CHICAGO — The Indiana Bond Bank as soon as today plans to price about $300 million of tax-exempt special program gas revenue bonds in its first prepaid gas transaction, which is aimed at reducing the long-term purchase costs of the three local municipal utilities participating in the transaction. The 15-year bonds will sell in two series, one that will include a fixed-rate tranche and a floating-rate one that will be synthetically fixed based on a pricing index that will be decided on the sale date, according to Dan Huge, executive director of the bond bank. The size of each series also be set at pricing. JPMorgan is the underwriter and Barnes & Thornburg LLP is bond counsel. The Bond Bank will loan the proceeds of the sale to the Indiana Municipal Gas Purchasing Authority, anonprofit corporation that will use the funds to prepay for gas under a 15-year contract from J.P. Morgan Ventures Energy Corp. to supply to Citizens Gas, the city of Batesville, and the town of Lapel.While there are risks to bondholders, the structure includes several backups designed to give investors comfort. For instance, JPMorgan Chase & Co. is providing a guarantee behind the obligation of its energy ventures division as the supplier of the gas. Under the contract, the three utilities will pay a market-indexed rate for their gas purchases less a fixed discount that is expected to result in millions of dollars in annual savings for the three. The discount is estimated to be at least 40 cents per one million BTU of gas.“It’s a significant level of savings,” said Richard Mourdock, the state’s treasurer and chairman of the Bond Bank.The bonds are secured by the loan agreement with the gas authority, whose revenues come from the gas contracts signed by the three utilities and any swap receipts. Bondholders benefit from the security for their investment being outlined in several agreements underlying the deal: the agreement between the Bond Bank and the authority; the gas purchase agreement between the authority and JPMorgan’s energy corporation that requires a fixed supply of gas for 15 years; and the gas supply contracts between the authority and the three utilities. As part of the overall transaction, the authority will enter into a floating-to-fixed commodity swap with BNP Paribas that is designed to hedge the risk of natural gas price differences between the fixed rate paid by the authority and the market index price paid by the utilities.At the same time, JPMorgan ventures will then enter into a fixed-to-floating commodity price swap agreement with BNP. The total volume of natural gas hedged by the commodity swap agreements will equal the volume of gas to be delivered by the supplier at the primary delivery point. “The commodity swap is essential to the structure and the rating on the bonds. The net swap payments made to IMGPA are designed to accommodate any difference between the index-based natural gas revenues IMGPA will receive from the customers, versus the fixed debt service IMGPA will pay” based on the loan agreement on the bonds, Fitch Ratings analysts wrote in their report on the transaction.The overall structure of the deal is backed up by reserves sufficient to cover a default in payments. Assured Guaranty Corp. is also providing triple-A coverage through a surety policy that would cover late payments by any of the three utilities to the authority. The trust indenture between the bond bank and trustee the Bank of New York Trust Co. further provides some bondholder protections in provisions that call for an extraordinary redemption of the bonds in the event of any early termination of the gas purchase agreement. “This structure has belts, suspenders, velcro, and duct tape,” Mourdock said yesterday. Fitch assigned a AA-minus to the deal and Moody’s Investors Service rates it Aa3. The impetus for the deal came from broker-dealers who approached the Bond Bank more than a year ago with the idea as a means to pass along savings to municipal utilities.“The mission of the Indiana Bond Bank is to help local units of governments reduce their costs, and this is something that will definitely benefit them,” Mourdock said. Bond Bank officials settled on JPMorgan with Huge calling that firm’s model the “best, most economical.” Officials also felt additional comfort with the experience of JPMorgan’s Dallas-based banker, Lance Etcheverry, on prepaid transactions.Only three utilities showed an interest, which Huge and Mourdock attributed to the complexity of a prepaid transaction. They foresee additional bond issues once utilities see the potential long-term savings associated with prepaid transactions. Indiana has 18 municipal utilities.The Bond Bank’s deal comes amid growing interest across the nation for prepaid gas deals as a means to add some stability to the fluctuations in natural gas prices. Tennessee-based Tennergy Corp. next week is planning to sell a record $2.5 billion tax-exempt prepaid issue in a deal that involves municipal utilities in more than a dozen states. JPMorgan is also underwriting that transaction.
