DALLAS - The Salt River Project Agricultural Improvement and Power Districtwill provide additional power to a growing, energy-hungry customer base in Arizona with the proceeds from next week's $800 million sale of electric system revenue bonds.
The Tempe-based utility provides power to more than 920,000 residential, commercial, industrial, and agricultural customers in a 2,900-square-mile service area that includes portions of Maricopa, Gila, and Pinal counties. The service territory includes about half the Phoenix-Mesa metropolitan area.
Proceeds from the $800 million of revenues bonds set for pricing on March 4 will help finance a new 400-megawatt coal-fired unit currently under construction in Apache County, said SRP treasurer Steven J. Hulet.
"The proceeds will be used for the expansion of the system. We're a vertically integrated utility so we have generation, transmission, and distribution systems, and we'll be doing some of each," Hulet said. "But most of the money will go towards what we call Springerville Four."
Tucson Electric Power operates the Springerville units One, Two, and Three generating units, but SRP will be the sole owner of Springerville Four, Hulet said. Salt River has a 30-year contract with Tucson Electric Power to purchase 100 megawatts from Springerville Three.
The revenue bonds are rated Aa1 by Moody's Investors Service and AA by Standard & Poor's. The utility has $2.3 billion of outstanding revenue bonds, $250.4 million of lease-purchase obligation bonds rated Aa2 by Moody's and AA-minus by Standard & Poor's, as well as $475 million of commercial paper notes rated P-1 by Moody's and A-1-plus by Standard & Poor's.
The bonds will not be insured. SRP has never insured any revenue bond issue.
Bear, Stearns & Co. is the book-running senior manager for the bonds. Co-managers include Citi, Goldman, Sachs & Co., JPMorgan, and Morgan Stanley.
Drinker Biddle & Reath LLP is bond counsel for the utility. Public Financial Management Inc. is the financial adviser.
Hulet acknowledged that the utility is worried about bringing a large issue to a market that is in turmoil.
"It has caused some concern, but we never thought about delaying the sale," he said. "We want to get it done. We feel that Salt River Project represents a good, solid credit and believe investors will recognize that."
The deal is structured with $290 million of serial bonds that will mature between 2016 and 2028, $140 million in term bonds that will mature in 2033, and $365 million of term bonds that will mature in 2038.
SRP's capital plan calls for expenditures of $6.1 billion between 2009 and 2014, with about $2.7 billion allocated to new generation projects. About 57% of the money will come from internally generated funds with the balance provided by debt issues. The utility expects long-term debt to more than double by 2013, to some $6 billion.
SRP's last revenue bond sale, for $296 million, came in June 2006.
"We're not on a set schedule for bond issues," Hulet said. "As we enter each fiscal year we look at our financial results, see how much cash we have on hand, and determine what projects we have coming up in the next year. Salt River Project issues debt on an as-needed basis."
Hulet said the utility needs the additional power to serve a customer base that continues to grow despite the recent housing slowdown in the region.
"We've felt a little bit of the slowdown from the slow housing market in the nation and the region, but that just means we will be seeing growth of 2% to 3% a year instead of 4% or more a year," het said. "The utility typically adds 20,000 to 30,000 new accounts every year."
Hulet said the slowdown in growth probably will not last long.
"We think it is short-lived," he said. "We expect it will pick up again in a year or two."
Peak demand is expected to increase from 7,649 megawatts in 2007 to 8,192 megawatts in 2014.
SRP owns all or part of 11 major generating facilities, and a number of smaller units, using a mixture of fuels that include nuclear, coal, and natural gas.
"We're the largest provider of electricity and water to the greater Phoenix metropolitan area," said Jeff Lane, a spokesman for the utility.
The number of customers will grow steadily because Salt River's service territory includes land between Phoenix and Tucson that was once agricultural but is now seen as prime development property, Hulet said.
"Growth is moving beyond Maricopa County and into Pinal County," he said. "That's an area with tremendous growth potential. The area was once mainly farmland, but the farmers are selling their land to developers who are building large tracts of homes."
New homes being built are larger than most existing residences, Hulet said, with more electrical devices that require more energy and with more space to cool in Arizona's desert climate. In addition, existing customers are increasing their energy use.
"We're seeing more demand from existing customers," he said. "As they get plasma TVs and other energy-intensive appliances, their energy use goes up."
Residential demand is the main factor in determining how much generating capacity the utility needs, according to Hulet.
"We have a few industrial and other large customers, but most of our demand is on the residential side," he said. "Our top 10 customers represent only about 6% to 8% of total sales. That's good for us, because residential demand is fairly stable and is not subject to the fluctuations in demand from industrial users that may be affected by ups and downs in the economy."
Work on Springerville Four is on schedule for coming on line in 2009, but over budget.
"We're affected by higher construction costs just like any other business that does large projects," Hulet said. "We've seen big increases in the costs of materials and the price we have to pay to get work done, and it is not slowing up. It is just not getting as bad as fast as it was, so I guess you can say prices are leveling out."
