Lansing, Mich., Water and Light Utility Dealing for Natural Gas

CHICAGO — The Lansing Board of Water and Light will price $250 million of new-money utility system revenue bonds Tuesday to finance construction of a new natural gas plant in Michigan.

The institutional pricing follows a retail order period held on Monday.

Proceeds will finance the replacement of one of the utility’s four steam plants with a new natural gas-combined cycle co-generation plant, a move that will diversify the utility’s coal-heavy energy mix and reduce its greenhouse emissions.

The board will break ground on the project Wednesday. The plant is scheduled to be finished by July 2013.

The board — which is the largest municipally owned utility in Michigan and a rare issuer — last entered the market in 2008 with $40 million. This week’s borrowing will more than triple its debt load, boosting it to $356 million from about $100 million. All of its bonds are in a fixed-rate mode.

The finance team is touting the utility’s diverse customer base, strong debt-service coverage levels, and its monopoly as a regional service provider to potential bond buyers.

The utility typically finances its roughly $40 million of annual capital improvements with cash, and has spent the last few recessionary years trying to protect its cash and liquidity position.

“We’ve been hit with the recession here in Michigan pretty bad, and we’ve been very careful, so our cash is pretty good,” said assistant general manager and chief financial officer Susan Devon. “We’ve been trying to manage our finances through the recession.”

The credit is also boosted by the board’s sole rating-setting authority, analysts said. The board approved a trio of rate increases that started in 2011 and the additional revenue will go to cover debt service on the bonds.

“The board has had a willingness to raise customer rates every single year,” Devon said. “The new rate increase will pay for the cost of service of the new plant.”

Moody’s Investors Service, which rates the credit Aa3 with a stable outlook, said its rating reflects the fact that its aging coal-fired assets expose the utility to future greenhouse regulations.

While praising the system’s diverse customer base, Moody’s also noted that General Motors remains its largest electric customer, exposing the utility to the volatile automotive industry.

Standard & Poor’s rates the water and light utility AA-minus with a stable outlook.

The bonds are secured by a pledge of revenues from the system’s electric, water, steam, and chilled water utilities. Fiscal 2011 finances project debt-service coverage levels of 2.42 times total debt-service coverage and 144 days cash-on-hand, according to Moody’s.

The utility currently has four boiler steam generating units that are “very, very old,” according to Devon. After determining it would cost less to build a new facility than to repair and upgrade the new one, the utility secured necessary environmental permits from the state over the last year.

The project is estimated to cost $185 million, which includes the plant, a new office building and the renovation of an old depot, and the cost of demolishing the old plant. 

Proceeds will also supplement the utility’s pay-as-you-go capital plan, Devon said.

Bank of America Merrill Lynch is senior manager and Samuel A. Ramirez & Co. is co-senior. Citi, Morgan Stanley, JPMorgan Chase and Wells Fargo round out the underwriting team. Robert W. Baird & Co. is the utility’s financial adviser. Miller, Canfield, Paddock and Stone PLC is bond counsel.

The issue includes $75 million of serial bonds that mature from 2015 through 2031, and $172 million of term bonds.

The utility opted to backload the repayment structure in order to smooth out debt service payments in it overall debt portfolio, Devon said.

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