The Source - Winter 2008 - (Page 27)

Prepays APGA’s role The American Public Gas Association (APGA), along with a number of its members and associate members, has been instrumental in ensuring that federal tax law continues to permit the use of tax-exempt bonds to finance the cost of the acquisition of long-term gas supplies by public gas distribution systems. APGA has viewed its role in this area as necessary to enable its members to acquire firm, long-term gas supplies for delivery to the residential, commercial, industrial, and institutional customers in their service areas at a price that reflects their status as governmental entities. Essential contract elements At the core of a gas prepayment transaction is an agreement between a public gas distribution system, or more often its joint action gas supply agency, to purchase natural gas from a supplier (i) in agreed upon quantities, (ii) at agreed upon delivery points, (iii) for an agreed upon period of time, and (iv) for an agreed upon dollar amount, paid in advance in a lump sum at the time the agreement is executed. The purchase price for the prepaid gas supply is financed through the issuance of the purchaser’s revenue bonds. When the purchaser of prepaid gas and the issuer of bonds is a joint action agency, the public gas distribution system simply enters into a gas supply contract with the joint action agency and has no obligation with respect to the bonds (other than to use the gas it purchases for sale to its retail customers). Protecting the municipal gas system From the beginning, the dominant theme from the public gas system’s perspective has been ensuring that the joint action agencies and the distribution systems that purchase the gas supplies from them are insulated from liabilities for non-performance by a prepaid gas supplier or any other entity involved in the transaction. In a natural gas prepayment transaction, the prepaid supplier’s obligations are backed by strong operational capabilities and credit ratings in one of the higher rating categories (ordinarily A+/A1 or higher). In the event of non-performance by the supplier, the purchaser is contractually assured of receiving replacement cost damages (or make-up gas). In the event of default by the supplier, including chronic non-performance, the transaction will terminate automatically in some circumstances or at the option of the joint action agency in others. The joint action agency will be owed liquidated damages in the form of a termination payment for the early termination of the supply contract. Such liquidated damages are structured in all cases to ensure that sufficient amounts are available to retire outstanding bonds, and in many cases, also to provide compensation for all or part of the lost economic benefits that the purchaser would have realized if the transaction had remained in place for its full term. From the beginning, natural gas prepayment transactions have had twin THE SOURCE | WINTER 2008 , VOL. 1, ISSUE 2 27 

Table of Contents Feed for the Digital Edition of The Source - Winter 2008

The Source - Winter 2008 Contents First Person The Bridge to Renewable Energy Future Natural Gas: The Comfortable, Responsible Energy Solution Gas Hydrates: Poised for the Next Phase The Role of Natural Gas in a Carbon-Constrained World Natural Gas Prepays Taking the Leap to Natural Gas Vehicles The Pipeline Legislative Outlook Advertiser's Index Advertiser.com At Last

The Source - Winter 2008

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