San Antonio to Refund $564M for CPS Energy

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DALLAS – San Antonio's CPS Energy will join the pre-Independence Day parade to market with $564 million of refunding bonds designed to reduce interest cost on debt issued during the Great Recession.

The bonds to be refunded were sold in 2008 and 2009 when rates were falling sharply after the global financial crisis. Despite assumptions that rates would rise in the anticipated recovery, they have remained near historic lows, continuing to offer refunding opportunities.

"We primarily are matching maturities, although we are concentrating some of the savings around the 2025 time frame just to level out some of our existing debt service," said Linda Dzierzanowski, senior director at CPS.

A year ago, CPS refunded $320.5 million of senior-lien bonds, earning net present value savings of $36.9 million.

Great Britain's vote last week to leave the European Union added even more gravity to the already low yields.

Benchmark 30-year triple-A bond yields dropped to 2.08%, according to Thomson Reuters Municipal Market Data. That registered as the lowest rate in the 35 years since the curve was formulated.

"The market for munis has been strong and this will only add to the dynamic," said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management. On Friday, yields on some maturities fell by as much as 17 basis points.

The CPS bonds are scheduled to sell June 28, with closing July 28.

Christopher Fink, managing director, Bank of America Merrill Lynch & Co., and Brian Middlebrook, managing director at JP Morgan, are lead bankers on the deal.

The city uses three financial advisors: Public Financial Management, First Southwest Co., and Estrada Hinojosa & Co.

High credit ratings on the CPS bonds are expected to attract investors looking for safety in an uncertain world during an election year.

Moody's Investors Service rates the bonds Aa1 while Fitch Ratings applies an equivalent AA-plus.  Only Standard & Poor's Global Ratings is out of step with a lower AA. Outlooks are stable, and all three agencies rate the Alamo City's general obligation debt triple-A.

"We continue to have strong credit ratings because we are focused on strong management perspective of our operations and really always staying focused on financial performance," said Paula Gold Williams, interim chief executive for CPS. "We are able to transfer funds over to the city and still maintain our strong financial metrics."

With this deal, CPS will have $3.5 billion of senior lien and $1.9 billion of junior-lien bonds outstanding, according to Moody's.

"Debt leverage has increased over past five years as CPS implemented a large capital improvement plan to improve the utility's distribution system," Moody's analyst Dan Aschenbach noted. "Over the next five years, CPS expects to fund a significant amount of plan with internal funding along with amortization of debt, leaving debt ratio near the current level."

The CPS five-year capital improvement plan for 2016-2021 calls for investment of $3.197 billion, slightly higher than the prior five-year plan. About 60% of the capital plan is expected to be funded by new debt averaging about $345.2 million of bonds per year, according to utility officials.

CPS has experienced management uncertainty after former chief executive Doyle Beneby left the firm in October to head New Generation Power, a Chicago-based renewable energy firm founded in 2010, the year Beneby came to CPS.

After Beneby left, Williams was promoted to interim CEO from her previous position as chief financial officer.

The CPS board, which had tried to keep Beneby after he announced his new position, later began trying to hire him back. In mid-April a deal to bring Beneby back was reported by local news outlets.  However, that plan ended when Beneby withdrew as a candidate under CPS' national search.

Serving virtually all of Bexar County and small parts of other surrounding counties, CPS Energy provides electric service to approximately 786,000 metered accounts, making it one of the biggest public power systems in the U.S. CPS considers itself the fourth-largest combined gas and electric public utility in the nation.

Median household effective buying income for the San Antonio metropolitan statistical area is 93% of the national level, helping to close the gap in the national average, according to S&P.

Unemployment in the metro area as of April 2016 was 3.4%, a full percentage better than the state's. The national rate was 5% at the time..

San Antonio's four military bases add stability but also create risk if military spending is reduced. Oil and gas production in the Eagle Ford Shale region to the south is also slowing as many producers mothball rigs.

"Given the sheer depth to the MSA, however, and the well-established diversity, San Antonio's long-term economic prospects remain auspicious, in our view," according to S&P analyst Theodore Chapman. "It continues to also see sustained growth in manufacturing, tourism, and services."

San Antonio's continued pace of growth is causing difficulties for city departments trying to manage services and infrastructure.

Backed by Mayor Ivy Taylor, an ex officio member of the CPS board, city staff recently recommended a slowdown in annexations of unincorporated areas.

"Until we at least do better here as far as infrastructure, neighborhoods, access to opportunity, it just makes it harder to justify an aggressive annexation program," Taylor told the City Council.

With a population of 1.4 million, San Antonio is Texas' second-largest city behind Houston.  Bexar County, which includes San Antonio, grew by 10.7% between 2010 and 2015.

Taylor is proposing asking voters to approve an estimated $850 million infrastructure bond package in 2017. In May, Taylor told the San Antonio Express that she would not support bonds for a downtown triple-A minor league baseball stadium.

Taylor said that completion of the SA Tomorrow process in 2016 will give San Antonio its first comprehensive growth plan, which could guide future annexation.

"Until that time, it is entirely appropriate for the City of San Antonio to focus our maintenance, programming and capital improvements on the many needs already identified by today's residents," Taylor asserted in a memo.

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