DALLAS — A nonprofit corporation responsible for heating and cooling 13 million square feet of space at the Texas Medical Center in Houston will issue $52 million of revenue bonds to keep pace with the growing campus.
Thermal Energy Corp., or TECO, plans to price the debt on Wednesday through the Harris County Health Facilities Development Corp.
RBC Capital Markets is lead underwriter. Siebert Brandford Shank & Co. and Wells Fargo Securities are co-managers. First Southwest Co. is financial adviser and Fulbright & Jaworski is bond counsel.
With final maturities in 2040, the tax-exempt bonds carry ratings of AA from Standard & Poor’s and Aa3 from Moody’s Investors Service. Fitch Ratings does not rate the debt.
As of Aug. 31, 2010, TECO had $343.8 million of long-term debt outstanding, according to Standard & Poor’s.
TECO will use the money to expand its chilled-water and steam services to customers in the Texas Medical Center, a massive complex that includes 49 institutions with more than 6,500 licensed beds and 93,500 full- and part-time employees. The medical center is the Houston metropolitan area’s leading employer.
To be a member of TMC, institutions must be governmental, higher education, or nonprofit organizations. The flagship facilities are associated with the University of Texas system, Texas Children’s Hospital, and St. Luke’s Episcopal Hospital, which account for more than 75% of annual revenues.
Currently, only Methodist Hospital and Baylor College of Medicine operate separate heating and cooling systems, but both member institutions are expected to use TECO for future growth, analysts noted.
The original TECO Central Plant was built by the Houston Natural Gas Corp. and began operation in 1969. In 1978, the medical center bought the plant in the name to serve all of its members as a cooperative association. In 2003, the nonprofit TECO was created to operate and expand the facilities.
TECO is owned by nine Texas Medical Center institutions and operates two plants with a combined capacity of 80,000 tons of chilled water, 761,000 pounds-per-hour of steam, and 16,330 kilowatts of emergency power generation.
As the medical center expands, TECO is planning to double capacity over the next 12 years. The company hired Burns & McDonnell as the design-build contractor for the first phase of that expansion, adding 45 megawatts of combined heat and power generation, an 8.8 million-gallon thermal energy storage tank and a new chiller plant with 32,000 tons of chilled water production.
Credit analysts considered the strength of the medical institutions in rating TECO’s debt and see little threat of competition from any lower cost providers. Standard & Poor’s noted: “TECO’s position as a monopolistic provider of chilled-water and steam services to multiple customers with significant barriers to entry for potential competition.”
Final maturity of all bonds in 2040 comes 10 years after TECO’s existing sales contracts expire. However, if by 2020, customers accounting for at least 90% of TECO’s revenues have not extended their contracts to at least match the final maturity of the bonds, debt-service requirements will be repaid over an accelerated schedule that matches the contracts. About 38% of the parity debt will mature beyond the 2030 contracts.
Pledged revenues are expected to remain about 1.4 times debt service once the current projects are completed by 2012 and the capitalized interest period is over.
“TECO’s total revenue requirements have tended to be very predictable,” said Standard & Poor’s analyst Theodore Chapman. Last year, TECO issued $98.7 million of Series 2009A fixed-rate revenue bonds and $13.0 million of Series 2009B fixed-rate refunding bonds.
“If any member institution wishes to terminate its contract with TECO, it must make a termination payment equal to five years of demand charges, which Moody’s believes provides adequate insulation from the unlikely event of a member termination,” noted Moody’s analyst Michael O’Connor. “In assigning the Aa3 rating, we have considered a downside scenario contemplating no-load growth after 2011.”
He said that “TECO’s cost profile will be maintained with a 15% rate increase over the next 15 years in such a scenario, which Moody’s considers to be reasonable.”
The expansion project also qualifies for a $10 million grant from the U.S. Department of Energy under the American Recovery and Reinvestment Act of 2009.
With the addition of four water chillers, a cooling tower, and other plant equipment, the system would have the capacity to produce about 45 megawatts of on-site electricity generation and 270,000 pounds per hour of steam, according to DOE.
Electricity from the system would be produced using a natural gas-powered combustion turbine. The exhaust gas from the turbine would be routed to a heat recovery steam generator, which would be equipped with natural gas-fired duct burners to increase steam production. A selective catalytic reduction system would be installed to reduce emissions of oxides of nitrogen.
According to the environmental impact statement, the combined heat and power system would have an overall energy efficiency of more than 78%.
“Operation of this system would result in an annual energy savings for the Thermal Energy Corp. of about 1.5 trillion British thermal units compared with the current system of individual natural gas-fired boilers, chillers, and grid-supplied electrical power,” according to the EIS. “The new system would allow Thermal Energy Corp. to reduce its consumption of electricity from the regional grid, and would require less natural gas to produce steam than under current operations.”
Founded in 1945, the Texas Medical Center has grown to become the largest medical complex in the world. The University of Texas Medical Branch in Galveston joined the TMC in March, becoming the 49th member.
“While Galveston will always be UTMB’s home, the people we serve will benefit as we strengthen connections with fellow Texas Medical Center institutions to ensure the Houston-Galveston region remains a leader in health sciences education, research, and patient care well into the future,” said UTMB president David Callender.
