GAS PROJECT REVENUE BONDS
Prior to joining MCM, our team pioneered the development of prepaid natural gas supply transactions and structures beginning in the late 1980s upon deregulation of the natural gas pipeline industry, and completed the first such transaction in 1994. Since that time the team has participated in approximately twenty-four prepay transactions totaling approximately $12 billion as sole senior manager, co-senior manager or Financial Advisor (while at MCM), or about one-third of all prepay par value originated. The MCM team is responsible for the development of various bond structures and documentation commonly used in prepays. The team was actively involved in submitting commentary to the IRS in the development of the 2003 IRS regulations governing power and gas prepayments. Following is a description of the The Lower Alabama Gas District, $599,350,000, Gas Project Revenue Bonds, Series 2016A where MCM served as financial advisor in the issuance of the bonds and qualified independent representative relating to the issuer’s commodity swap.
Gas Purchase Agreement
The Gas Project consists of the acquisition by the The Lower Alabama Gas District (the “District”) of the right to receive up to approximately 269 million MMBtus of natural gas from J. Aron & Company (“J. Aron”) pursuant to the terms of the Gas Purchase Agreement. The gas is to be delivered to the District at designated delivery points in specified daily quantities each month over an approximately 30-year (355-month) term of the Gas Purchase Agreement.
In addition to its gas delivery obligations under the Gas Purchase Agreement, J. Aron is obligated to make payments to the District for any gas not delivered or taken for any reason, including force majeure events. J. Aron has also agreed to remarket, on a daily or monthly basis, quantities of gas designated by the District or the Trustee. In the event that J. Aron is unable to remarket any such gas after using Commercially Reasonable Efforts, it has agreed to purchase such gas for its own account.
The payment obligations of J. Aron under the Gas Purchase Agreement, the Receivables Purchase Agreement and the Debt Service Account Investment Agreement are unconditionally guaranteed by Goldman Sachs Group (“GSG”) under a guaranty agreement (the “GSG Guaranty”). The payment obligations of J. Aron under the J. Aron Commodity Swap are unconditionally guaranteed by GSG under a guaranty agreement.
The District has entered into a Gas Supply Agreement (the “Gas Supply Contract”) with the Clarke-Mobile Counties Gas District (the “Project Participant”). The gas system owned by the Project Participant provides natural gas distribution services and transportation services to retail customers in its service area which is located in the Southwest portion of Alabama as well as wholesale customers both inside and outside of its service area.
Gas Supply Contract
The District has agreed to sell all of the gas to be delivered to it under the Gas Purchase Agreement to the Project Participant under the Gas Supply Contract. The District has agreed to deliver and the Project Participant has agreed to purchase specified daily quantities of gas at designated delivery points. Gas deliveries under the Gas Supply Contract total in each month at each delivery point the quantity of gas required to be tendered for delivery by J. Aron at that delivery point under the Gas Purchase Agreement through July 31, 2046. The Project Participant is obligated to pay the District for the quantities of gas tendered for delivery under its Gas Supply Contract. If gas is tendered for delivery by the District but not taken by the Project Participant, revenues from J. Aron remarketing the natural gas are credited to the Project Participant under certain circumstances. The Project Participant has no obligation to pay for gas that the District fails to deliver. Through the Gas Project, the Project Participant anticipates realizing a fixed discount to market index natural gas prices for the entire 30 year term
The Project Participant has agreed to make payments under the Gas Supply Contract from the revenues of its gas system, and only from such revenues as an operating expense of its gas system and a cost of purchased natural gas.
In order to hedge against reductions in its gas sale revenues resulting from changes in monthly market index prices, the District has entered into a commodity price swap agreement (the “District Commodity Swap”) with RBC Europe Limited (“RBCEL” or the “Commodity Swap Counterparty”) under which the District pays the floating price and the Commodity Swap Counterparty pays the fixed price. The notional gas quantities and pricing points under the District Commodity Swap correspond to the scheduled gas quantities and delivery points under the Gas Purchase Agreement. The index used to compute the floating price payable by the District under the District Commodity Swap for each pricing point corresponds to the index used to compute the price payable to the District under the Gas Supply Contract for gas delivered to the Project Participant at the corresponding delivery points.
J. Aron has entered into a comparable commodity price swap agreement (the “J. Aron Commodity Swap”) with the same Commodity Swap Counterparty under which J. Aron pays a fixed price and the Commodity Swap Counterparty pays a floating price. The notional gas quantities and pricing points under the J. Aron Commodity Swap match those under the District Commodity Swap and, accordingly, those under the Gas Purchase Agreement.
The District Commodity Swap and the J. Aron Commodity Swap (collectively, the “Commodity Swaps”) extend for the term of the gas delivery period under the Gas Purchase Agreement, but are subject to early termination upon the occurrence of certain events. Termination of either of the Commodity Swaps without replacement by the District and J. Aron will give rise to early termination rights under, and in some cases result in automatic termination of, the Gas Purchase Agreement which would result in redemption of the Bonds.
Termination of the Gas Purchase Agreement
Upon the occurrence of various events, including a failure by J. Aron to perform its gas delivery or payment obligations or to remarket gas not taken by the Project Participant in accordance with applicable tax laws, the District may elect to terminate the Gas Purchase Agreement. Upon the occurrence of other events, J. Aron may elect to terminate the Gas Purchase Agreement. In addition, upon the occurrence of certain events, the Gas Purchase Agreement will terminate automatically and, in certain cases, immediately. If the Gas Purchase Agreement is terminated, J. Aron will be required to pay a scheduled termination payment (the “Termination Payment”) to the District. Any termination of the Gas Purchase Agreement will result in an extraordinary mandatory redemption of the Bonds. The amount of the Termination Payment declines over time as J. Aron performs its gas delivery obligations under the Gas Purchase Agreement. The amount of the Termination Payment, together with the amounts required to be on deposit in certain Funds and Accounts held by the Trustee, has been calculated to provide a sum at least sufficient to pay the Redemption Price of the Bonds, assuming that J. Aron and the Project Participant pay and perform their contract obligations when due.