Prepay Panel Discussion
Prepay Panel Discussion American Public Gas Association 2017 Gas Supply Conference
INTRODUCTION AND TABLE OF CONTENTS I. II. III. IV. V. VI. VII.
Who We Are History of Prepay Issuance Preparation to Participate in a Prepay Time Value of Savings Considerations Market Conditions Conclusions Questions and Open Discussion
Who We Are: Black Belt Energy
Establishment
Black Belt Energy Gas District (“BBE”) established August 2008 is a public corporation and gas supply district under the laws of the State of Alabama BBE provides natural gas supply, operations and business support expertise to the Clarke‐ Mobile Counties Gas District (“CMC”), an Alabama gas district, and other public entities, both inside and outside the state of Alabama CMC provides natural gas service to 6,500 Residential, Commercial and Industrial customers in seven counties in southwest Alabama. CMC’s average daily through put is 38,000 MMBtu/Day.
Governance
Powers
BBE Headquarters are located in Jackson, Alabama. BBE is governed by a three‐member Board of Directors; each Director is the Mayor of a member municipality. The current Directors are: Sheldon Day, (Mayor of Thomasville, Alabama) Paul South, (Mayor of Jackson, Alabama) Cynthia Jackson, (Mayor of the Town of Grove Hill, Alabama) BBE’s powers under its Certificate of Incorporation and the Alabama Gas District Law include the to the ability to: Acquire and own gas supplies, acquire, construct, establish, own and operate systems for the transmission, transportation, delivery, distribution and sale of gas throughout Alabama or outside Alabama for the benefit of the Member Municipalities and other customers, and to further CMC’s objectives and purposes. Sell gas to consumers directly, to gas distribution systems, and to other governmentally‐owned wholesale customers
Who We Are: Black Belt Energy (cont.)
Operations
Manage Natural Gas Supply for the Louisiana Municipal Gas Authority (LMGA), a Louisiana governmental joint action entity serving over 70 cities, towns and districts across Louisiana Managing and Monitoring privately owned natural gas pipelines for two industries in St. James Parish, Louisiana and one industry central Alabama. Gas Supply and Prepayment: Since 2012 have been actively pursuing Prepay transactions as Issuer Summer of 2012 Priced Prepay and Failed to Close In 2015, attempted to develop a Natural Gas prepay transaction with the U.S. arm of an international commodities trading house. ■ The company did not have the financial strength or perceived market transparency to avoid the adverse effects of a former employee’s public accusations of financial impropriety ■ Internet criticism of its accounting practices brought down the company's stock price and its credit rating to below investment grade. The company recorded significant net losses in 2015. ■ It was apparent the tax‐exempt bond market would not purchase the bonds ■ It became impossible for BBE and CMC to complete the prepayment transaction. ■ 2016 Closed two Prepay Transactions ■ Goldman Sachs (through LA Gas) ■ RBC
Who We Are: MCM Commercial
Municipal Capital Markets Group, Inc.
Innovators and Leaders in Municipal Prepayments
24 prepays and nearly $11 Billion Structuring and Documentation Creative solutions and less wasted effort on low probability ideas Minimize bond funded reserves Maximize float fund earnings Minimize counterparty risks Limit and control termination provisions Expedited negotiations reducing staff time and legal expenses Quantitative Assistance Transaction modeling of prepay and termination amounts Accounting/Finance and Treasury Credit Rating Process Long‐standing reputation and relationship with key rating agency personnel Independent Advice and Representation Provide market information on pricing and availability of alternative structures Assist in commodity swap negotiation of terms and price evaluation
Prepay Issuance Since 1998 Past Prepayments 11
9 5 3
1
3
16
3
3
4
Economic Drivers Rating Structure Interest Rate Spreads Supplier Credit Income Tax Rates Municipal Credit Forward Gas Prices Dual Credit Tenor (30‐Years) Credit Enhanced Volume Profile Asset Backed
2
2
Transaction Structure Fixed Rate Synthetic Fixed Rate Fixed Economics Variable Economics Statutory/Regulatory
Preparation to Participate in a Prepay 1
Gas Supply Agreement
BBE agrees to supply gas to Project Participant
Commodity Swap Counterparty
$ Fixed Price Gas
$ Index Price Gas Physical Gas
Project Participant
4
$ Index Price Gas Physical Gas
1
2
Index Price Less Fixed Discount
Prepayment from Bond Proceeds
Tax‐Exempt Debt Service
3
Bond Proceeds
Tax‐Exempt Bond Investors
2
$ Fixed Price Gas
BBE enters into a fixed price prepaid gas purchase agreement with Prepay Supplier for term 3
Prepay Supplier
Prepaid Agreement
Trust Indenture
BBE issues Bonds under new Trust Indenture Proceeds from Bonds used to Prepay Supplier for gas delivery
4
ISDA
BBE and Prepay Supplier enter into offsetting swaps returning Black Belt Energy to index based pricing
Preparation to Participate in a Prepay
■ Examine Your Credit: ■ Participants credit is important to the overall deal rating ■ Cash reserves and surety policies an economic burden to the transaction ■ A rating can lower your cost (increase economics) to participate in prepays ■ MCM recently assisted TEAC and PEAK obtain ratings and is currently assisting other participants for this reason
Preparation to Participate in a Prepay ■ Know Your Volumes and Discount: ■ “Statutory Safe Harbor” Volume Calculation: ■ ■ ■ ■ ■
Average Direct Sales over the last Five Calendar Years (Test Period) less Non‐Qualifying Electric Sales less Any Long Term Purchase Obligations Including Prepay Purchases less Any Lost Load Incurred during the Test Period Remainder is the Maximum Volume Eligible for a Prepay Transaction
■ How do You want to use Your Eligible Volume ■ Portfolio Your Prepay Supply ■ What is Your Minimum and Maximum Volume: ■ Ramping ■ Shaping ■ How Much Volume at What Discount at What Term
■ Total Discount: ■ ■ ■ ■
Agency Fee Monthly Discount Possibly an Annual Refund Possibly a Refund at the End of Transaction
Preparation to Participate in a Prepay
■ Review & Update Your Contracts: ■ What’s Your Name? ■ Transportation, Storage and Supply ■ ■ ■ ■
Transportation Contract: Delivery Point, Pipelines and Capacity Storage Contract: Storage Facility, Storage Capacity & Gas in Storage Gas Management Contract(s) Gas Supply Portfolio Contract(s)
■ Tariff, Retail Contracts and Wholesale Contracts ■ ■ ■ ■ ■
Do you Know Where They Are Are they Executed Do you Know What They Say Who are the Counterparties What are the Terms, Conditions and Pricing Mechanisms
Preparation to Participate in a Prepay
■ Avoid Last Minute Hiccups: Approvals and Opinions ■ Educate Your Governing Authority ■ Earlier the Better ■ Governing authority approves a Resolution to participate, approve the Gas Supply Agreement in substantially final form establishing the maximum term, maximum volumes and minimum acceptable discount, and delegating authority to execute the final agreement and related documents ■ Determine how long it takes to get their approval ■ Local Counsel will need to provide an Opinion Letter that all required approvals have been obtained and the contract is enforceable ■ Tax Certificate: Certifying you will only sell to good use customers
Time Value of Savings – “A Bird in the Hand” Savings Expectations – 5,000 MMBtu/Day
20 cents on 5,000/day provides total economics of $1.825 million over the first five years “If” you can do a 40 cent deal in 5 years, the two deals are equal in total value at the end of year 10 with each providing $3.65 million of total economics (without considering the time value of money)
BBE/CMC Prepay Portfolio BBE/CMC Prepay Transactions Prepay Issuer
Prepay Supplier
Daily Volume (MMBtu/Day)
LA Gas & SAGA
Societe Generale
9,000
2007 ‐ 2027
20 Years
TEAC
Goldman Sachs
7,500
2006 ‐ 2026
20 Years
MGAG
2,500
2007 ‐ 2022
15 Years
Main Street Gas
Merrill Lynch Royal Bank of Canada (RBC)
4,670
2010 ‐ 2040
30 Years
LA Gas: CMC
Goldman Sachs
17,500
2016 ‐ 2046
30 Years
Black Belt Energy
RBC
2016 ‐ 2046
30 Years
Pending
Issuer
12,500 Daily Volume (MMBtu/Day)
Projected Start
Term
Black Belt Energy
RBC
10,000
1st Qtr. 2017
30 Years
PEAK
Morgan‐Stanley
1,000
1st Qtr. 2017
30 Years
TEAC
Goldman Sachs
1,000
Term
Duration
30 Years
Requirements to Participate in a Prepay Forward Curves
Market Conditions – Dislocation of Municipal Rates after the Election Black Belt Series 2016 Prepay
Lower Alabama Series 2016 Prepay
Market Conditions – Taxable Corporate Rates vs. Tax‐Exempt MMD Municipal tax‐exempt rates have a steeper forward curve than taxable rates Tax‐exempt Rates are higher than taxable at the 10 year point Factors affecting the net spread available for prepay economics Supplier’s corporate treasury spreads Municipal market investor spreads
Market Conditions – “Window” for Prepays Opens and Shuts Quickly 5yr LIBOR vs. 5yr MMD Spread
At the beginning of 2016, market conditions were favorable for prepays
Black Belt 2016 Bonds Priced
Volatility in February caused the Black Belt deal to delay but Lower Alabama found a window to price on 2/23 Black Belt found a pricing window on 5/17 The market dislocated after the election but has since rallied
Lower Alabama 2016 Bonds Priced
Market Conditions – The Future?
Tax Reform Overall higher interest rates Recent flattening of the gas curve
Conclusions Opportunities develop and disappear quickly You have to be prepared to capitalize on opportunities Credit Supply Agreements Financials Volume Profile Portfolio Strategy
Questions and Open Discussion
THANK YOU APGA!
INTRODUCTION AND TABLE OF CONTENTS I. II. III. IV. V. VI. VII.
Who We Are History of Prepay Issuance Preparation to Participate in a Prepay Time Value of Savings Considerations Market Conditions Conclusions Questions and Open Discussion
Who We Are: Black Belt Energy
Establishment
Black Belt Energy Gas District (“BBE”) established August 2008 is a public corporation and gas supply district under the laws of the State of Alabama BBE provides natural gas supply, operations and business support expertise to the Clarke‐ Mobile Counties Gas District (“CMC”), an Alabama gas district, and other public entities, both inside and outside the state of Alabama CMC provides natural gas service to 6,500 Residential, Commercial and Industrial customers in seven counties in southwest Alabama. CMC’s average daily through put is 38,000 MMBtu/Day.
Governance
Powers
BBE Headquarters are located in Jackson, Alabama. BBE is governed by a three‐member Board of Directors; each Director is the Mayor of a member municipality. The current Directors are: Sheldon Day, (Mayor of Thomasville, Alabama) Paul South, (Mayor of Jackson, Alabama) Cynthia Jackson, (Mayor of the Town of Grove Hill, Alabama) BBE’s powers under its Certificate of Incorporation and the Alabama Gas District Law include the to the ability to: Acquire and own gas supplies, acquire, construct, establish, own and operate systems for the transmission, transportation, delivery, distribution and sale of gas throughout Alabama or outside Alabama for the benefit of the Member Municipalities and other customers, and to further CMC’s objectives and purposes. Sell gas to consumers directly, to gas distribution systems, and to other governmentally‐owned wholesale customers
Who We Are: Black Belt Energy (cont.)
Operations
Manage Natural Gas Supply for the Louisiana Municipal Gas Authority (LMGA), a Louisiana governmental joint action entity serving over 70 cities, towns and districts across Louisiana Managing and Monitoring privately owned natural gas pipelines for two industries in St. James Parish, Louisiana and one industry central Alabama. Gas Supply and Prepayment: Since 2012 have been actively pursuing Prepay transactions as Issuer Summer of 2012 Priced Prepay and Failed to Close In 2015, attempted to develop a Natural Gas prepay transaction with the U.S. arm of an international commodities trading house. ■ The company did not have the financial strength or perceived market transparency to avoid the adverse effects of a former employee’s public accusations of financial impropriety ■ Internet criticism of its accounting practices brought down the company's stock price and its credit rating to below investment grade. The company recorded significant net losses in 2015. ■ It was apparent the tax‐exempt bond market would not purchase the bonds ■ It became impossible for BBE and CMC to complete the prepayment transaction. ■ 2016 Closed two Prepay Transactions ■ Goldman Sachs (through LA Gas) ■ RBC
Who We Are: MCM Commercial
Municipal Capital Markets Group, Inc.
Innovators and Leaders in Municipal Prepayments
24 prepays and nearly $11 Billion Structuring and Documentation Creative solutions and less wasted effort on low probability ideas Minimize bond funded reserves Maximize float fund earnings Minimize counterparty risks Limit and control termination provisions Expedited negotiations reducing staff time and legal expenses Quantitative Assistance Transaction modeling of prepay and termination amounts Accounting/Finance and Treasury Credit Rating Process Long‐standing reputation and relationship with key rating agency personnel Independent Advice and Representation Provide market information on pricing and availability of alternative structures Assist in commodity swap negotiation of terms and price evaluation
Prepay Issuance Since 1998 Past Prepayments 11
9 5 3
1
3
16
3
3
4
Economic Drivers Rating Structure Interest Rate Spreads Supplier Credit Income Tax Rates Municipal Credit Forward Gas Prices Dual Credit Tenor (30‐Years) Credit Enhanced Volume Profile Asset Backed
2
2
Transaction Structure Fixed Rate Synthetic Fixed Rate Fixed Economics Variable Economics Statutory/Regulatory
Preparation to Participate in a Prepay 1
Gas Supply Agreement
BBE agrees to supply gas to Project Participant
Commodity Swap Counterparty
$ Fixed Price Gas
$ Index Price Gas Physical Gas
Project Participant
4
$ Index Price Gas Physical Gas
1
2
Index Price Less Fixed Discount
Prepayment from Bond Proceeds
Tax‐Exempt Debt Service
3
Bond Proceeds
Tax‐Exempt Bond Investors
2
$ Fixed Price Gas
BBE enters into a fixed price prepaid gas purchase agreement with Prepay Supplier for term 3
Prepay Supplier
Prepaid Agreement
Trust Indenture
BBE issues Bonds under new Trust Indenture Proceeds from Bonds used to Prepay Supplier for gas delivery
4
ISDA
BBE and Prepay Supplier enter into offsetting swaps returning Black Belt Energy to index based pricing
Preparation to Participate in a Prepay
■ Examine Your Credit: ■ Participants credit is important to the overall deal rating ■ Cash reserves and surety policies an economic burden to the transaction ■ A rating can lower your cost (increase economics) to participate in prepays ■ MCM recently assisted TEAC and PEAK obtain ratings and is currently assisting other participants for this reason
Preparation to Participate in a Prepay ■ Know Your Volumes and Discount: ■ “Statutory Safe Harbor” Volume Calculation: ■ ■ ■ ■ ■
Average Direct Sales over the last Five Calendar Years (Test Period) less Non‐Qualifying Electric Sales less Any Long Term Purchase Obligations Including Prepay Purchases less Any Lost Load Incurred during the Test Period Remainder is the Maximum Volume Eligible for a Prepay Transaction
■ How do You want to use Your Eligible Volume ■ Portfolio Your Prepay Supply ■ What is Your Minimum and Maximum Volume: ■ Ramping ■ Shaping ■ How Much Volume at What Discount at What Term
■ Total Discount: ■ ■ ■ ■
Agency Fee Monthly Discount Possibly an Annual Refund Possibly a Refund at the End of Transaction
Preparation to Participate in a Prepay
■ Review & Update Your Contracts: ■ What’s Your Name? ■ Transportation, Storage and Supply ■ ■ ■ ■
Transportation Contract: Delivery Point, Pipelines and Capacity Storage Contract: Storage Facility, Storage Capacity & Gas in Storage Gas Management Contract(s) Gas Supply Portfolio Contract(s)
■ Tariff, Retail Contracts and Wholesale Contracts ■ ■ ■ ■ ■
Do you Know Where They Are Are they Executed Do you Know What They Say Who are the Counterparties What are the Terms, Conditions and Pricing Mechanisms
Preparation to Participate in a Prepay
■ Avoid Last Minute Hiccups: Approvals and Opinions ■ Educate Your Governing Authority ■ Earlier the Better ■ Governing authority approves a Resolution to participate, approve the Gas Supply Agreement in substantially final form establishing the maximum term, maximum volumes and minimum acceptable discount, and delegating authority to execute the final agreement and related documents ■ Determine how long it takes to get their approval ■ Local Counsel will need to provide an Opinion Letter that all required approvals have been obtained and the contract is enforceable ■ Tax Certificate: Certifying you will only sell to good use customers
Time Value of Savings – “A Bird in the Hand” Savings Expectations – 5,000 MMBtu/Day
20 cents on 5,000/day provides total economics of $1.825 million over the first five years “If” you can do a 40 cent deal in 5 years, the two deals are equal in total value at the end of year 10 with each providing $3.65 million of total economics (without considering the time value of money)
BBE/CMC Prepay Portfolio BBE/CMC Prepay Transactions Prepay Issuer
Prepay Supplier
Daily Volume (MMBtu/Day)
LA Gas & SAGA
Societe Generale
9,000
2007 ‐ 2027
20 Years
TEAC
Goldman Sachs
7,500
2006 ‐ 2026
20 Years
MGAG
2,500
2007 ‐ 2022
15 Years
Main Street Gas
Merrill Lynch Royal Bank of Canada (RBC)
4,670
2010 ‐ 2040
30 Years
LA Gas: CMC
Goldman Sachs
17,500
2016 ‐ 2046
30 Years
Black Belt Energy
RBC
2016 ‐ 2046
30 Years
Pending
Issuer
12,500 Daily Volume (MMBtu/Day)
Projected Start
Term
Black Belt Energy
RBC
10,000
1st Qtr. 2017
30 Years
PEAK
Morgan‐Stanley
1,000
1st Qtr. 2017
30 Years
TEAC
Goldman Sachs
1,000
Term
Duration
30 Years
Requirements to Participate in a Prepay Forward Curves
Market Conditions – Dislocation of Municipal Rates after the Election Black Belt Series 2016 Prepay
Lower Alabama Series 2016 Prepay
Market Conditions – Taxable Corporate Rates vs. Tax‐Exempt MMD Municipal tax‐exempt rates have a steeper forward curve than taxable rates Tax‐exempt Rates are higher than taxable at the 10 year point Factors affecting the net spread available for prepay economics Supplier’s corporate treasury spreads Municipal market investor spreads
Market Conditions – “Window” for Prepays Opens and Shuts Quickly 5yr LIBOR vs. 5yr MMD Spread
At the beginning of 2016, market conditions were favorable for prepays
Black Belt 2016 Bonds Priced
Volatility in February caused the Black Belt deal to delay but Lower Alabama found a window to price on 2/23 Black Belt found a pricing window on 5/17 The market dislocated after the election but has since rallied
Lower Alabama 2016 Bonds Priced
Market Conditions – The Future?
Tax Reform Overall higher interest rates Recent flattening of the gas curve
Conclusions Opportunities develop and disappear quickly You have to be prepared to capitalize on opportunities Credit Supply Agreements Financials Volume Profile Portfolio Strategy
Questions and Open Discussion
THANK YOU APGA!
