CHICAGO — The Omaha Public Power District, one of the nation’s highest-rated utilities, comes to market next week with $300 million of electric system revenue bonds.
The borrowing comes as the OPPD continues to recover from last summer’s Missouri River flooding, which disrupted several of its facilities and lapped at the grounds of its Fort Calhoun nuclear plant.
The flood has so far cost the utility nearly $60 million, with additional costs looming as what had been an expected three-month outage at the nuclear facility now seems likely to drag on another nine months or longer.
Separately, the OPPD — like all public power utilities in the country — finds itself facing dramatically higher capital requirements associated with new federal environmental regulations. The new Cross State Air Pollution Rule, which is being fought by several states, could drive up the utility’s capital costs by 50% through 2015, analysts warned.
In the midst of a $1.4 billion capital plan, the OPPD last entered the market in June, and next week’s issue could be the district’s last until 2013, according to John Thurber, the utility’s division manager of finance.
The transaction tentatively includes up to $150 million of 30-year new-money bonds that mature in 2042, and $140 million of refunding bonds.
The refunding is expected to achieve a net present-value savings of more than $9 million, or over 6%, Thurber said. Attracted by the savings in the refundings, the OPPD decided to accelerate its new-money sale to save issuance costs.
All the debt will be issued as fixed rate. Bank of America Merrill Lynch and JPMorgan are senior managers, with 10 additional firms on the underwriting team. Kutak Rock is bond counsel and Barclays Capital Inc. is financial advisor.
The finance team will take retail orders on Tuesday, Nov. 15, and price the bonds Wednesday. The team expects strong retail interest, as nearly half of the OPPD’s last issue went to individual investors.
“We’re a publicly owned utility and like to get our customer-owners involved, so we try to make the [bonds] available to them, and make sure we advertise in local newspapers,” Thurber said.
Moody’s Investors Service rates the OPPD Aa1, making it the fourth-highest ranked power utility rated by Moody’s among 135 similar credits. Standard & Poor’s rates the district one notch lower at AA. Analysts praise its strong management team, diverse power portfolio, rate-setting authority and a relatively strong local economy.
The OPPD is the nation’s 12th-largest utility based on its 771,000 customers, serving Omaha and 47 other cities across a 5,000-square-mile area. Its competitive position is strengthened by Nebraska’s status as an all-public power state that prohibits investor-owned utilities.
Moody’s analyst John Medina said the Missouri River flooding last summer tested the utility’s emergency plans and found them up to the task.
“During a crisis, it’s all about the management. We’ve always said that they’re so highly rated because they have such a good management team,” Medina said. “They had a plan in place, and they had to test it. They were able to get through all of it and come through it stronger.”
The Fort Calhoun nuclear station was already shut down for a routine refueling when the flood struck. That saved millions compared to the costs that would have been incurred shutting down an active reactor at the flood-endangered plant.
The facility was supposed to be running again by June, but has been offline since the flood. It likely won’t open until late this year or early 2012 as officials make sure that the plant is safe to operate, according to Thurber.
“We’re going through a series of tests and studies to make sure that we understand what damage occurred and make sure that we can correct that damage,” he said.
The closure will serve to benefit the utility as it uses the time to make repairs that were otherwise scheduled for late 2012, noted Peter Murphy, an analyst with Standard & Poor’s.
“Some of the impacts in 2011 that were adverse will, at the end of the day, reduce negative impacts in 2012,” Murphy said.
Through Sept. 30, the OPPD had spent $59.4 million to deal with the floods. Outside of flood protection expenses, such as sandbags and keeping staff on duty, the biggest cost comes from having to buy power on the open market. Nearly $30 million of the $59.4 million came from the cost of buying power, Thurber said.
The district tapped its healthy cash reserves to cover flood costs. “They did have some liquidity drain, but they’re starting from a very strong liquidity position,” Medina said. “This is the argument about why it’s always important to have cash and strong liquidity, because of these types of events.”
The OPPD expects some reimbursement from the Federal Emergency Management Agency, but will recover most of the expenses through its fuel and purchased power adjustment mechanism, which allows it to immediately pass costs through to its customers.
The utility has $1.6 billion of outstanding debt. Total debt-service coverage after payments in lieu of taxes — or PILOTs — for fiscal 2011 is expected to decline slightly to just below 2 times compared to 2.07 times in 2010, according to Moody’s.
As the district continues to recover from the flood, it faces a fresh challenge in the form of the recently enacted Cross-State Air Pollution Rule.
The law is scheduled to take effect next year and could mean significantly higher costs for most power companies across the country. But the law’s impact on the OPPD and other utilities remains uncertain for now, as at least 12 states and a handful of federal lawmakers fight its implementation.
The Environmental Protection Agency unveiled the measure in July. It requires 27 states, including Nebraska, to improve their air quality by capping the amount of sulfur dioxide and nitrogen oxide from power plants that can drift across state borders.
Public power companies like the OPPD, which rely on coal-generating power, could face significantly higher costs, but it’s still early to tell what the law’s fiscal effect will be, according to Murphy.
“The impact is hard to gauge yet, and the utilities themselves need to figure out how they’re going to respond,” he said.
In a ratings report on the upcoming deal, S&P said that the power district “would likely face significant costs and credit-risk exposure should greenhouse gas regulation be promulgated.”
Moody’s projects that the new rule will mean a 50% increase in the OPPD’s capital requirements through 2015.
“Most utilities are facing this,” Medina said. The utility’s diverse power portfolio — it gets 25% from its nuclear plant — gives it some flexibility to deal with the new law, for example, by decreasing the amount of coal-based energy it produces.
“They have something to work with, while others don’t,” Medina added.
Now boasting one of the lowest retail power rates in the country, the OPPD is likely to raise rates every year for the next four years to finance its swelling capital needs, Moody’s said.
