BRADENTON, Fla. — The Florida Municipal Power Agency is in the midst of a complex $400 million transaction that involves the sale of fixed- and auction-rate revenue bonds and includes partially unwinding several forward swaps associated with the financing.
To meet Florida’s growing need for electricity and to hedge against rising energy prices, the FMPA is using a series of three financings to build a $258 million natural gas-burning power plant on the state’s east coast. It also is refinancing loans related to previous generation projects and securing long-term wholesale natural gas supplies.
The complex transaction started last Friday with the sale of $125 million of Series 2006A fixed-rate bonds insured by Financial Security Assurance Inc. The agency decided to sell the 10-year bonds and partially terminates some synthetic swaps entered into late last year due to better-than-anticipated interest rates in that section of the yield curve.
The offering continues this Wednesday when the power agency prices $225.8 million of tax-exempt Series 2006B auction-rate bonds, and $45 million of taxable Series 2006C auction-rate securities insured by CIFG Assurance North America Inc., said Craig Dunlap of Dunlap & Associates Inc., the FMPA’s financial adviser. Swaps related to those transactions will remain in place.
Mark Larson, chief financial officer of the FMPA, said the financings are driven by the energy requirements of the agency’s 29 member municipal utilities — whose power demand is growing between 2½ and 2¾% each year — and the retirement of older generating units. Fifteen of those members will be parties in the development of the gas-fired power plant.
Knowing of near-term financing needs and wanting to capture low interest rates led the agency to enter in December entered into a series of forward floating-to-fixed interest rate swap agreements covering a combined notional amount of $451.4 million to hedge against the risk of interest rate increases before the issuance of the Series 2006A, B, and C bonds.
Larson said that as the deal got closer to being marketed the agency decided to sell the $125 million of fixed-rate bonds and terminate a similar notational swap amount after analysis showed that fixed-rate borrowing was more advantageous for that portion of the financing maturing during the first 10 years.“We saw that if we had our druthers, we’d rather be issuing fixed rate on the front end up to the point where the curve crossed the line for the synthetic yield,” Larson said. “Net of termination costs, we e still had money in our pocket.”
Larson said the FMPA had negotiated “favorable provisions” with the swap counterparties that enabled it to make these terminations economically more positive.
“The total economic effect is we’ll be better off having done the fixed-rate component than if we’d stayed with the swaps and issued auction-rate debt across the entire curve,” Larson said.
Counterparties to the swap agreements relating to the Series 2006B bonds are Merrill Lynch Capital Services Inc., Goldman Sachs Capital Markets LP, Morgan Stanley Capital Services Inc., Bear Stearns Capital Markets Inc., and J. P. Morgan Chase Bank NA.
The FMPA will make periodic payments to the counterparties on the 2006B bonds at fixed rates ranging from 3.612% to 3.737% and the counterparties will make periodic payments to FMPA based on 72% of the London Interbank Offered Rate.
Wachovia is the sole counterparty to the swap for the Series 2006C taxable bonds in which the power agency will make payments based on a fixed rate of 5.175% and Wachovia will make payments based on 100% of Libor.
The $45 million of Series 2006C taxable auction-rate securities are related to the FMPA’s obligations as a member of Public Gas Partners Inc., a partnership with the Georgia Municipal Gas Authority, the Florida Gas Utility, the Lower Alabama Gas District, Patriots Energy Group, the Southeast Alabama Gas District, and the Tennessee Energy Acquisition Corp.
Public Gas Partners was formed in late 2004 to secure long-term wholesale natural gas supplies for its members. In January, Public Gas announced that it completed a series of transactions to acquire a portfolio of natural gas reserves with interests in over 2,000 wells located in nine states.
Fitch Ratings assigned an A-plus to the FMPA’s Series 2006A, B, and C bonds, while Moody’s Investors Service assigned an A1. The securities were not rated by Standard & Poor’s.
Fitch said its rating reflects the strong crossover in member participation and integration between the agency’s various projects as well as added support from court-validated power supply contracts that obligate all members to share the full cost of dedicated capacity associated with each project.
“Additional credit characteristics of these projects include stable financial performance and a favorable and diverse customer base at the member level,” said a report by Fitch analyst Chloe Weil.
Along with a sound financial position, Moody’s said the FMPA has a well-established role managing relations between and among members.
The power agency “has embarked on a plan to construct new generation facilities to meet future demand growth and diversify fuel mix,” noted a report by Moody’s analyst Dan Aschenbach.
In addition to financing the new natural gas plant, the FMPA also is considering becoming a partner in building an 800-megawatt coal-fired power plant in north Florida, which is still in the planning stage and may require bond financing.
The 2006A bonds were sold through negotiation with Merrill Lynch & Co. as the lead manager and A.G. Edwards & Sons Inc., Citigroup Global Markets Inc. and Morgan Stanley & Co. as members of the syndicate.
Nixon Peabody LLP was bond counsel. Orrick, Herrington & Sutcliffe LLP was underwriters’ counsel.
The 2006A revenue bonds priced to yield from 3.44% in 2007 to 3.66% in 2011 and 4.01% in 2016, according to Thomson Municipal Market Monitor.
The insured bonds offered yields ranging from two basis points under Municipal Market Data’s non-state specific triple-A insured revenue bond scale in 2007 to three basis points over the scale in 2011 and one basis point over the scale in 2016.
