The winds of war buffeted Minnesota Community Energy as it prepared to go to market with $803 million of prepaid gas bonds in a deal that finally crossed the line Monday after taking a delay last week.
The war in Iran has created uncertainty in both the commodities and municipal bond markets, which are pillars of any prepaid energy deal.
The issuer, a municipal gas agency and a political subdivision of the state, made the decision with lead manager JP Morgan to wait on the pricing last week with an eye on moving when the markets lined up.
"The market isn't quite where we need it to be," MCE President and CEO Jack Kegel told The Bond Buyer on Monday, before the deal priced.
"I think the issues in the Middle East obviously are a contributor," he said. "MMD
Kegel said the issuer and underwriters would be in the market until the numbers lined up, which turned out to be later on Monday.
The deal, which carried 5% coupons, priced to yield between 3.4% for the 2027 maturity to 4.44% for the 2035, according to data posted on LSEG's TM3.
In a prepaid natural gas deal, public utilities secure a long-term supply of natural gas at a discounted rate, made possible as the other deal parties take advantage of the spread between tax-exempt and taxable bonds.
Such deals can provide attractive yields and additional spread tax-exempt bond investors are seeking. And a higher interest-rate environment allows for wider spreads between taxable and tax-exempt rates, drawing in financial sector guarantors with a cost-effective funding mechanism, according to a report by Moody's Ratings.
The deals are
The bonds have seen interest expand from mutual funds, broker-dealers and insurance companies to separately managed accounts, with
Issuance has been a little slower so far this year, but "that doesn't mean it's not going to be another record year," said Jude Scaglione, director and head of fixed income research at A&M Private Wealth Partners. "We have noticed over several years that, depending on market conditions, you can see a pullback. I think you experienced a little bit of that last week and the week before. Or you can see a ramp up with these types of deals."
A&M released a report earlier this year that put the prepaid energy market's growth into context, Scaglione said.
"It's doubled in size," he said. "From 2018 to '19 to '21, even into '22, it's around that $7 billion range to upwards of $10 billion, and then from '22 to '23… it went from $10.3 billion to roughly $19.3 billion, and then it hit $24 billion; now $31 billion. So if you keep doing that exponentially, we're going to see some sizable moves in this market."
The elaborate structure of prepaid energy bonds can leave some investors wary, especially since they are not secured by the municipalities involved and the structure exposes the bonds to corporate credit risk. The bonds' ratings are tied to the rating of the ultimate guarantor of cash flows on the deal — in the case of MCE's Series 2026A gas project revenue bonds, Nomura Corporate Funding Americas, LLC.
Scaglione said the bigger issue is "there's only so much gas to do a lot around. And at this point, I think you have to start looking into the project participants," he said.
"I would look at deals to see if it's straight through to a traditional municipal utility or (if there are) resale agreements," he said. "It goes back to the point about traditional utilities within the municipal space having cycled through these and then the next evolution is, where are they going to sell the gas to?"
As for the Minnesota deal, recent events in the Middle East meant that with "any spread product, there's a pullback," he said.
"So even high-grade deals
The fixed-rate tax-exempt bonds are rated Baa1 by Moody's, reflecting the credit quality of Nomura Holdings and the structure and mechanics of the transaction.
The gas supplier is Pierpont Energy Prepay 3, a Delaware LLC organized for the sole purpose of this transaction. JP Morgan Energy Ventures Corporation is the sole member of the gas supplier.
The rating also reflects the credit quality of the guaranteed investment contract providers for the debt service account, put receivable account, debt service reserve account and commodity swap reserve account, all of whom will be identified at closing. They must have a minimum rating of A3 by Moody's.
The municipal advisor on the deal is PFM. The bond counsel is Taft.
The bond proceeds will allow the issuer to prepay Pierpont Energy for a certain amount of gas that will be delivered over a 30-year period. The issuer will then sell the gas to its municipal participants under the terms of their gas supply contracts, and the municipal participants will give the gas to retail customers at a reduced cost.
The project participants are the Hutchinson Utilities Commission (48% of the gas), the Missouri Basin Municipal Power Authority (17%), Hibbing Public Utilities (10%), Kansas Municipal Gas Agency (10%), Owatonna Public Utilities (9%), the City of Perham, Minnesota (4%), the New Ulm Public Utilities Commission (2%) and Centennial Utilities (1%).
The commodity swap counterparty is BP Energy Company. Under respective swap agreements, a front-end and a back-end commodity swap are simultaneously entered into with BP.
The debt service reserve account is sized at about the highest two consecutive months of scheduled debt service deposits during the initial interest rate period, or $11 million.
The commodity swap reserve account is sized at $11 million, with MCE covenanted to stop delivery to the project participant and request the gas supplier remarket the gas if any of the project participants fail to pay.
The reserves can cover non-payment by a project participant for the largest month of gas delivery during the initial interest rate period at a gas price of about $12.571/MMBtu.
As more separately managed accounts hold prepaid gas bonds — nearly one quarter of the prepaid gas bond market was held primarily by SMAs as of the third quarter of 2025 — issuers have been structuring deals differently to cater to them. The deals have gone from two or three terms with a mandatory put or soft put to serials, with a five-, seven- and 10-year maturity range.
Prepaid energy deals are poised to double or even triple due in part to rising demand for energy from data centers, according to a recent research report by Morgan Stanley.
"Gas and electricity prepay bonds let municipalities lock in a discount on years of prepaid energy deliveries. Expect to see more deals for electricity. And expect to see more industrial customers sign up to lock in a discount on gas," the authors wrote. "Data centers could be among the industrial off-takers of gas prepay deals, given the rapid development of gas plants dedicated to exclusively serving new data center projects."
The report warned that remarketing risk could rise as the industrial market grows. "Customer concentration does introduce the risk that gas cannot be remarketed in the event a project participant's volume needs decline," the authors wrote. "In most circumstances, such an event would result in the early termination of the deal."
The MCE investor presentation says the gas delivery and remarketing obligations are "largely similar to prior prepayment transactions." If a gas supplier fails to deliver gas, it pays an amount sufficient to allow MCE to meet debt service. If a project participant does not take gas, the gas supplier remarkets it. If early termination is triggered, cash flows are sized to pay the debt service or redemption costs.
Bondholder protections include that termination payments, along with other funds scheduled to be on hand, are designed to be sufficient to redeem the bonds.
"Gas prepays are a fairly popular investment opportunity these days," Kegel said. "This is pretty similar to the other deals that have gone to market."
