Fixed Income

Prepaid gas bonds: A differentiated source of tax-exempt income

Oct 5, 2026

What are prepaid gas bonds and how do they work?

Prepaid gas bonds are tax-exempt financings in which a municipal utility prepays for a long-term supply of natural gas or electricity at a discount to current market prices. Due to the structured nature, credit quality is primarily driven by exposure to various supporting counterparties, often large, highly rated financial institutions, rather than the municipal utility directly.

 

Municipal Utility / Issuer: Corporate Funding Agreement Provider:
Reduce energy procurement costs by accessing tax-exempt financing Receives significant upfront capital through the execution of the prepaid contract
Secure long-term energy supply - typically natural gas or electricity - at favorable pricing Commits to provide funds necessary for the delivery of a fixed volume of gas/electricity on a monthly basis over the life of the transaction (20-30 years)
Improves budget predictability for the utility and it's downstream customers Benefits from the lower cost tax-exempt financing
May reduce energy cost volatility depending on contract terms Repayment obligations are often supported by large, well-capitalized financial instutions
Prepaid gas is 11.76% of the index; Goldman Sachs and Morgan Stanley are the largest funding providers.

 

Sources: 1. Bloomberg Indices, BlackRock, as of 8/20/2026.

Prepaid gas bond issuance is growing

Prepaid gas issuance has grown rapidly, surpassing $100 billion and increasing by more than 25% annually since 2020. This reflects the relative appeal of tax-exempt financing in a higher rate environment. At the same time, rising power demand from AI hyperscalers could drive more long-term gas supply agreements, creating opportunities for these companies to access the municipal market and potentially accelerate prepaid gas issuance.

Why it matters for investors

  1. Potential income advantage: offers meaningful yield pickup relative to traditional municipal sectors, particularly in the front end of the curve where AAA muni ratios are tight
  2. Diversified credit exposure: primarily tied to large, high-quality corporate counterparties rather than local tax revenues
  3. Lower duration: typically issued with short-to-intermediate effective maturities and 5-10-year put structures, helping limit sensitivity to interest rate movements
Prepaid gas muni yields have consistently exceeded broader 10-year muni yields since 2022, with spreads generally ranging from 100 to 150 basis points.

 

Sources: 2. Bloomberg as of 8/20/2026. Index YTW represents the average YTW of all securities within the index. Prepaid Gas 10-Year YTW shown is based on the BVGASA10 Index, and 10-Year YTW shown is based on the B12MTR Index. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

How BlackRock evaluates prepaid gas bonds

  • BlackRock’s scale and expertise provide a meaningful advantage in navigating the structural and credit complexity of prepaid gas transactions. The Municipal Credit team conducts detailed, security-level analysis of each structure, working closely with the Investment Grade Corporate Credit team to assess funding agreement providers.
  • Credit quality differs materially across guarantors, and spreads can exhibit increased volatility during periods of stress. Our process centers on rigorous, research-driven security selection complemented by a disciplined relative value framework.
Patrick Haskell

Patrick Haskell

Head of Municipal Bonds
Patrick Haskell, Managing Director, Head of the Municipal Bond Group within the Portfolio Management Group (PMG) as well as Global Head of Financial Institutions Group Investments Business.