DALLAS — The Lower Colorado River Authority, a major public power wholesaler based in Austin, is preparing to issue $200 million of revenue bonds to refund commercial paper that financed expansion of the utility’s transmission system.
The bonds, expected to sell next week or the first week of May, will also include some new money for the transmission construction fund.
Morgan Stanley is book-runner on the deal. Barclays Capital, Goldman, Sachs & Co., and Bank of America Merrill Lynch are co-senior managers. The syndicate includes nine other firms. McCall Parkhurst & Horton is bond counsel. LCRA does not use an outside financial adviser.
“We are relying on our underwriting team to lead us in a successful transaction,” said authority spokeswoman Clara Tuma.
The deal comes four months after a $426 million refunding in which LCRA sought to take advantage of favorable market conditions. That issue was for the power generation side of the business, while this deal is for the transmission side, operated as an affiliate that is technically separate but managed by the same board and executives.
In addition to power, LCRA manages the flows from the Colorado River of Texas and water supplies from a chain of lakes in the region around Austin.
The upcoming bonds have earned ratings of A from Standard & Poor’s and A-plus from Fitch Ratings, both with stable outlooks. Moody’s Investors Service, which rated the previous deal A1, has not issued its report on the next issue.
Power transmission on the Texas grid is a regulated industry managed by the Electric Reliability Council of Texas. The grid, serving 22 million customers and 85% of the state’s electric load includes more than 40,000 miles of transmission lines and 550 generation units. ERCOT manages financial settlement for the competitive wholesale bulk-power market and administers customer switching for 6.5 million Texans in areas where retail power is sold competitively.
Through its nonprofit Transmission Services Corp., LCRA owns or leases more than 4,400 miles of transmission lines and 300 substations and equipment.
Under a 1999 state law, LCRA and other electric utilities were required to “unbundle,” or separate, their electric generation and transmission operations as part of preparations for a deregulated retail electric market. The law also allowed the authority to expand its transmission facilities and operations beyond its traditional 55-county Central Texas electric service area.
On Jan. 1, 2002, LCRA transferred ownership of its transmission facilities to the Transmission Services Corp. to satisfy the new law. The TSC has no employees but contracts with LCRA staff to operate and maintain the facilities and provide other services.
The TSC has put expansion of transmission capacity on the fast track through more than 60 major projects over the next five years. Some of the work comes in partnerships with investor-owned utilities such as American Electric Power and Oncor, the transmission arm of TXU Corp., the state’s largest electric power provider.
The partnership with AEP will build projects totaling approximately $800 million to add transmission capacity in South and West Texas, areas identified by ERCOT as important for competition.
In rating the TSC bonds, analysts look through the TSC operations to the authority’s board and management, applying the same ratings.
“About five or six years ago, we took a consolidated look at the ratings,” said Standard & Poor’s analyst Theodore Chapman.
LCRA has $1.1 billion of outstanding debt on its transmission system, on parity with the upcoming issue.
Analysts note the fact that revenue supporting the transmission debt come from a diverse array of the 92 retail utilities.
“All but one of LCRA’s customers are municipally owned or cooperative distributors, allowing them to remain non-opt-in service providers and, therefore, exempt from competitive retail choice, securing loads,” Chapman noted in his report on the deal. “The leading customers, which account for the bulk of LCRA’s revenues, are also, in general, of strong creditworthiness.”
Among transmission utilities, the authority’s A rating is “about in the middle” of its peer group, Chapman said.
While there are none in the triple-A category, “We’ve got some a little bit higher and some in the triple-B category,” he said.
While proceeds from this bond issue will go toward traditional power lines in the Central Texas service area of LCRA, the public company’s largest undertaking in years is coming in the form of carrying power generated by wind farms in West Texas.
The $5 billion Competitive Renewable Energy Zone transmission network is envisioned as a new way of building a system for bringing power to major population centers from the sparsely settled but windy regions of the state.
On the so-called CREZ, the authority has a share of the project along with investor-owned utilities that will build their own sections of the system. As the largest public utility on the project, LCRA is expecting to finance its $789 million section through revenue bonds.
Oncor, meanwhile, will invest $1.34 billion in the project. It is being held up by legal action by the city of Garland, which bid for a share of the project but was rejected by the Public Utility Commission. Garland, whose power utility competes with TXU, sought to build transmission lines beyond its designated service area, which would give it the power of eminent domain wherever the lines were built.
Garland, an eastern suburb of Dallas, claimed it could develop its proposed segment of the project at a lower cost than investor-owned companies.
On Jan. 15, Texas District Judge Stephen Yelenosky ordered the PUC to suspend development of the CREZ lines and reconsider its award process. Yelenosky found that the commission had overstepped its mandate.
The CREZ project will double the amount of wind energy available to utilities to more than 18 megawatts. The regulator was expecting to have the new lines in service within four or five years under an ambitious plan passed by the Texas Legislature in 2005.
SB 20 directed the PUC to select the most productive wind zones in the state and devise a transmission plan to move power to populated areas in the state.
