Two public power providers in North Carolina yesterday launched bond sales totaling about $570 million as they refinance debt to avoid the need to raise their already high electricity rates. They also will raise cash to terminate interest rate swaps, and one will issue Build America Bonds for new money.
The North Carolina Eastern Municipal Power Agency and North Carolina Municipal Power Agency No. 1 have weathered the recession well even as electricity usage has declined, analysts said. They were the state's fourth- and fifth-largest debt issuers in 2008, respectively, according to Thomson Reuters.
The transactions will eliminate their remaining swap exposure and also extend final maturities on outstanding debt. Both agencies have above-average electricity rates for North Carolina and the debt refinancing will put them in a better position to compete with the state's private energy suppliers, according to analysts.
North Carolina No. 1 - a joint powers agency that provides electricity to 19 municipalities in the western half of the state - yesterday issued $200 million of Series A refunding bonds and about $9 million of federally taxable Series B refunding bonds. For complete pricing information see the market column. The bonds will refund outstanding debt issued between 1997 and 1999 for its Catawba Nuclear Station.
It also expects to issue $69 million of Series D Build America Bonds today. The BABs will finance capital improvements at Catawba.
During a retail order period yesterday the tax-exempt Series A bonds due in 2030 were priced to yield 4.75%. The BABs were priced to yield 6.184% due in 2032.
The $8.3 million Series C will be issued on Sept. 30, according to Timothy Tunis, the chief financial officer of ElectriCities, which manages both utilities. The Series C bonds will pay the termination costs for interest rate swaps entered into in 2004.
The agency will have $1.7 billion of debt outstanding after this deal.
All four series for agency No. 1 were upgraded by Standard & Poor's to A from A-minus. By refunding the Catawba bonds, the utility has reduced its debt burden, "which will help reduce required rate increases," said analyst Judith Waite.
The bonds are rated A2 by Moody's Investors Service and A by Fitch Ratings.
The Eastern agency also received an upgrade from Standard & Poor's to A-minus from BBB-plus. Its bonds are rated Baa1 by Moody's and BBB-plus with a positive outlook by Fitch.
The utility is in talks with Assured Guaranty Corp. for bond insurance, Tunis said last week. An Assured official did not return calls seeking comment.
Eastern begins its $277.7 million deal with a retail period on Sept. 16. The utility, which operates three nuclear and two coal-fired plants in the northeastern part of the state, will refund $235.2 million of Series B bonds and $26.7 million of federally taxable Series C bonds issued in 1998 and 1999.
The agency expects to issue $15.8 million of Series D bonds for swap termination on Oct. 8, Tunis said.
The upgrades demonstrate solid footing for the utilities sector amid the longest recession in the post-WWII era.
"The utility sector seems to have fared well and has remained stable," said Fitch analyst Chris Jumper.
Analysts said power usage has declined in North Carolina as manufacturers cut back production. Total power generation in the state fell 14.4% through May 2009 compared with the year ago period, according to the most recent data available from the U.S. Department of Energy.
The recession has caused problems for the utilities' swap counterparties and liquidity providers as they have suffered credit rating downgrades. As a result, utilities have been closed out of the variable-rate market - the market of choice for many utilities.
Though the variable-rate market served utilities well for years, issuers are increasingly exiting the market by refunding with fixed-rate debt and terminating swaps.
"They're being very conservative now and prudent to exit those swaps," Jumper said.
Neither agency will have swaps remaining after these issues.
Utilities are frustrated by the current state of the variable-rate debt market, according to Jumper.
There are "ridiculously low rates" for variable-rate deals, he said, yet there is "a specter of uncertainty" surrounding the VR market that utilities do not want to be associated with. Jumper added that utility issuers got "whipsawed" in 2008 when the SIFMA swap index spiked above 7% last September.
By refunding debt, the power agencies are able to push back the bonds' final maturities - a move that likely eases pressure on them to raise electricity rates, analysts said.
Agency No. 1 will extend its final maturity to 2032 from 2020.
Eastern's Series B refunding bonds will mature between three and 17 years, Series C will mature between one and six years, and Series C will mature in two to 17 years.
Rates at the two utilities are above the regional wholesale market price. Though protected by its pricing power with municipalities, the agencies' higher rates are largely due to high fixed-debt costs, according to Moody's. Eastern's 293% ratio of debt outstanding to full valuation is well above the U.S. power agency median of 120%, analysts said.
Agency No. 1 charges retail rates that are 15% to 28% higher than rates charged by Charlotte-based Duke Energy Corp. Eastern charges between 19% and 32% more than its regional competitor, Raleigh-based Progress Energy Corp. The agencies have been able to charge higher rates because the municipalities they serve are locked into buying their electricity through 2032.
Eastern, which increased rates in February, is not expected to raise prices again "in the foreseeable future," Tunis said. Agency No. 1 increased rates on July 1 and evaluates its rates each spring, he said.
Agency No. 1's deal will be underwritten by six firms led by Morgan Stanley with Citi, Barclays Capital, Merrill Lynch & Co., First Southwest Co. and Wells Fargo Securities. Citi will be the lead underwriter on the Eastern deal, which will include the same team except First Southwest.
Hawkins Delafield & Wood LLP will serve as bond counsel and Womble Carlyle Sandridge & Rice PLLC will represent the underwriters.