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The Handbook of Municipal Bonds by FRANK J. FABOZZI, SYLVAN G. FELDSTEIN

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CASE STUDY 8
A Tax-Exempt Prepay Natural Gas Purchase Bond
Sandra McDonald Principal McDonald Partners, Inc.
 
 
 
The City of Roseville, California owns and operates a municipal electric system, Roseville Electric, that provides electric service to 48,500 retail customers. To serve the city’s growing load, the city commenced construction of a 160 MW natural gas fired generating plant in 2005. Once operations commenced in mid-2007, the plant would require a reliable supply of natural-gas. To this end, the city utilized a tax-exempt prepaid structure for a portion of its fuel requirements. The $209,350,000 of Roseville Natural Gas Financing Authority Revenue Bonds, Series 2007 were issued in early February 2007.
In a prepaid natural gas transaction, the net proceeds of municipal debt are used to prepay a natural gas supplier for a fixed volume of gas. The prepaid price is based on the forward price of the future gas deliveries at the time the transaction is executed. The supplier discounts the contract cash flows using a discount rate that makes the supplier indifferent to whether he receives a lump sum up-front or is paid monthly as gas is delivered over time. The amount of the prepayment, credit enhancement costs and other costs of issuance determine the amount of municipal bonds that must be sold. If the transaction is structured efficiently, the semiannual debt service can be substantially less than the natural gas payments the municipality would otherwise pay on a monthly basis. ...

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