CHICAGO — Nebraska-based Central Plains Energy Project on Thursday priced $609 million of natural gas revenue bonds, marking one of the first fixed-rate deals in the prepaid gas market since the 2008 market collapse. Interest rates ranged from 3% to 5% on bonds maturing from 2013 to 2042. Investor interest was strong, according to sources close to the deal.
CPEP will use proceeds to make a prepayment for a 30-year supply of natural gas. Like most prepaid gas deals, the borrowing features a complex structure that relies heavily on investment banks.
A commodity swap will play a duel role, hedging the risk for rising gas prices over the next three decades — which is how the municipal utilities expect to save their money — and smoothing out cash flow by providing a fixed-rate revenue stream for debt service payments.
The prepaid gas market is a relatively small sector of the market that typically sees only a few deals a year, though individual debt issues tend to be large, typically more than $500 million.
The sector took a beating in the aftermath of the 2008 global market collapse when a deal in which Lehman Brothers was the counterparty guaranteeing delivery of the commodity led to a default after the bank failed. Most deals done since 2008 have been in variable-rate, in part to provide liquidity to skittish investors.
“Although they’re just as complicated, they did well in the market because investors could just look to the fact that they have the right to put it back to the liquidity provider,” said Moody’s Investors Service analyst Joann Hempel. She said the CPEP deal was the sector’s first fixed-rate deals in years, but the market could be returning. “Even at the height of this market it was only six or seven deals a year,” she said. “But we’ve received some calls recently that people are considering more deals.”
CPEP sold $608.8 million of serials with a final maturity of 2042. Orrick, Herrington & Sutcliffe LLP was bond counsel and Goldman, Sachs & Co. and RBC Capital Markets were the underwriters.
CPEP will use the proceeds to make an up-front payment to J. Aron & Co., the Goldman subsidiary acting as gas supplier, which agrees to supply the issuer with gas for the next 30 years. CPEP will then sell the gas to five participating municipal utilities, which will make regular payments that will serve as debt-service payments. Funds in a working capital account and the debt service reserve account will be invested under a guaranteed investment contract.
CPEP officials did not return calls.
All three rating agencies base their ratings largely on the credit of Goldman Sachs Group Inc., which is playing four key roles in the deal. Based on Goldman’s ratings, Moody’s rates the deal A1 on review for downgrade, Fitch Ratings rates it A with a stable outlook, and Standard & Poor’s rates it A-minus with a negative outlook.
In addition to acting as underwriter, Goldman is also the gas supplier guarantor, through its subsidiary, and the receivables purchase agreement guarantor, the back-end commodity swap guarantor and the investment agreement guarantor for the debt service account. RBC is the counterparty on the commodity swap.
Ratings are also based on the transaction’s structure and the credit quality of the Omaha Municipal Utilities District, the majority participant in CPEP.
CPEP was created in 2006 as a conduit issuer for prepaid gas deals. It has five members, including Omaha MUD, rated Aa2 by Moody’s and AA-plus by Fitch.
The four remaining municipal utilities in Nebraska, Iowa and South Dakota are not factored into the ratings because they play a relatively small role in the deal and because reserve funds would be sufficient to cover their payments, if missed.
Redemption of the bonds is required if any entity stops playing its role. In this case, J. Aron is responsible for paying off bondholders in the event of an early termination, analysts noted.
