DALLAS - San Antonio is preparing the first issue of Build America Bonds in Texas with a combined $560 million of debt for the city's CPS Energy utility.
The deal, expected to be sold later this month, would include $101 million of Series 2009B revenue bonds, $250 million of Series 2009C Build America Bonds, and $209 million of Series 2009D revenue refunding bonds.
CPS expects to use most of the proceeds to complete the J.K. Spruce Unit 2 coal-fired plant, which is scheduled to begin operating in mid-2010. Funds will also go toward expanding the electric distribution system and toward costs of environmental, reliability, and pricing requirements.
CPS, one of the nation's largest public power utilities and recognized as one of the most innovative in diversifying power sources and environmental programs, earned confirmation of its AA rating from Standard & Poor's yesterday.
The rating applies to all the bonds in the upcoming issue, as well as $3.5 billion of senior-lien electric and gas revenue refunding bonds. The utility's $402 million junior-lien debt is rated AA-minus.
"In our view, the rating reflects a strong, growing economy; very competitive electricity rates; economic, diverse fuel generating capacity; strong financial metrics; and good management," wrote Standard & Poor's credit analyst Judith Waite.
Moody's Investors Service and Fitch Ratings have not reported their ratings on the upcoming deal. Moody's rated a February deal Aa1 while Fitch maintained its AA-plus.
San Antonio appears to be the first Texas issuer to take advantage of BABs, which were created as part of the federal stimulus package designed to get credit flowing again. The bonds provide either a 35% federal tax credit to the bondholder in lieu of tax-exempt status or payments to the issuer equal to 35% of the interest paid on the bonds.
It was not known yesterday which option San Antonio would select, but most issuers to date have selected the payment subsidy. BABs can only be issued to raise new money for capital projects and must be issued from Feb. 17, 2009, through 2010.
The BAB option opens a new market for municipal debt, including tax-exempt entities such as pension plans and foreign entities.
By the end of April, more than $10 billion of BABs had been issued, and bond experts have predicted that more than $50 billion may be issued before the program ends.
Among the earliest issuers were university systems in Minnesota and Virginia, the New Jersey Turnpike Authority, and the state of California. In Texas, the North Texas Tollway Authority is considering issuing BABs in June.
California's $5 billion of BABs last month paid a yield in the mid-7% range but cost the state only about 4.5%.
For large issuers such as CPS, the BABs circumvent a still balky muni bond market, though credits of double-A and better have received good responses.
Access to the debt market is critical for CPS as it continues a $3.6 billion capital construction program. In addition to the coal-fired plant, CPS is a partner in the South Texas Project nuclear power plant that is seeking permits to double its capacity at the Matagorda Bay site.
"CPS Energy retired all debt associated with generating units except the STP nuclear facility, ahead of deregulation," Waite noted. "Debt is about 56% of total capital, which we believe is strong for a vertically integrated municipal utility."
With 695,000 retail electric and 321,000 retail gas customers, "CPS Energy's major challenge is providing adequate generating capacity to meet the rapidly increasing energy demand of San Antonians," Waite said. "Although management expects demand to rise more slowly the next few years, it also expects the rate to again be above the state and national average after the recession."
