CHICAGO — The Omaha Public Power District is set to come to market Wednesday and Thursday with $500 million of revenue bonds, marking its largest borrowing to date.
The sale comes as the OPPD, one of the highest-rated utilities in the country, faces a major challenge tied to its nuclear plant. The Fort Calhoun Nuclear Station is about to enter its second year of an extended outage that is projected to cost more than $200 million as well as weaken the utility’s liquidity, raise its operating costs, and force it to increase the amount of debt in its $1.6 billion capital plan.
This week’s $493 million transaction is a mix of new-money and refunding bonds. Proceeds from the new money will be used to boost liquidity and to finance various projects in the capital plan.
The refunding is expected to bring interest-rate savings of $20 million, or 10% net present-value savings, officials said.
Moody’s Investors Service revised its outlook to negative on the utility last week, saying the district’s struggles with Fort Calhoun reflect the heightened risk of operating nuclear plants in a “post-Fukushima environment,” referring to the 2011 nuclear meltdown in Japan, among other factors.
With an Aa1 rating, however, the utility remains Moody’s fourth-highest rated public power utility among the agency’s 135 similar credits, and analysts continue to praise it for a variety of fiscal strengths.
Standard & Poor’s affirmed its AA rating and stable outlook last week. The utility is also one of S&P’s highest-rated utilities.
The OPPD is the nation’s 12th largest utility with 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. It also enjoys the ability to set its own rates.
Its Fort Calhoun Nuclear Station has been offline since April 2011, when it was shut down for regularly scheduled refueling.
A Missouri River flood in the summer of 2011 extended the outage, and the utility has since struggled to overcome regulatory violations and is working to meet a checklist of inspections before the U.S. Nuclear Regulatory Commission will allow it to reopen. The plant is currently operating under a special NRC oversight program, that the regulator said reflect its “significant performance issues.”
OPPD officials last year said the plant would reopen within a matter of months, but its predicted reopening is now set for the first quarter of 2013, a year after original projections. In August, the utility signed a contract with Chicago-based Exelon Corp. to operate the plant.
“We think we’ve got a good handle on it now,” said Rick Shaneyfelt, the the district’s manager of treasury and capital management.
“We’re going to do everything in our power to get the plant up and running again in the near future,” he said. “We’re obviously anxious to get the plant back online, but we want to do everything the right way.”
The nuclear plant generates roughly 25% of the utility’s overall power. The extended outage forced it to purchase replacement power on the open market at a higher cost than if it had produced it at Fort Calhoun, though low natural-gas prices have muted the impact.
In addition, the utility was forced to draw on its cash reserves to cover costs from the Missouri River flooding and a fire that followed, as well as costs tied to regulatory violations.
Proceeds from this week’s transaction will replace some of the reserves and the utility expects to recover significant money from a mix of rate increases, federal reimbursements and insurance.
Following a late 2011 bond sale, the OPPD had not expected to return to market with a new-money deal until 2013. But that changed in part as the district decided to do a refunding to take advantage of low rates, and in part as Fort Calhoun’s outage dragged on, according to Shaneyfelt.
“We did accelerate the deal,” he said. “There are some cost savings by combining with the refunding, and because of our situation with Fort Calhoun, our liquidity has dropped below where we like to see it.”
The OPPD has a liquidity target of 100 days of cash on hand, but currently it is in the 80-day range, Shaneyfelt said. “This will bring us well beyond the 100s, and we’re projecting that this will be enough to get us through 2013.”
The $493 million transaction includes $268 million of new money. Of that, $170 million will reimburse the utility for money it has already spent. Another $100 million will finance the district’s $1.6 billion capital plan, which has grown in recent months also due to the outage.
The OPPD now plans to finance roughly 70% of the capital plan with debt, up from about 50%, with the rest coming from internal funds. Much of that internal cash will be now have to be used to cover higher operating costs, Shaneyfelt said.
“Our [operating and maintenance] costs have gone up a fair amount because of the extended outage,” he said. “Over the long term we want to get back to that goal of 50-50 ratio.”
If the station reopens by early 2013, the estimated total cost to the OPPD will be $212 million, much of which the utility expects to recover.
The plant shutdown appears manageable over the long term, particularly given the utility’s strong management team, said S&P analyst Jeffrey Panger.
“It is a significant short-term shock to them and represents a risk that is at this point significant,” he said. “It’s manageable at the current rating, but it has the
potential to move beyond that.” The decision to hire Exelon will likely be beneficial to the utility, Panger said.
“They’re the largest nuclear operator in the country,” he said. “They do have a good record in terms of having shorter outages for fueling purposes.”
Moody’s said it expects to resolve its outlook within the first half of 2013, in part based on the scheduled opening of the Fort Calhoun station.
“OPPD’s recent challenges of operating a single-unit nuclear plant are beginning to reflect a higher business risk profile in the context of increased NRC scrutiny in a post-Fukushima environment,” analyst John Medina wrote in the report on this week’s bond deal. “While OPPD has effectively managed and minimized the financial impact of the extended outage at the Fort Calhoun Nuclear Station ... the long outage highlights the higher business risk associated with full ownership of a single nuclear unit plant.”
The district owns and operates three coal plants as well as several natural gas stations. Like all utilities with coal power, the OPPD faces costs tied to future regulation, a factor that Moody’s cites in its negative outlook revision.
The utility is in the midst of experimenting with various compliance technologies, and its $1.6 billion capital plan includes the highest cost of compliance in order to be conservative.
Officials expect proceeds from this week’s deal to carry it through to 2014, Shaneyfelt said. Starting in 2014, the OPPD will likely to come to market at least once a year through 2017 to finance its capital plan.
Citi is the senior book-running manager on this week’s deal. Goldman Sachs & Co. is co-senior manager, with 10 more firms on the underwriting team. Barclays Capital Inc. is the utility’s financial advisor. Kutak Rock LLP is bond counsel.
A retail period is set for Wednesday with institutional pricing on Thursday.
A piece of the utility’s 2011 bonds with a 5% coupon and 2020 maturity were yielding 1.8% in recent trading, according to the Municipal Securities Rulemaking Board’s EMMA website. Bonds issued in 2006 with a 4.35% coupon and 2036 maturity were yielding 4% in late-August trading.
