The New Mexico Municipal Energy Acquisition Authority is poised to price around US$625m worth of gas supply revenue and acquisition bonds in June, while natural gas costs continue to plunge.

The New Mexican municipality aims to issue the new series 2019 bonds, in part to replenish its series 2014 gas supply revenue refunding notes, as well as to prepay natural gas purchase costs and adjust existing supply levels.

The proposed issuance will be comprised of sub-series 2019A and 2019B tranches, which will carry fixed and variable interest rates, respectively. Although the notes are set to mature in November 2039, they will be subject to a mandatory tender in May 2025.

Fitch Ratings, which assigned a ‘AA’ expected credit rating to the issuance, noted that credit risk to the gas purchasers is mitigated through a funding agreement, which requires the Royal Bank of Canada – the principal transaction counterparty – to make a mandatory advance in an amount up to the debt service required reserve to satisfy any deficiency on interest or principal payment dates.

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Fitch analysts Nicole Wood and Tim Morilla said that since the sub-series 2019B bonds will be issued with a variable interest rate, the authority will agree to an interest rate swap arrangement with RBC to hedge its exposure to interest rate fluctuations.

Under the terms of the issuance, RBC will act as the gas supplier, settlement agreement provider, and funding agreement provider, as well as the interest rate swap counterparty, with respect to the sub-series 2019B bonds.

Fitch’s credit rating on the deal is driven by RBC – the credit quality of the sole counterparty whose default risk is not otherwise offset.

Meanwhile, the authority also entered into a commodity swap agreement with JPMorgan Chase, which enables the issuer to make floating payments based on gas prices to RBC, while receiving fixed payments based on a fixed price from JPM.

JPM will also agree to a back-end swap agreement with RBC, exchanging a fixed price for a monthly index price to further hedge its position.

Wood and Morilla added that a custodial agreement among JPMorgan, RBC and Wells Fargo, which is serving as the deal’s custodian, “insulates bondholders from the credit risk of JPMorgan.” The custodian will hold the payment from RBC and will pay JPM only after it has paid the authority under the front-end swap.

The deal is being lead-managed by RBC Capital Markets.

The structure of the authority’s issuance is similar to Alabama’s Black Belt Energy Gas District’s recent sale of US$735m worth of gas prepay revenue notes.

New Mexico’s Energy Profile

According to the U.S. Energy Information Administration, New Mexico is among the top U.S. natural gas-producing states – highlighted by its San Juan Basin – and holds more than 4% of the nation’s total proved natural gas reserves.

The EIA notes that the state produces more natural gas than it consumes and exports three times more of the commodity than it imports through interstate pipelines, with most of the outflows sent to Arizona. 

The EIA continued that while less than one-fifth of the natural gas produced in New Mexico is consumed within its borders, it remains among the top 10 states in the nation in per capita natural gas consumption, with the electric power sector as its largest consumer.

The energy agency added that New Mexico’s households consume “much less natural gas than is used by the electric power sector” even though nearly two-thirds of the state’s residents use natural gas as their primary energy source for home heating.

In terms of The New Mexico Municipal Energy Acquisition Authority’s proposed bond issuance, the issuer said it has formed agreements with New Mexican cities Las Cruces, Los Alamos and Farmington to provide natural gas supplies and, in the case of the latter, for its electric utility.

For Farmington, its share of natural gas supplies is set to reduce its current contractual arrangement with BP Energy Co, which the city has in place through the end of 2020 for its Animas and Bluffview plants.

Farmington’s Bluffview Plant and San Juan Unit 4 assets generate 43% and 26% of its sales, respectively. In 2018, its residential revenue rose to US$260.3k from US$257.3k in the prior year, with total sales up to US$1.02m from US$972.3k over the same period.

Although prices of natural gas had risen towards the end of 2018, recent price levels have plunged.

Analysts at Bespoke Weather Services recently highlighted that costs for the commodity have reached new multi-year lows.

The July contract was well below the US$2.40 level intraday Friday, and was last hovering at about US$2.34, according to the IBKR Trader Workstation.

Bespoke noted that these levels are “quite uncommon for this time of the year, especially considering we are still (for now) at storage levels that are under the 5-year average.” They also pointed out that “Mother Nature is not helping,” as El Niño appears to have gained some strength, as seen in the latest sea surface temperature anomalies posted by the National Oceanic and Atmospheric Administration (NOAA).

Under its proposed US$625m series 2019 muni bond sale, the authority’s commodity swap transaction with JPM should help to hedge the risk of gas price fluctuations.