Board hears NMEA prepaid natural-gas refinancing plan; experts outline discounts and contractual limits

Chair Gibson opened a follow-up presentation on a proposed New Mexico Municipal Energy Acquisition Authority (NMEA) prepaid natural-gas refinancing at the Board of Public Utilities work session on Feb. 5.

The board heard from Ben Ulbrich, the county’s deputy utility manager for power supply, and George Majors, financial advisor to NMEA, who said the 2025 remarketing under discussion would be a refunding of the 2019 transaction. Majors and representatives from Royal Bank of Canada (RBC) explained how the financial mechanics of a prepaid transaction generate a discount available to participating members.

Majors and RBC described the transaction as an arbitrage driven by the spread between tax‑exempt municipal rates and the taxable reinvestment rate institutions pay. Jim Loszde of RBC told the board, “we’re not locking in a fixed cost of gas for the next 5 years,” and emphasized that the structure yields a discount off an index price rather than a fixed gas price.

Why it matters: prepaid transactions have been used for gas and power since the mid‑2000s and are explicitly addressed in federal law, the presenters said. If market conditions in early March produce a large spread between municipal and taxable rates, those conditions would produce a larger discount for NMEA participants than in the prior remarketings.

Key contractual and program details

- The RBC team and Majors said the expected mechanics: NMEA would issue intermediate‑term tax‑exempt bonds (roughly five years), prepay proceeds to a bank counterparty, and the counterparty would in turn discount cash flows and pass value back to participants as a per‑unit discount on index gas purchases. - Jason (RBC) and Ben Ulbrich explained that Los Alamos’s index premiums for the April 2025 through September 2030 reset period are expected to be 15¢ per MMBtu and that those premiums would be covered by the transaction structure. - Majors described a 2019 repricing agreement that created a contractual “minimum discount” test for participants if the transaction were remarketed. He and Jason said that the 2019 repricing agreement set a minimum discount threshold referenced during the presentation as 33¢ per MMBtu; participants would have an option not to proceed if the available discount at pricing were below that threshold. Majors summarized the practical effect: participants have an opt‑out if the market discount is below the negotiated floor.

Board concerns and clarifications

Board members asked about the magnitude of savings and operational obligations. Ben Ulbrich and the RBC panel presented a simple illustrative table showing how the prepayment creates an annual dollar stream that divided by delivered units yields a per‑unit discount. Board member Matt asked whether prior transactions’ savings equate to the figures in the attachment; staff cautioned that earlier transactions used differing structures (some had variable components) and that the illustrative numbers are conceptual rather than a guaranteed future result.

On operational commitments, Majors stated bluntly: “You’re never obligated to take gas you don’t need, ever.” He explained that if Los Alamos reduces its physical demand faster than expected, the contract suite includes mechanisms to remarket unneeded volumes; that remarketing can be done by the county or by RBC under the contract provisions.

Potential savings and risks presented

- Presenters showed past, fixed discounts for earlier transactions (for example, 20¢ in 2009, about 28.9¢ in 2014 and about 29.5¢ in 2019 under the structures used then) and discussed how current rate spreads could produce materially higher discounts in 2025. - Consultants and RBC warned that the ultimate discount will depend on market conditions at the time of pricing; the board would only know real numbers when the transaction is marketed in March. - The presenters noted tradeoffs: participating volumes cannot be simultaneously committed to an identical physical fixed‑price contract elsewhere. However, Los Alamos can still use financial hedges (NYMEX futures or swaps) to lock budgets while participating in the prepaid structure.

Next steps and timing

Staff told the board they expect to bring a resolution to the regular Board meeting in two weeks and then seek council approval so the county could participate in a March remarketing if the board sets acceptable parameters (for example, a minimum discount or delegated authority to execute if pricing meets a threshold).

Ending

Board members expressed interest but asked staff to return with more detailed, pricing‑dependent numbers as March pricing crystallizes. No formal board action on the transaction was taken at the Feb. 5 session.