Lansing utility joins taxable refunding crowd

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Michigan's Lansing Board of Water and Light is pricing a taxable bond refunding on Thursday.

The Lansing-based utility will sell $252 million of taxable debt to refund bonds it issued in 2011 for an estimated $40 million of net present value savings, according to LBWL chief financial officer Heather Shawa.

“The savings associated with this refunding is expected to translate to an average of over $2 million in annual cash flow savings,” Shawa said. “This savings will be used to further support our strategic plan, which includes a transition to additional renewable energy.”

The bonds are secured by a first lien on the net utility revenues.

JP Morgan is the senior manager on the upcoming bond transaction. BofA Securities, Citi, Goldman Sachs and Piper Jaffray are co-managers. PFM Financial Advisors LLC is advising the utility.

Ahead of the deal, Moody’s Investors Service affirmed its Aa3 rating on the utility. S&P Global Ratings assigns its AA-minus rating. Both assign a stable outlook.

Moody’s said the rating reflects the utility’s strong financial performance which it said is of particular importance as LBWL transitions to primarily natural gas and renewable generation from its current mostly coal-fired generation fleet.

“LBWL has approved the required rate increases on its services through FY 2020 and we expect LBWL to follow through with any needed future rate increases to ensure strong financial metrics are maintained as they have historically,” Moody’s said.

S&P said the stable outlook reflects its view of the system’s “extremely strong financial risk profile” as it implements its renewable energy strategy.

“However, any pressures to its financial profile, primarily related to unexpected additional debt requirements or materially lower-than-projected wholesale electric revenues, could challenge the utility's ability to continue generating robust margins,” S&P stated.

In June LBWL priced $320 million of tax-exempt, utility revenue bonds to fund the construction of a $500 million natural gas-fired combined cycle generating facility known as Delta Energy Park. The transaction more than doubled the utility’s debt outstanding. The deal drew notice for using the Bloomberg's BVAL AAA curve instead of the widely used MMD benchmark.

Shawa said LBWL plans to issue an additional $77 million of variable-rate debt next year to provide the remaining funds needed for construction of the new natural gas combined cycle electric generation plant and other system improvements.

The construction of the new plant offsets LBWLs planned shutdown of two of the utility’s coal-fired plants — Erickson by 2025 and Belle River by 2030 — to reduce its coal exposure to zero.

LBWL has said that the new plant will be more economical than its coal-fired generation when dispatching into the Midcontinent Independent System Operator (MISO) market and could increase wholesale revenue beginning in fiscal 2021.

The utility's investment in natural gas-fired generation is projected to increase natural gas to 40% of total capacity by 2021 and potentially 59% by 2030.

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Refunding bonds Utilities Taxable bonds Primary bond market Michigan