How A Prepay Transaction Works:

The basic structure of long-term prepay transactions, as defined by industry convention and practice is fairly straightforward. The buyer and seller come together and negotiate an arm's-length contract for the provision of set volumes of natural gas to be delivered over an extended period of time, usually not longer than fifteen years. To calculate the present worth of the future value of the volumes to be delivered over the life of the contract, the seller discounts the associated monthly cash flow stream at a rate that represents its financial "opportunity cost" to the agreed upon date of sale and preferred delivery point. That present value amount is the price that the buyer will pay for the contracted delivery of the gas.

The primary difference between a typical commercial prepay transaction and one involving a tax-exempt issuer is the issuance of bonds to obtain the required purchase price.

The Role of an Index Swap in Municipal Prepays

Taken by itself, the prepayment by a buyer for the delivery of future volumes of gas is not an extraordinary event in the for-profit gas marketplace. It is the use by public Local Distribution Companies (LDC's) of bond proceeds (specifically tax-exempt bond proceeds) to provide the purchase price that has focused attention on these transactions. But the use of bond proceeds is not the only aspect of these contracts that reflect the special needs of public LDC's.

The swap agreement allows APEA to pay index price to the swap counterparty and receive a fixed price in return. This provides a balanced book transaction for the swap counterparty and provides APEA an amount that guarantees sufficient payment for the debt service.

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For more information on how the transaction structure works contact us at 1-800-476-3749.