Project is pricing $775 million to refund outstanding prepaid gas bonds and to purchase an additional 30-year supply of gas.
Prepaid gas bond issuance is on the rise due to favorable market conditions that have encouraged banks to serve as gas suppliers to generate their own funds and spurred investor interest in varied transaction structures, Moody's Investors Service said in a report Thursday.
Gas prepay bond transactions, Moody's said, allow municipal gas or electric utilities to lock in a long-term discounted natural gas supply. The transactions typically include tax-exempt bonds issued by a conduit entity, with bond proceeds provided to the gas supplier, typically, a large bank or its commodity affiliate.
In CPEP's case, the sole counterparty is the Royal Bank of Canada. In addition to acting as underwriter, RBC is also the gas supplier, the principal transactional counterparty, settlement agreement provider and funding agreement provider, and as a result the bond rating is tied to RBC's credit.
Ahead of the CPEP deal, Moody’s affirmed its Aa2 rating on the bonds and Fitch Ratings affirmed its AA rating on the bonds.
Municipal Capital Markets Group Inc. is financial advisor. Gilmore & Bell is bond counsel to the issuer.
A commodity swap with JPMorgan Chase Bank will play a dual role, hedging the risk for rising gas prices over the next three decades — which is how the municipal utilities expect to save money — and smoothing out cash flow by providing a fixed-rate revenue stream for debt service payments.
“The commodity swap transaction has a front-end and back-end swap,” Fitch wrote. “The front-end swap between CPEP and JPM, exchanges a monthly index price for a fixed price that is sufficient, together with the payments for gas, to cover CPEP's debt service requirements. RBC also has in place a matching back-end swap agreement with JPM, exchanging a fixed price for a monthly index price to further hedge its position.”
The bonds are secured by the trust estate pledged under the indenture, including revenues derived by the sale of natural gas; payments received from the commodity swap provider; and any payments due under the settlement agreement.
The bonds are expected to be issued with a final maturity of Dec. 1, 2049, but are subject to a mandatory tender on Aug. 1, 2025. The bonds may be converted to the fixed, daily, weekly, auction, CP or index rate modes at any time after the business day following the initial long-term rate period.
Moody’s has rated more than $15 billion of prepaid gas bonds in the last 21 months. The rating agency's report said the recent uptick in volume reflects a wider spread between tax-exempt and taxable yields, encouraging banks to serve as gas suppliers to generate their own funds.
Moody's rated 12 prepaid gas transactions that closed in 2018, exceeding its previous yearly peak of 10 in 2007, and as of Thursday had rated 11 transactions in 2019
“Gas prepay bond transactions provide municipal gas or electric utilities with significant cost savings as purchasers of discounted gas,” said Ashley Staropoli, lead author of the report. “The purchase of gas is one of a utility's largest expenses, making these transactions particularly beneficial to participating entities from a budgeting perspective. Participating utilities are offered a locked-in discount versus the market price for periods as long as 20 or 30 years, reducing the need to manage natural gas purchases on the spot market for delivered gas. Some municipalities participate in more than one prepayment transaction simultaneously to diversify the sources of their natural gas supply.”
CPEP was created in 2006 as a conduit issuer for prepaid gas deals. CPEP's participants on the project include the Omaha Metropolitan Utilities District, the Cedar Falls, Iowa, Municipal Gas Utility, and the city of Hastings, Neb. It has $1.8 billion in debt outstanding.
