DALLAS — Amid slowing growth in its service area, Arizona’s Salt River Agricultural Improvement and Power District will issue its first Build America Bonds next week as part of a $750 million deal.
The state agency, which has played a historic role in the development of Arizona, generates, transmits, and markets energy from its plants and hydroelectric dams. It is part of the umbrella organization known as the Salt River Project that includes a private corporation called Salt River Valley Water Users’ Association.
JPMorgan and Morgan Stanley are co-senior underwriters on the negotiated deal. The co-managers are Bank of America Merrill Lynch, Citi, Goldman Sachs and Ramirez & Co.
Aidan McSheffrey, manager of financial services for the SRP, said the underwriting team was chosen based in part on its experience with taxable BABs, which receive a federal interest subsidy. Some BAB issuers have found themselves facing increased Internal Revenue Service scrutiny such as audits or having their direct subsidies withheld in tax disputes.
“We’re aware of the issues that are out there and we think we’ll be able to address those if they come up,” McSheffrey said.
With ratings of AA from Standard & Poor’s and Aa1 from Moody’s Investors Service, Salt River’s $500 million of BABs will appeal to a broader group of investors than just those shopping for tax-exempt debt.
Since the advent of BABs last year, the muni investment world has included those who once preferred corporate debt.
“We think we’re coming to the market at a good time,” McSheffrey said.
Underwriters will take retail orders on Sept. 29 and institutional the next day, he said.
The utility plans to use $500 million of the Series 2010A BAB proceeds to fund capital projects and $250 million of 2010B proceeds to refund existing debt. The district will likely refund bonds issued between 1997 and 2001, according to McSheffrey.
The district sets a savings threshold of 3% on current refundings and 7% on advance refundings.
“We’ll probably do a mixture of both,” he said.
Bonds with 30-year maturities and double-A ratings yield 3.94% on the Municipal Market Data curve.
Salt River district bonds issued in 2009 with 30-year maturities and 5% coupons have recently yielded 3.95%. The original yield of 5.08% was 34 basis points above MMD.
On the most recent trade Sept. 16, the 30-year bonds yielded 3.84%.
While the state’s AA-minus remains on Standard & Poor’s watch list with a negative outlook, the Salt River power district has remained steady.
“The stable outlook reflects our expectations that management is committed to developing strategies that preserve financial margins in the face of the challenges substantial capital spending and recessionary pressures present,” Standard & Poor’s analyst David Bodek wrote.
Arizona was one of the nation’s fastest-growing states until 2009, but has seen its growth rate plummet due to the collapsing housing market and the national recession. For years, the state’s economy fed on its own growth, and home construction was ranked as one of the top industries.
“We’re experiencing the challenges of the economy,” McSheffrey said.
Because of an uncertain economic outlook, the utility has deferred some generation projects and has shortened its financial forecast’s horizon to two years from six.
Nevertheless, it expects to add more than $1.2 billion of debt, including capital leases, through fiscal 2012 as it addresses emissions and pursues system-renewal projects, Standard & Poor’s noted.
SRP officials project 2012 retail electric sales levels will be about 5% less than those in the 2012 forecast it prepared in 2009, according to analysts. Wholesale sales projections for 2012 are now nearly 20% lower than those projected in 2009.
Capital needs tied to customer growth also contributed to a substantial increase in long-term debt from fiscal year-end 2005 to 2010 — more than $4 billion — as the utility added generation resources and increased its distribution capabilities. SRP issued more than $800 million to build the coal-fired Springerville 4’s 400-megawatt plant that began service in December 2009.
The downturn in Arizona’s economy has left the state looking for ways to cut spending or raise revenues to cover a declining budget.
State officials estimate the budget shortfall for the coming fiscal year at $1.7 billion, even after closing a $3.3 billion budget gap with cuts and a new, three-year increase in the sales tax of one cent per dollar.
In November, voters will decide whether the state can raid funds dedicated to special causes through previous initiatives.
Gov. Jan Brewer, who recently won her first primary as governor and is ahead in the polls for the November general election, has become a lightning rod for critics, warning about the state’s rampant crime and blaming illegal immigrants.
Arizona saw boycotts and reports of Hispanics leaving the state after Brewer signed the controversial SB 1070 into law. The new law required local officers to enforce federal immigration law and to question anyone they stopped about their citizenship status if practical. Some of the requirements of the law were halted by a federal injunction before they could go into effect.
Arizona’s electricity generators were drawn into the SB 1070 controversy after the Los Angeles City Council voted to boycott the state last May.
Arizona Corporation Commission chairman Gary Pierce, whose board regulates water and electricity in the state, wrote back that he would be glad to renegotiate the flow of Arizona’s electricity to Los Angeles.
“If, however, you find that the City Council lacks the strength of its convictions to turn off the lights in Los Angeles and boycott Arizona power, please reconsider the wisdom of attempting to harm Arizona’s economy,” Pierce wrote.
One indication that the boycott might have had an impact came in August unemployment data showing the loss of 4,000 jobs in the hospitality industry. That bucked the normal trend of gains in hospitality employment in August. Across all industries, unemployment grew to 9.7%, the highest level in the state in 30 years.
The latest data from the U.S. Census Bureau indicated that Arizona is now the second poorest state in the nation behind Mississippi, with more than one out of five Arizonans living in poverty.