BRADENTON, Fla. — A north Florida municipal utility plans to use $757 million in financing to buy a privately owned biomass plant, a move that will lower local electric bills.

The city of Gainesville will issue the debt in three series — $492 million of tax-exempt bonds and two variable-rate private placements totaling $265 million — on behalf of Gainesville Regional Utilities.

The Gainesville Renewable Energy Center biomass facility, shown here, is a 100-megawatt wood-burning plant in north Florida that began service in December 2013.
The public Gainesville Regional Utilities in Florida will issue debt to buy out the privately owned Gainesville Renewable Energy Center biomass power plant. Gainesville Regional Utilities

GRU will use $750 million of bond proceeds to purchase the Gainesville Renewable Energy Center biomass facility from a group of investors.

The purchase will terminate the GREC’s above-market power purchase agreement, which contains some onerous provisions such as a requirement to unnecessarily ramp up the plant in the summer, GRU General Manager Ed Bielarski told investors in an Internet roadshow.

The $492 million of Series 2017A fixed-rate utility system revenue bonds will price Tuesday with Goldman Sachs & Co. as the book-runner. Bank of America Merrill Lynch is co-senior manager.

Barclays, Citi, Ramirez & Co., and Wells Fargo Securities are co-managers. The bonds will mature between 2018 and 2040.

Bond pricing will reflect the risk of integrating the new biomass facility into GRU’s existing fleet as well as the fact that the utility transfers funds annually to the city, said Alan Schankel, a managing director at Janney Capital Markets. Schankel said he had not followed the deal closely.

“I suspect demand will be solid given general lack of supply lately and what I consider to be solid demand for more traditional revenue issues,” Schankel said, referring to bonds supported by basic utility services for which bills are likely to be paid.

Retail orders will get priority during pricing on Tuesday, said GRU Chief Financial Officer Justin Locke. Locke described interest in the deal as “very high” after one-on-one meetings with investors and roadshows in New York and Boston.

“You can almost look at this as a refinancing,” he said.

GRU has 26 years remaining on the biomass plant’s power purchase agreement, which will cost $1.9 billion. By financing the purchase of the plant and taking ownership, Locke said GRU expects to save about $700 million compared to what would have been paid under the PPA.

“The big story is that our intention is to hand $27 million a year back to our customers for the next 30 years” with about a 10% reduction in the base rate, Locke said. “You probably don’t see that very often.”

The plan to purchase the biomass facility led Moody's Investors Service to downgrade GRU’s senior lien utilities system revenue bonds to Aa3 from Aa2, and to lower second-lien commercial paper notes to A1 from Aa3.

The Aa3 senior-lien rating, which Moody’s assigned to next week’s deal, places all of GRU’s ratings on the same level.

The bonds are rated AA-minus by Fitch Ratings and S&P Global Ratings. All three agencies assign stable outlooks.

Moody’s said among its concerns are changes in the debt service coverage ratios “even though the transaction will provide GRU with ownership of the GREC facility, terminate a costly above-market PPA, lower costs for GRU's customers, and allow management to refocus on its core activities.”

The expected additional annual debt service burden associated with the transaction will result in total debt service coverage ratios – per the bond ordinance - of about 1.8 times versus 2.27 times in 2016, Moody’s said.

Moody's calculated the fixed-charge coverage ratios, after transfers to the city's general fund, to be about 1.4 times versus 1.7 times in 2016, and 1.5 times on a pro-forma basis after the GREC buyout, over the next few years.

“Coverage ratios at these levels position GRU more solidly in the Aa3 rating category,” said Moody’s analyst Kathrin Heitmann.

In fiscal 2016, GRU transferred $35 million to the city’s general fund. For 2015, the payment was $34.9 million, according to the 2016 comprehensive annual financial report. The general fund transfer can only be made if GRU does not need the money to pay operating and maintenance expenses, or debt service, the CAFR said.

The finance plan also includes the private placement of $150 million of synthetically fixed variable-rate debt, 2017B, and $115 million of variable-rate debt, 2017C.

Those deals will be placed with Bank of America Merrill Lynch and Wells Fargo, with closing at the same time as the fixed-rate bonds are issued.

Variable-to-fixed interest rate swaps on the notional amount of the 2017B bonds will be placed with two banks, but they had not been chosen as of Tuesday, Locke said.

PFM Financial Advisors LLC is the financial advisor for the deal. PFM Swap Advisors LLC is advising on the swaps. Holland & Knight LLP is bond counsel, Bryant Miller Olive PA is disclosure counsel, and Nixon Peabody LLP is counsel to the underwriters.

Gainesville is about 111 miles north of Orlando.

GRU has 95,000 electric customers in the city and some areas of unincorporated Alachua County. The utility system also provides water and wastewater, natural gas and telecommunications services.

The utility system also provides some services to the University of Florida, which is the state’s flagship institution. The Gainesville City Commission oversees the system.

The Gainesville Renewable Energy Center biomass facility is a 100-megawatt wood-burning plant built by Boston-based American Renewables.

The company built a similar plant in Nacogdoches County, Texas, where it was owned by Austin Energy, a municipal power provider. It is now owned by Southern Co., an investor-owned utility.

When the Gainesville project was contemplated, many people supported its environmental attributes and felt it added diversity to GRU’s generating assets. The idea was to develop a renewable energy supply with cleaner emissions that was “less subject to the price volatility of fossil fuels,” the Gainesville Sun newspaper said then.

In 2009, the city signed a 30-year contract with the private developers, who assumed the construction risk.

At the time, natural gas prices were also high, Locke said, but that has since changed with cheaper pricing spurred by fracking.

The GREC began commercial operation in December 2013. It is currently owned by Energy Management Inc., Starwood Global Energy, Bay Corp., and Fagen Inc.

In 2016, the GREC’s owners filed for arbitration with the American Arbitration Association in an attempt to settle disputes with GRU related to provisions in the power purchase agreement, according to the CAFR.

Determining what to do about the PPA over the past few years hasn’t been easy. Some people urged the city to walk away from the contract.

“We can’t get anybody to agree that we can walk away from this flat out,” said Locke, referring to legal opinions that were obtained. “So the next best alternative, given the very solid financing market now, was to do the financing on our own to get the most out of it.”

Once the sale is completed the arbitration case will end, he said, and GRU will retain about $7.4 million in disputed payments.

GRU does not plan to mothball the plant. Locke said the utility has “baked” about $5 million a year in its budget for operations and maintenance to keep the GREC in readiness mode.

“We think the best value today is to pay the $5 million, create flexibility in how we operate the plant, and then use the plant as a hedge or backstop to purchase cheap power on the market and get that value back,” he said.

The upcoming deal will be “absolutely transformational” to the utility and the Gainesville community, Bielarski told investors in the Internet roadshow presentation released last week.

“It will convert an above-market PPA with no real ability to own the asset into the purchase of a viable generating asset, which will modernize the generating fleet and terminate that above-market PPA,” Bielarski said. “It will also put to an end the major political distraction in running a utility, which is owned by the customers it serves.”

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