Prepaid Energy Transactions and Their Evolution (CPE)

Transcription:

Seema Mohanty (00:09):

Hi, good afternoon. Welcome to the Prepay Energy Panel. My name is Seema Mohanty. I'm Founder of Mohanty Gargiulo. It's a municipal advisory firm that specializes in capital markets including prepay energy transactions. During this session, we are going to provide a broad overview of energy, prepay, bond transactions and the market, and we're going to explore how the structure has changed and evolved over the past 10 years, including thinking about thoughts about what's the future of these types of transactions. We are fortunate to have a terrific panel of experienced prepaid transaction professionals who will provide some insights and perspectives, their particular perspectives in their roles from the issuer perspective. Susan Reeves, who's to my right, is the Chief Executive officer of Main Street Natural Gas. Susan, do you want to say a couple of words?

Susan Reeves (01:07):

Sure. Hi everybody. The first thing though I wanted to do is just have a show of hands. How many folks in the audience know what a prepayment transaction is or your city's been involved in? One. Okay. Good money. Cool, cool. That's what we thought, but we really weren't sure. So I'm the CEO of Main Street Natural Gas. We've done a lot of these transactions. I'm also the CFO of the Gas Authority of Georgia, which has been doing prepayment like transactions since the 1990s. We serve about a hundred municipals around the country, big ones and small ones. We do lots more than just Ah, thank you. I'm sorry if you guys couldn't hear me. We do a lot more than just prepayment transactions. We actually help our cities get the gas, manage all the technical aspects behind the scenes of their gas systems, but prepayments are a big part of what we do. They are a tremendous advantages for the municipals that participate and look forward to talking with you guys and answering any questions you might have.

Seema Mohanty (02:30):

And our other issuer, by the way, we have the top two issuers in prepaid transactions. So Kelly Henry is the CFO for Blackbelt Energy.

Kelly Henry (02:39):

Thanks, Seema. Yeah, so I've been with Blackbelt about seven, well with a related entity 17 years. Collectively I am the CFO Blackbelt has transacted 19 prepaid transactions. Three of those have been resets in the put bond structure and so we currently have 16 active transactions that we are managing. A little different than Susan Blackbelt is more in the supply arm, but they do perform the role of agent for other joint action agencies. So Blackbelt is involved in the physical management of gas for other joint action agencies and related services there. And so gas is a big part of Blackbelt's past and future. And so we certainly are excited about the conversation. We think that gas has an important part to play in the ongoing conversation in the future conversation. So yeah, looking forward to today.

Seema Mohanty (03:52):

Thanks Kelly. Jim Lostly is Managing Director of RBC is one of the largest suppliers and underwriters. And go for it.

Jim Lostly (04:02):

Thanks Seema. So good afternoon everyone. Happy to be here. And as Seema said, one of our, we are a big group at RBC that's involved and dedicated to the prepay space. And I've been involved really since this new generation of prepay transactions started in 2014 and we're going to get into a little history today of just what the new generation is and what was behind it and where we are today on that. So I interact with issuers, I work on our structures. I also run our derivative business and prepaid transactions also have a derivative component to them that's typically not necessarily front and center, but it's involving a commodity swap. So we're very involved in that as well. And RBC is a W rated bank and we've been one of the three largest suppliers in the prepay space to date. Thanks Seema.

Seema Mohanty (04:55):

Thanks. And speaking of sort of the newer evolution of structures, third party funding recipients have become, and we're going to speak more about it, but Eric has been from SMBC. Yeah,

Eric Isban (05:06):

So I'm on the newer the first.

Seema Mohanty (06:00):

Thanks Eric. So since it seems like a lot of you do know the structure we were going to go through and we'll do it a little bit more briefly, an overview of the structure we wanted to start with. Again, part of this topic is to talk about really the evolution of the market and the structure. So we do have a slide, actually we want to just start with this really quickly. That shows about going back 20 years. Here we go. This graph, actually the bar chart to the right shows you total paramount of energy prepaid tax transactions since 2005. Obviously what you see in the past 10 years is a huge increase in that volume. You'll also see that the chart to the left will show you just, we really focused on issuers that have done multiple transactions over a billion dollars since that time. Here you see Main Street and Blackbelt up at the top too. But why don't we start with kind of a brief overview of the structure. Jim, do you want to?

Jim Lostly (07:05):

Sure. Thanks Seema. So when we look at this graph, and it only goes back to 2005, the prepay space really started earlier than that. It started in the mid nineties, 1995 or 96 were the first prepaid transactions, and they tended to be anywhere from 10 to 30 year fixed rate transactions, right to maturity that had a relatively short life, and then they ran into some regulatory issues and it stopped cold in the early part of the 2000 while legislation was ultimately put in place that specifically authorized exactly what is happening in the market today. That happened in 2005 and we started to see a resurgence there certainly in oh six and oh seven of long-term fixed rate transactions. Then of course we hit the wall in 2008 with the financial crisis and all prepay activity basically stopped cold and a number of prepaid transactions had to be restructured.

(07:58):

RBC was the first bank that actually got back into the prepay space in the 2009 and 10 range with a variable rate structure, just a seven day VRDB that we did four transactions across the country. With that structure, it worked well for a few years and then with Basel three taking effect in 2013 and 2014, we had to restructure those transactions and it was a lot of work. But the good news out of that restructuring was that we came up with a new structure that has been the reason we see all the activity that you see on the right side of that chart. And it was purely at the end of the day, a prepaid transaction is driven by spread the spread between the tax exempt borrowing rate and the spread that a bank a supplier will pay for the funding. And as everybody in the room probably knows in the aftermath of the financial crisis, much like we saw in the aftermath of the pandemic, the Fed drove rates to zero and kept them there for a very long time.

(09:01):

We didn't start moving off that zero fed funds rate until we got to 2016. So during that very, very low rate environment with withdrawal rates were sub 2%, it was very hard to generate any spread anywhere, which is why we didn't see any transactions being brought to market at that time in 2014, as we were fixing a couple of those variable rate bonds, we found that the only spot where we both had investor interest as well as a minimal amount of spread that could generate a transaction was in a five year range. So we moved ahead with a five year put transaction associated with a 30 year final maturity, and that was totally driven by the yield curve. There was some spread in the five year space that market ebbed and flowed fairly slowly for 20 14, 15, 16 and 17. And then in 18 and 19 pre pandemic we saw a big surge, and that was as the Fed was driving rates up, we started to see more spread.

(10:01):

We're actually able to move out the maturity curve a bit to six and seven years and generated some of the largest discounts of this new era. Then with the financial crisis, or I'm sorry, with the pandemic in 2020, everything ground to a halt again. And we were in a period where really nothing much happened at all in 20 20 20. And then of course in 2021 and 22 and 23, particularly as the feds start raising rates in 2022, we've seen the best time in the prepay space really going back to the late nineties where there were some very large discounts. But the market has been absolutely fabulous for an issuer, for suppliers, for investors. In the last couple of years we've seen big volume, of course, it's a sector that completely blew up in the last couple of years in terms of volume. One of the few bright spots in the municipal market was the prepay volume last year, which was well in excess of anything we'd seen before. And that's entirely driven by the spreads that are in the market right now. The fact that if you look at A MMD and even with the spread to MMD that these bonds are bringing, comparing it to a so OFR curve and the spread that the bank's going to pay on that. So FR curve, those spreads are very, very good right now and sufficient to generate significant discounts.

Seema Mohanty (11:21):

So it might be worth, Susan and Kelly, let's even step back for a second. Why are you doing these transactions? What are you doing? Why are you doing them? And oftentimes we hear when you think about prepaid gas transactions, we hear about issuers and we hear participants, are they the same? Can they be different? So maybe you could just start with the why are you doing these?

Susan Reeves (11:44):

Alright, so I'll go first and then go for it. Kelly can fill in the blanks, right? So we have been doing long-term transactions for a really long time. The gas industry as damn it, sorry guys. The gas industry as compared to the electric industry is pretty low margin and it's pretty low dollars. So as we over the last really 30 years have been helping our municipal gas systems compete in a more and more complex environment and actually help their cities through general fund transfers or economic development or just having a thriving community, having a little bit of extra margin through some kind of long-term supply transaction has been very strategic for us. And so we have been along for the ride, all of the different structures, the different phases of gas prepayments, and the new phase is, and Jim is absolutely right, that big increase in prepayments in the last few years has been because market conditions are very, very good, but it's also because we now have public power who are using more and more gas as they are becoming green.

(13:18):

And so to generate electricity takes a lot of gas. And so some of that is being driven by that transition as well. We do expect that to continue, public power has probably across the board, I'm going to take a guess here, maybe 20 or 25% of their throughput today has been prepaid at the most. So there's a lot left for them to prepay and most of them have additional gas generation planned on the books. And so as we move more and more to the clean environment, I think that you're going to continue to see a lot of gas usage. And then they also help renewables, as probably everybody knows, renewables need a backup system that can handle peaks, that can handle the intermittency of solar and wind and gas can fill that better than any other energy source. So for our cities, it's terrific.

(14:33):

The transactions are tailor made for municipal systems in that at the credit of these prepayment bonds is not theirs, it's the prepaid supplier. And so if the prepaid supplier goes down, the munis lose the benefits of their bargain, but that's it. They do not have to pay the mons back. And they're also a discount to market prices. So if you're a city and you're using gas and you enter into a prepayment, you're not making a bet on the price of gas today and what it's going to do in the future. There's a swap in there that takes you back to market but locks in a discount. So for our systems, it is just a very much an integral part of how we manage our business. And

Jim Lostly (15:30):

Susan, one follow up question on that. Why would some of those major municipalities not have sold all their gas prepaid, all their gas, and how does this put structure benefit that at all as well?

Susan Reeves (15:41):

So I think both in the gas industry and in the public power sector that is using gas for fuel, nobody likes to put their eggs all in one basket. They like to have a portfolio of supplies coming from different suppliers. And also I think it's taken a while for municipal systems to adopt gas prepayments. They are a little bit involved and so you have to think about it and then once you've done a deal, you kind of want to make sure that it works before you enter into another one. So I think it's just an evolution.

Kelly Henry (16:29):

Yeah, so Blackbelt story a little different in that it's not a statewide organization with members throughout the state. So Blackbelt has three members, they're very rural and the southwest portion of Alabama and the system, the related entity system there, that's the LDC has about 6,500 municipal customers, but 90% of their load is largely industrial. And so they sit on a corridor that has a very diversified manufacturing just load on their system. So a lot of transmission line, a lot of distribution line. And so prepays became a way for them to be competitive, to retain jobs, to ask their corporate citizens to be better corporate citizens frankly. And so it allowed for them to retain jobs. And so it's something that was really important in a lifeline to those rural communities and something that has been important to us on a deep level, myself included, because I grew up in those rural communities.

(17:48):

And so to see jobs that have been retained there, that's very important. And so yeah, that's the bargain. That's why Blackbelt started. I would say since I've been in this industry, I've seen nothing but evolution. Blackbelt's first transaction while it was formed in 2008, we didn't close our first transaction until 2016 with RBC in this put bond structure. And so I think since then we've seen a lot of ways that there's been flexibility and evolution. We've had people reach out to us and one of those ways has definitely been an economic development as they've seen, okay, you all have a lot of load industrial load, what does this look like? And so to Susan's point, when people see this transpire, then they come, okay, it seems to be successful. It seems to be working. Tell us more it. So that's certainly been part of Blackbelt's story. We were formed to do business within and without as a supply arm of the state of Alabama. Obviously we have participants throughout the country. Yeah, they're bringing their muni load, but they're also bringing load beyond that and looking to utilize this as an economic toll.

Seema Mohanty (19:07):

So one follow up question for both of you, and as we look at the volume, we see these pretty big numbers and the paramount, the bonds are big, what does it mean? So what kind of volumes are you looking at per participant and on average, and maybe there isn't on average, but how many participants do you usually see in your deals?

Susan Reeves (19:27):

So it really just depends. Aggregators like Kelly and I are and issuers. So we're the ones that are going out talking with different systems and seeing who has gas needs and if there's any that's not prepaid, they can be very small. So many of our members are little bitty cities all over Georgia and Alabama and Florida, but there's also some really big ones. We also do business with Philadelphia Gasworks in Richmond, Virginia and San Antonio, Texas. And the transactions can be upsized or downsized and typically have more than one. They certainly could have only one CPS could do multiple transactions on their own with nobody else involved, but they tend to have a good many participants and that's just fine. So they tend to be about $700 million because the market is a pretty small market. The municipal bond market is relatively small and a subset of that market is institutional investors that are willing to put their money to work in prepayment bonds, they've got to do a little work to vet.

(21:02):

So that's where we have found that you kind of have supply demand balance from a bond investor and an issuer standpoint. But any of you that are with cities that either have done them in the past or are interested in looking at 'em, speak to Kelly and I and we'll be glad to fill you in on all of the details because it is really an excellent market. We all do it for the same reason, and that is to get discounts on something that we're going to buy anyway. And the contracts are very, very flexible. One of the things that folks have been concerned about over the years recently is, well, gosh, these are 30 year transactions. I don't know if I'm going to use gas for 30 years with all of the issues with clean energy and everything else, but the contracts are flexible and they will allow cities to walk away from the contract if they're no longer using gas. They will allow the city to hold onto the discount and put it to another qualified use. So for instance, your city moves away from gas and starts using renewable power. You can novate a contract into the transaction and hold onto that discount. So they will continue to evolve over time as we see the clean energy transition.

(22:45):

And that's fine. What we're on the municipal side, we're in the business of helping our munis use the infrastructure, the energy infrastructure that they've already bought and paid for and thrive as a community. And so as the market changes, we'll find ways to change with it.

Jim Lostly (23:07):

Well, I was just going to just mention, and Kelly had involved your transaction for Blackbelt. Blackbelt was the first of this new wave of put bond transactions. And I remember that transaction that we originally were going to come to market with eight or 900 million and were unable to get even close to that done. It just goes to the depth of the buyer base right now. We had to cut that transaction in half and the first put bond was just under 500 million. And it was because many of the mutual fund complexes were not approved on this, had not seen them in so long. We still had an aftertaste from some of the problems in oh eight and oh nine. So we cut that deal in half and then we're not even able to come back with the second half for a full year.

(23:49):

And that was mainly because the market was tough with interest rates compressed and near zero, but it was also because of the lack of diversity in the buyer base compared to, we did a transaction with Susan here in March of this year, which was by far the biggest book of orders we've ever had in terms of number of different orders. Not only all the mutual fund complexes and lots of many, many institutional buyers, but lots of retail as well. So SMA accounts were a big, big part of that transaction. So it's been rare that we've brought a prepay in the last couple of years where we haven't had a very significant book of business generally in excess of the offering size.

Seema Mohanty (24:33):

And that kind of leads us to the next evolution. So we talked about a lot of different evolutions here. The first was structure going from 30 years to now five-year put bonds. We talked about moving from natural gas to power to renewable. Well, we just talked about the limited market, right? There's fewer buyers. It's usually the funding of the gas supplier, which there are maybe three major ones in there. So it gets smaller and smaller. So in comes the evolution of third party funding. So now there is, in the past, the deals were always the supplier and the funding recipient were one and the same. So it was the credit of that deal is the gas supplier funding recipient. As Susan mentioned, there's no risk to the issuer and the participant. It all sort of boils down to them. But now if you have three or four different suppliers and that's it, that's out there and a huge amount of supply coming, there starts to be capacity limitations. So the third party funding recipient comes in. So Eric, do you want to talk about that?

Eric Isban (25:35):

We want the generators, but I think that it brings a lot of new entrant capability to the structure. From our perspective, this is on the funding side, we're allowed to take down very large amounts. These transactions are anywhere from 500 to a billion dollars. We're seeing transaction. It gives us an opportunity to diversify the capital base at a relatively reasonable cost. That's just important for institutions. I will say the one thing that I like about the trade, there are no adverse trade termination events here, all my obligations. And at the end of the day, it is our credit out there. We are the ones that are holding the money. And the third party I think really puts us in a position to be our true rule, which really a deposit bank out in accordance with the schedule of the project to move gas and be there for the bondholder. So it is our credit. We think that while we're a small part of this, we're an important piece. And the third party I think in my mind helps bring in new parties. We're seeing now we've seen ten third parties get done. We're seeing insurance companies come into the space, other corporate entities being able to this market. I think that's all goes to the benefits and important for evolution as we talk about.

Seema Mohanty (27:09):

Yeah, no, thanks Eric. I have one question for you, Jim is thinking about, Eric mentioned why SMBC wants the funding and what their benefits and how they look at the pricing. Do you see there, what kind of limitations do you see on a particular third party? Or is it pretty much open to anyone? Any corporation? What about corporation besides, except for a bank, you can address that too if you want.

Eric Isban (27:32):

Jim may have a comment here too. Look, I think that you need to pick good partners on trades, complex people particularly understand how they work behind elements, match that on one side, I think you need to pick good partners, particularly on resets as an example of that, people who have some track record. But I do think, again, the ability to make new entry money.

Jim Lostly (28:17):

Sure, thanks Seema. I would say that, again, this has just evolved here since 2014. In the early days of this new structure, we were constantly worried about running into some of the major mutual fund complexes that said, no more RBC gas paper. That has not happened. We continue to get very, very good receptivity. All the transactions that RBC has done have been for RBC funding. We have not sought any outside funding, mainly because our treasury to date has been happy to take the funding internally, which makes the transaction more streamlined, simpler for the investor to follow and understand. And all roads lead to RBC in our transaction. So to date, I'm not going to table, we haven't run into anybody saying they're filled on RBC paper, but that day could come.

Eric Isban (29:08):

One thing I'm just thought to put structure the funding element, I mean what that did was that really aligned with the corporate banks tend to cap at least the internal five to seven year current. So we talk about investors, we talk about SMAs, the ability to get short on these bonds I think is attractive market and it allowed alignment banks versus 30 years.

Jim Lostly (29:42):

Just one other note on the put structure, one of the things that I think the market both from an issuer standpoint, a participant standpoint and also from investors worried about when this put structure just came up was, well, how is it all going to work? Is this really going to happen? Are these transactions going to be remarketed? What are the discounts going to look like? Fortunately, we're now several years into it and both Susan and Kelly have experienced a number of roles and I'll let them speak to those roles, but I think that's been a real plus for this market.

Susan Reeves (30:12):

Yeah, go ahead Kelly.

Kelly Henry (30:14):

Well, I was just going to say part of a Blackbelt's story, and I think part of the role to play for an aggregator is certainly managing expectations. And so I think back to answering the question on volume and size of a transaction, it's really centered around managing those expectations. And I think the biggest piece of this evolution since I've been in the industry has been the amount of players at the table that you're trying to manage those expectations. And so while we used to only worry about, yes, what's the price of gas? What's the spread on taxable to tax exempt, how much can we go out? Do we have our participants? And it is crazy to think, but I remember in the early days we wouldn't even start working on contracts until we saw that spread in the market. And then it finally dawned, we need to be working on transactions so that we have the paperwork ready when the spread's there, we lock it in.

(31:17):

And so that was huge for us to be able to react quickly and capture those spreads in the market. But I think in part with that, Blackbelt has gone to the market with smaller deals because of that we're managing expectations. And so we've found that we might have some participants at the table that are ready to go. Maybe they've been ready to go for a few months. We may have a third party funding recipient that we've already been talking with for months now and they're closing in on a blackout period. And so there are a lot of expectations at play there that we are looking at and we're managing and then obviously with investors. So yeah, there's a lot of people at the table now thanks to the evolution. I think it's good. I think another big tool that is opened up more supply is we've actually said in the past where you had your Jay Aaron arm of Goldman, they're handling the physical supply, even Morgan Stanley, RBC partnering.

(32:25):

Now we've opened it up with Blackbelt to say you can bring in your own supply, so let us work with that. I know the gas authority has been advanced on that for a number of years and helped in that regard. But I know that's something new to Blackbelt that we are now saying, okay, aside from Jay Aaron, do you want to assign in your supply? So where Munis in the past felt like they had to end a relationship with a supplier, we're saying, you no longer have to do that. You can bring your supplier into the transaction. And so that has also helped when they've been limited, it's opened their book up to say, okay, we can now bring our own suppliers into this.

Jim Lostly (33:08):

Talk about the remarketing.

Susan Reeves (33:10):

I am sure. So the remarketing we've done now two of the remarketing, they're more complicated and there's a lot of communication because you're going to your participants and trying to decide, help them decide exactly how you want to do a remarketing and roll the transactions forward. But in both of our resets, we got higher discounts for our municipal systems than we got the first time around. And that was really just because the market is really, really good right now. And so it's important to Kelly's point of getting ready. What you'll see in the market, I'm sure you've noticed, is that a whole bunch of transactions will come at the same time and then it might be two or three months and then they'll come again. And that's because all of us are doing our work behind the scenes and waiting for that good market. And good market for one is good for all. So we jump in and catch 'em when the market gives us an opportunity. Was that the remarketing you wanted me to talk about?

Seema Mohanty (34:31):

So I think switching sort of a little bit to the future, since you're sort of talking about it, the big conversation is always on decarbonization and Susan, you hit a little bit on some of the renewables and where we're going, but what about the natural gas transactions? I mean those from our chart, were the largest transaction. There's still more demand or supply as we're saying. And so what is the future of this? I mean natural gas, are we going to continue to see more of these transactions? Are they going to look the same?

Jim Lostly (35:09):

How does the price and how does the price of natural gas impact these transactions?

Susan Reeves (35:15):

So there was a lot of questions in there, sorry. That's okay. So it really depends on who you believe. The EIA says that we are going to continue to grow natural gas demand even with aggressive adoption of renewables. I think that that's true. Natural gas is clean, it's abundant, it's affordable, it's domestic. We have all of the infrastructure in place, both in the producing regions and in the consuming regions. So it is a natural to help us and maybe here forever because of its ability to be fired up and fired down as quickly as it can. And who knows, I mean maybe there's going to be something else that comes along, whether it's hydrogen or who knows what else that can be injected into the gas stream and continue to use that infrastructure in the new energy form, whatever that may be. So the idea that the IRS will allow us to prepay and use tax exempt bonds for our energy is powerful. And you can do it with electricity again, you can do it with renewables, you can do it with gas, you can novate transactions in like we've talked about of various kinds. So I think that the likelihood is that the sector will continue to grow pretty substantially, and we've really just scratch the surface of prepaying for energy. So I think there's a lot more to come.

Seema Mohanty (37:15):

Kelly, I know you had had some thoughts on this.

Kelly Henry (37:16):

Yeah, I was just going to say to Susan's point, as a reminder to all of us, this is prepaid energy transaction panel. And so while Blackbelt is certainly only in the gas realm, I do think we're going to see more prepay electrical transactions come. I think we'll see a wave of that. I mean, you've got some aggregators in California, you're starting to see movement there. I think we'll continue to see movement there. However, I do think to Susan's point, gas is a part of the conversation. It has to be a part of the conversation and moving things in the direction of green. I think the power demand is going to grow, and I just don't think it's practical to expect that we can flip a switch and not have natural gas be a part of that equation.

Seema Mohanty (38:08):

Have we seen any, I know on the California clean energy side you've seen green bonds. Would you think you'll see that on the natural gas side at all? Is there an argument to make that, I'm throwing this question at you guys and cold.

Kelly Henry (38:26):

Depends on who can define green.

Seema Mohanty (38:31):

We'll open it up since I know we threw a lot of things out there. Are there any questions right now? No. Okay.

Jim Lostly (38:44):

I guess what I would say, Seema, in terms of the future outlook for the future, I can't overemphasize how much of it is driven by the interest rate cycle. And as we all know, the Fed was supposed to potentially be cutting interest rates this year. The lack of cutting is good for prepaid gas transactions. There's not many things that benefit from the Fed staying where they are going higher. But lower rates will definitely contract the amount of issuance that, and the other thing that we're seeing, as many of you I'm sure well aware, is the ratio market right now is the ratio of tax exempt debt to taxable treasuries. Is that near historic lows? It's been at historic lows earlier this year. It's bounces back on forth, but it's at close to all time lows. That is also a very relevant factor. That's part of the reason these transactions are generating the levels of discounts that are enabling issuers like Main Street and Blackbelt to take advantage and pass along outsized discounts, some of the biggest discounts we've ever seen in this market. The other factor that we didn't touch on today that drives the discount. So it's the tax exempt rate, it's the taxable rate that the supplier pays, but it's also the gas curve. Do you want to talk about the gas curve a little bit, Susan?

Susan Reeves (40:03):

Sure. So really the discount is created by a cashflow model where you take 30 years of gas flows, so you have an assumed price and you discount that back to the present on a tax exempt rate and a taxable rate. And that creates the discount and it creates the ability to sell the bonds and pay for it and pay the lawyers and all of that. So a higher gas price is better when you're doing that calculation. When we're looking at the price of gas, there is a forward market that goes out 14 years and then after that large commodity traders. So a lot of banks and then just other organizations, producers, BP as a good example, marketers have views on what the gas curve will look like for the other 16 years. And so those are the prices that are used. They do move pretty dramatically.

(41:18):

When we were doing transactions back, gosh, I don't even know if I can remember, gas would go up to, at the end of the curve, maybe 15, $16. Well, now the curve has gone down pretty dramatically. And even the back of the curve has gone down. It hasn't gone down as much as the front. Right now we're at $2 gas, but in the back it might be, I don't know, seven or $8. And so average about $5, that kind of thing over the life of the transaction. So that does impact it as well. We really have, in this environment, we would say it's a little bit lower gas prices, but then we have higher spreads. And so the combination of that is throwing off some pretty good discounts.

Seema Mohanty (42:14):

And sort of getting back to the participant side, if you're a participant who hasn't ever participated in a prepay print transaction, but you want to, how does one go about doing that?

Susan Reeves (42:26):

I think that's a great question. So if you are a participant, you need to have a conversation with Kelly or I or another aggregator. The transactions used to be a little harder to get involved with from a city standpoint, from a municipal standpoint, they were a little bit more complicated. Well now they're really just like buying gas. It is a longer term commitment. But that commitment has all the flexibility that we've been talking about as far as changes in your usage, changes in the way that gas is used in the marketplace, all kinds of things. So now say you're a participant with, or you're a city and you've got a gas system and you're not in, well, you typically buy physical gas on what's called a NAS B, which is the industry standard physical gas contract.

(43:41):

We use those with customers in prepayments and we just add some additional special conditions that say you can't go sell it off for private use. You have to use it to either sell gas at retail or use it for electric generation that is sold at retail by your system. So it talks a little bit about that, and then it talks about all the flexibility that we just talked about. So they're much more straightforward because it's a long-term contract. You do have to go get typically governing body authority, not all. So public power has standing authority for fuel purchases that may or may not need additional, may not have to go all the way up to the city council, for instance. Maybe they've got an energy commission that's kind of in the middle, and that's as far as they need to go, but they will need some kind of authorization because of the term. But the rest of it from a physical gas standpoint is pretty much industry standard. So it is something that's easier for you to get involved with as a municipal system.

Seema Mohanty (45:02):

Kelly, I know you have a lot of participants in yours. What's the smallest size volume that a particular participant's buying?

Kelly Henry (45:10):

Oh gosh.

Seema Mohanty (45:11):

Or what's the ranges?

Kelly Henry (45:12):

Well, I mean, we allow sculpting. So you have some loads that may drop down in the summer and then ramp up. And so speaking to that point, there is a lot of flexibility there. So if don't think your system's too small because we could pull you in with a group of larger participants to fill out a deal. But yeah, I mean we've seen it as small as even 500 a day in some of the months sculpting. But I think when you come in under another aggregator, we've seen it even smaller than that. So to the extent that we've had a Florida gas utility participate or a Louisiana Municipal Gas Authority participate, they're bringing in a lot of their small entities. And Susan was speaking to that earlier in Georgia. And so yeah, there are a lot of small volumes that we've seen really to Susan's point, it's just not that complicated.

(46:11):

It's really you are getting a discount to market gas. You have to find the physical supply anyways. How can you get a discount to market gas? And again, to stress something I said earlier, you can bring your supplier, you can change suppliers. We are not going to change suppliers every month, but we have participants that have an RFP process that's brought into the transaction, and so they're not having to lock in that physical supply for the full 30 year term of the transaction. And so there's just a lot of flexibility that we can talk to and navigate that. We recently had a conversation with a joint action agency that thought, oh, we're good on supply. They just didn't want to swap suppliers. And coming from that old school of thinking that I'm going to have to give up my supply and the diversification, and no, there's been a lot of evolution. And so yeah, just reach out, ask us. I'm sure we can do it.

Seema Mohanty (47:16):

It's interesting to hear you guys talk about it because talking about on the one hand bond transactions, a lot of people here are probably bankers or finance professionals, but the financing side of it isn't really, the participants aren't really involved in it, right? They're really buying gas, as you guys had said before. Go ahead Jim.

Jim Lostly (47:34):

Just one note on that. As an investor, the investor really doesn't have to worry about some very small municipal and entity has taken 500 to MMB to use a gas a day and a bond transaction that might have 20 different participants like that. And the reason for that is the supplier in the case of the RBC structure, RBC or with Eric with Sumitomo is effect. And in some cases the issuer like Main Street is backstopping, those very small entities. So we have a robust process at RBC where we do have to prove the participants in any one of our gas prepay transactions. But when we do a 500, 700 or billion transaction, it's not as if our risk is at that level. And the reason for that is the gas is billed monthly. And if we haven't received, if it hasn't worked, it's supposed to within 60 days, the gas is shut off and that entity that hasn't paid is cut out of the transaction and we remarket that gas to another entity. So from a suppliers standpoint, from a bank standpoint, our risk is effectively 60 days of gas on the entire transaction and in many cases, and you have discounted gas to remarket. So we're comfortable doing that.

Seema Mohanty (48:53):

Yeah, I mean, so it's actually a simpler structure. And you touched on this, Jim, but I do want to sort of emphasize it again, is the last part of our evolution is really a growing investor base. And it used to not necessarily see a lot of SMAs given the fact that they come very quickly, they're sitting on the shelf waiting for that spread to get there. But now the structures are pretty standard. I mean, it's very well known. There's incredible amount of deals out there in volume so that we are seeing an increase in the different types of investors and hopefully see more of those, given the fact that there's supply. And that was going to be another one when you have plenty of deals to potentially do if their demand is there, right?

Susan Reeves (49:37):

Yeah. So I think that the prepay space was helped a lot by higher interest rates and therefore a lack of refundings. So investors had to go and do the research and figure out what these gas prepayment bonds were because it's a good yield and there's nothing else available and they're big. So that has been great. But I think that they continue to provide a good yield to investors. We wish that the investors would differentiate credits a little more so that they acted a little bit more like general purpose municipal bonds do from a credit perspective.

(50:26):

But it is an evolution. The last transaction that we did had over 50 investors participate, which was amazing. It used to be a much lower number. So folks really have done the work and really are getting more and more comfortable. And then back to Eric's point, for us to grow as an industry, we do need additional prepaid suppliers, whether they are a, what's called third, a funding recipient, or rather they're just additional prepaid suppliers. The market will eventually get tired of the bigger names and want to see, tired is not the right word, hopeless, not RBC, not RRBC is our best, but you do have to have capacity and you've got to have diversity of investors. So folks coming in like Eric or others that are really good credits to actually take the money is certainly very helpful.

Eric Isban (51:41):

Yeah, no thanks. I think it was back beginning, I think for you all, and that should be something.

Seema Mohanty (52:24):

Yeah, no, that's great. I think the point really of this panel was to talk about how even if we see a market compression where rates the spread decreases, and we might see another lull that I think what we've learned is that this is a market to stay and there will continue to be an evolution. There'll be some other development here because there's a great need and there's a benefit. It's one of the few structures that I've seen that has a benefit for almost every party involved. So it's kind of a unique situation in that. And any final words from our esteemed panel? No, but thank you. We're honored to have such the experience here. And thank you all for your time. Very much.