DALLAS — With municipal bond volume running about as low as the water levels in its reservoirs, Texas’ Lower Colorado River Authority will supply a parched market with $595 million of refunding revenue bonds this week.
The deal, being priced through negotiation with senior managers Morgan Stanley and Barclays Capital, includes $405 million of Series A and $190 million of Series B bonds for the LCRA’s Transmission Services Corp., a nonprofit electric wholesale extension of the state agency in Central Texas.
The Series A bonds will be used to convert outstanding commercial paper notes to long-term debt for transmission projects. The Series B bonds will be used to advance refund outstanding parity debt.
Retail pricing on Tuesday will be followed by institutional pricing Wednesday, but financial advisor OBP Muni expects most of the bonds to go to institutions.
At its Sept. 21 meeting the LCRA board authorized issuance of up to $900 million of refunding bonds, depending on market conditions. The authority is not obligated to cover the bonds issued on behalf of the legally separate transmission corporation, but the LCRA board doubles as the board of the corporation. McCall Parkhurst & Horton is bond counsel to the board.
The upcoming bonds carry final maturities of 2041 and ratings of A from Standard & Poor’s, A2 from Moody’s Investors Service and A-plus from Fitch Ratings, all with stable outlooks.
For investors looking for a combination of security and better yields than are available in Treasuries, the bonds are expected to find a good reception, primarily because of the LCRA’s longstanding reputation as a public power provider.
Last year, it issued a $380 million refunding that drew yields of 4.48% on coupons of 5% maturing in 2040.
This year, supply of tax-exempt munis has fallen sharply after federal support of the Build America Bonds program ended Dec. 31.
For the first three quarters of 2011, tax-exempt bonds are down more than 35% to $192.9 billion. Last month saw $27.4 billion in tax-exempt debt come to market, down 23% from September 2010’s $35.7 billion.
With yields at record lows, thanks in part to the Federal Reserve’s Operation Twist, refundings in September fared better than new money, down only 18.3% compared to the year before while new-money issuance was down almost 50%.
For the first three quarters, refunding is down only 18%, to $59.8 billion from $72.7 billion. New-money issuance is $99 billion, down over 46% from the $183.5 billion that was issued in the first three quarters of 2010.
With outstanding debt of about $1.6 billion, LCRA expects to spend more than $700 million on capital projects through 2016. It operates under the objective of maximizing its financial structure, so the debt-to-assets ratio is high at 90%, analysts noted. The authority operates at debt-service ratios of 1.44 with its covenants requiring a 1.25 ratio. The ratio fell as low as 1.36 this year, according to Moody’s.
“Notwithstanding its high debt leverage, LCRA TSC’s debt service coverage is generally satisfactory for a low-risk municipal electric transmission system in the A-rating category,” analyst Kevin Rose wrote in the Moody’s ratings report.
The LCRA produces power from its gas and coal-fired plants and hydro-electric dams, and the transmission corporation operates more than 4,600 miles of transmission lines and 300 substations within the Texas grid known as the Electric Reliability Council of Texas. The ERCOT area represents about 85% of the electrical load in Texas. The LCRA is a wholesaler of electricity to a 54-county service area, as well as a wholesale and retail water provider in the Lower Colorado River basin.
The board is considering the sale of its water and wastewater utility assets, which are a small component of its business. Meanwhile its electric service area is expanding under new state law.
Since February, the authority has worked with potential bidders for the water and wastewater systems. Bids were submitted in August to BMO Capital Markets, the LCRA’s third-party consultant handling the sale.
On the water management side of its business, the agency is dealing with one of the most severe droughts on record in its service area. It operates six hydroelectric dams that form the Highland Lakes: Buchanan, Inks, LBJ, Marble Falls, Travis and Lake Austin.
At its Sept. 21 meeting, the board updated its water management plan from an advisory committee made up of farmers, lake-area residents and business owners, and representatives from the LCRA’s municipal customers, including Austin.
The authority will ask the Texas Commission on Environmental Quality for permission to cut off Highland Lakes water to farmers in the Gulf Coast and Lakeside irrigation divisions if the lakes contain less than 850,000 acre-feet of water.
If water is available for farmers, it would only be used for the first crop of the season and pumping would not begin before April 1, and would last no longer than 145 days or until 125,000 acre-feet.
The 11 months from October 2010 through August 2011 have been the driest for that that period in Texas since 1895, when the state began keeping rainfall records, and Texas’ summer has been the hottest in the nation’s history.
New projections show that the combined storage of the lakes could drop to 640,000 to 680,000 acre-feet by Jan. 1. As of Sept. 21 the lakes were 39% full and held 789,000 acre-feet.
“This intense drought is painful for everyone, but with these drought relief measures in place, we will continue to responsibly manage the region’s water supply to meet our customers’ critical health and safety needs through this challenging time,” LCRA general manager Becky Motal said in a statement.
