DALLAS — The Lower Colorado River Authority in Central Texas anticipates savings of about 10% when it goes to market with $400 million of refunding revenue bonds Wednesday.
With no sign of inflation on the horizon, interest rates have remained at historic lows, providing issuers a chance to lower their finance costs with refunding deals.
The increasing issuance of taxable Build America Bonds has also left the tax-exempt market running short of supply in some months.
“LCRA has always enjoyed a favorable position in the marketplace,” said financial adviser John O’Brien, president of O’Brien Partners. “As this will be an all tax-exempt issue, we anticipate a strong interest by investors.”
Goldman, Sachs & Co. is book-runner on the negotiated deal. Morgan Stanley, Bank of America Merrill Lynch and Barclays Bank are co-managers. McCall Parkhurst & Horton LLP in Austin is bond counsel.
While this deal ranks as a sizable refunding issue, it is less than half of the LCRA’s record deal in 1999, which surpassed $1 billion. In that year, the authority — which manages dams and sells electricity — did a major restructuring of its debt.
The bonds earned an A from Standard & Poor’s, an A-plus from Fitch Ratings and an A1 from Moody’s Investors Service, all with stable outlooks. The ratings also apply to the authority’s $1.73 billion of outstanding long-term debt.
With those ratings, the authority is hoping to see spreads of 50 to 70 basis points above the Municipal Market Data yield curve, according to O’Brien.
Similarly rated LCRA refunding revenue bonds issued in December 2008 with coupons of 7.25% maturing in 2037 and original yields of 6.80% recently yielded 4.42%. The original 133 basis point spread against the MMD has narrowed to 68 basis points.
Proceeds from this week’s sale will be used to refund outstanding commercial paper and revenue bonds. They will also support a debt-service reserve fund and pay costs of issuance.
A public nonprofit that receives no tax support, the authority operates two lines of wholesale business — water and electricity. It operates dams and provides flood control as well as water and wastewater services on the Colorado River in Texas.
As the largest electric power wholesaler in Texas, the LCRA provides energy to 34 cities, eight electric cooperatives, and one investor-owned utility.
The authority was created by the Texas Legislature in 1934 during the Depression amid President Franklin Roosevelt’s push for rural electrification. Today it also operates more than 30 public parks, recreation areas, and river access sites along the Highland Lakes and lower Colorado River.
Texas lawmakers deregulated the state’s wholesale energy market in 1995 but left transmission services under the control of the Public Utility Commission. The LCRA’s 15-member board of directors, appointed by the governor and confirmed by the Senate, can set wholesale power rates to compete with investor-owned or publicly owned providers.
The agency does not have any taxing authority, nor does it receive any appropriations from the state budget, leaving it completely self-supporting through the sale of electricity, water, and related services.
“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,” said Standard & Poor’s credit analyst Theodore Chapman. “The leading customers that account for the bulk of LCRA’s revenues are also, in general, of strong creditworthiness.”
Moody’s analyst Dan Aschenbach said that the stable outlook for the authority’s revenue bonds “is based on Moody’s expectation that LCRA will continue to respond well to strategic challenges as deregulation evolves in Texas. Moody’s also expects LCRA to maintain sufficient financial margins and liquidity to manage risk exposures.”
The rating could rise if debt-service coverage margins strengthen and internal liquidity improves, Aschenbach said. Less uncertainty about retail competition in Texas and success in signing the balance of the post-2016 wholesale customer contract extensions could also prove beneficial, he said.
“The credit rating could go down if LCRA’s debt-service coverage margins fall below current levels,” Aschenbach added. “Also, if LCRA’s wholesale electric price increases above the competitive market, the rating would face downward pressure.”
The lingering recession has affected sales growth somewhat and has had minor impacts on debt-service coverage level, analysts noted. About 60% of the wholesale power contract load has signed long-term power supply contract amendments through 2041, with the remaining contract load under negotiation. New projects include the 179-megawatt Winchester Power Park Project that came online in May. It has four new gas-fired, combustion turbine peaking generation units.
LCRA Transmission Services Corp. is also participating in one of the most ambitious wind power transmission projects in the nation. It was awarded over $700 million of authorization to construct transmission lines from wind farms in isolated sections of Texas. The system will include lines to transmit wind energy into the major part of state’s electrical grid.
The LCRA’s cost structure is competitive in comparison with other utilities in Texas, partly due to its diverse power supply mix, according to Moody’s. In addition, a major portion of the electric generation it owns comes from the three-unit, 1,075-megawatt, coal-fired Fayette Power Project shared with Austin Energy. Fayette had a strong performance record in 2008 and 2009, analysts said.
“While LCRA’s overall power prices have risen due to rising coal and natural gas prices, most other power suppliers in Texas have also been affected by higher commodity prices,” Aschenbach said. “An important indicator of the competitiveness of LCRA’s power supply is the relatively competitive end-use retail rates of its wholesale power customers since power costs represent a major portion of the retail rate. Expected but still uncertain greenhouse gas regulations will pose a new cost pressure on LCRA given its exposure to coal-fired generation.”
“LCRA continues to exhibit sound financial metrics,” Fitch analyst Drake Ritchey wrote. “Fiscal 2010 debt-service coverage registered a healthy 1.57 times on a consolidated basis and 1.69 times excluding the TSC business line, which is not pledged to LCRA bondholders.”
