Tiny state agency plans on issuing $895 million bond

By WYATT EMMERICH,

When a Tiny backwater state agency published a public notice in the newspaper that it planned on issuing up to $895 million in state debt, it raised some eyebrows.

The Municipal Gas Authority of Mississippi (MGAM) only has a half-dozen or so employees, but that isn’t stopping the 30-year-old agency from some whopping plans.

MGAM plans on issuing bonds to buy a 31-year supply of gas for 25 small municipal natural gas operations located throughout the state.

The question is why?

With fracking, there is a huge supply of natural gas. Gas pipelines are regulated and are independent from gas producers, of which there are dozens. Natural gas prices are low and predicted to be low for decades to come. Why would the MGAM want to tie down cities and the state in such a complex 31-year deal that few people can even understand?

MGAM Executive Director Geoff Wilson claims the deal will save the municipalities 15 percent off the market rate, but I am skeptical of these claims. Audited reports of other gas authorities show discounts in the one and two percent range, if that.

The annual MGAM audit does not have a single word or statistic showing any savings to its municipal members. A 2003 PEER review found savings of two cents from the typical $4 MMBTU price of gas. That doesn’t even cover the salaries at MGAM.

Here’s the thing I can’t get over. The 25 Mississippi municipal gas companies represented by MGAM purchased a total of $18.7 million in natural gas in 2017. If MGAM issues $895 million in bonds, the interest on the bonds alone will cost about $35 million in the first year. How does that make sense? Just the interest on the bonds alone is twice the total amount spent on gas for the whole year.

I emailed that question to Wilson, but I never could figure out his answer. To his credit, he has been responsive, it’s just loaded with technical jargon. I recall that statement rumored to be said by Albert Einstein; “If you can’t explain it to a 12-year-old, you probably don’t understand it very well yourself.”

To be sure, I am not 12. I worked in the corporate finance division of Merrill Lynch in the heart of Wall Street doing bond deals. I am struggling to understand this deal.

I do know that during the financial collapse of 2008, dozens of these deals went down the tubes leading to billions of dollars in losses.

Curious, I got on the internet and did a little research. I only found one analysis written in 2010 by First Principles Capital Management in New York. It was titled, “Dissecting Municipal Prepaid Gas Transactions.” It was not an encouraging report.

A flow chart of the transactions shows nine different entities involved in 20 different transactions.

The report states: “A municipality issues a long term tax-exempt bond and uses the proceeds to purchase a long term supply of natural gas. The gas delivered under the contract is sold to local buyers at the prevailing market price. The proceeds from the sale of gas are paid to a commodity swap provider in return for fixed cash flows that are consistent with the debt service obligations of the municipal bond. The net result of these transactions is that the municipality has acquired a long term supply of gas at the prevailing market prices at the time of delivery. The issuance of the municipal bond serves no economic purpose other than to create an economically attractive loan for the financial institution serving as the gas supplier.

“In summary, a complex series of transactions involving long-term commodity supply contracts and derivatives were utilized by taxable financial institutions to obtain tax-deductible financing in the tax-exempt market at tax-exempt yields, something that taxable institutions are expressly forbidden from executing. With the purchase of the bonds issued by the financial institution, the recycling of the money from the debt issuance lacks any business purpose other than creating a significant tax benefit for the financial institution to the detriment of taxpayers.”

MGAM Wilson says neither the municipalities nor MGAM (meaning ratepayers and taxpayers) will be on the hook. They plan to use the Mississippi Development Bank.

If you go to the Mississippi Development Bank’s website it states: “The security for Mississippi Development Bank bonds is a lien on the revenues of the local governmental entity. A Mississippi Development Bank revenue bond may also contain the moral obligation of the State of Mississippi . . . Should a local government entity fail to make a debt service payment on the bonds, the State Tax Commission can withhold sales tax, homestead exemption and other funds to make those payments.”

In the fine print of the audit of Georgia’s gas authority, which just issued over a billion of these bonds, it states: “The Gas Authority is exposed to market price risk in the event of nonperformance by any of its counterparties.” Not so good.

As I see it, the biggest beneficiaries of this deal are lawyers, bankers and middle men. Certainly the staff of MGAM will have 31 years to administer the program.

And if, pray tell, this deal goes bad, the lawsuits will be flying and you can bet the taxpayers will be picking up the legal tab and possibly a lot, lot more.

There is a huge supply of natural gas with dozens of suppliers and private companies that can assist any municipality to get the best price on gas. Lacking more substantial evidence of cost savings, it makes little sense for this small agency to get caught up in a complex billion dollar deal that nobody understands and could possibly put cities, taxpayers and ratepayers at risk.

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