Salt River Project deal arrives with boost from upgrade

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Arizona’s Salt River Project expects strong demand for $436 million of public power revenue bonds that represent the utility’s first new-money issue in two years.

“We feel pretty confident about the timing of this deal,” said SRP Treasurer Brian Koch. “We see it as being a strong market.”

Pricing through book runner JPMorgan, led by director Isaac Sine, is expected Wednesday with closing planned for Nov. 6. Michael Mace, managing director at PFM, is financial advisor.

The bonds come to market buoyed by Thursday's S&P Global Ratings upgrade to AA-plus from AA.

"The upgrade reflects a very strong enterprise profile and an extremely strong financial profile," said S&P Global Ratings credit analyst David Bodek. "Fixed-charge coverage metrics have consistently been extremely strong and that we expect to remain so."

Moody's rates the bonds an equivalent Aa1, citing the utility's "self-regulated rate setting authority, robust financial metrics, and strong management of the moderate electricity demand growth in a service area that includes Phoenix and more than half of the surrounding metropolitan area."

"SRP's strong financial position allows it to fund ongoing capital improvement with funds from operations, moderating its debt burden," Moody's lead analyst Gayle Podurgiel wrote.

The sale will be the first long-term debt issuance by SRP since October 2017, when it sold about $735 million of tax-exempt, fixed-rate revenue bonds to refund outstanding 2009 revenue bonds and to finance capital improvements of the district’s electric system. SRP has about $3.79 billion of outstanding parity debt, per Moody's.

SRP is a community-based, not-for-profit public power utility and the largest provider of electricity in greater Phoenix, serving more than 1 million customers. SRP is also the metropolitan area’s largest supplier of water, delivering about 800,000 acre-feet annually to municipal, urban and agricultural water users.

Chief Financial Executive Aidan McSheffrey said proceeds of the tax-exempt, fixed-rate electric system revenue bonds will be used to finance capital improvements to the SRP electric system.

Co-managers on the deal are Goldman Sachs & Co., Bank of America Merrill Lynch, Citigroup and Morgan Stanley. Public Financial Management Inc. is financial adviser. Chiesa Shahinian & Giantomasi is bond counsel.

SRP's pledged revenues have averaged 250% of debt service over the last five years, with most surplus financial margins used to fund SRPs ongoing capital improvement plan, according to Moody's.

SRP expects to use internally generated cash to fund 89% of the $4.15 billion of planned capital improvements between 2020 and 2025. The remaining 11% will be debt-financed, officials said.

“This has a smoothing effect on SRP's debt ratio, which has been stable since 2014 at around 50% unadjusted for pensions,” Podurgiel wrote. “SRP also maintains strong liquidity with strong fund balance policies and an authorized commercial paper program. Over the last five years SRP has maintained days liquidity on hand in excess of 250 days, a trend we expect to continue.”

SRP is seeking to lower the carbon content of its fuel supply in a way that maintains its competitive prices while reliably meeting its peak demand. Its sustainability targets include achieving a 62% reduction in carbon emissions from generation by 2035 as well as a goal to conserve 5 billion gallons of water by 2035.

“A related rating consideration is SRP's reliance on coal-fired generation, which makes up 40% of its fuel mix. SRP has implemented a plan to accelerate depreciation on the coal-fired generation facility assets and transition to sustainable and renewable energy sources,” Podurgiel wrote. “A decision to end participation in the coal-fired Navajo Generating Station by December 2019 and replace the energy with several new natural gas fired combined cycle units exemplifies this strategy.”

The NGS closure is the largest and most complex power plant decommissioning ever undertaken by SRP. A team of SRP employees and representatives of the Navajo Nation have formed a joint consultation group to oversee decommissioning.

Under SRP supervision, contractors will be responsible for the demolition of the generating units, removal of the catenary electrical system that powered coal-carrying trains, and addressing site cleanup and restoration. Though SRP has five years to decommission NGS, it is expected to take three years to complete all major activities.

On June 3, the SRP board of directors approved changes to the SRP 2035 Sustainability Goals to include more aggressive measures to reduce carbon emissions, strengthen the grid to allow more customer choice and improve water resiliency.

SRP stakeholders consulted in the process of developing the plan included Intel, Apple, Southwest Energy Efficiency Project, Arizona State University, the Environmental Defense Fund, The Nature Conservancy and the cities of Phoenix and Mesa.

The 2035 goals, which were originally approved in late 2017, targeted carbon emissions reductions, water resiliency, grid enablement, supply chain and waste and community engagement.

“The energy grid is complex, and it takes a lot to transition to cleaner energy resources while still maintaining a reliable and affordable energy supply,” said Gary Dirks, director of the Julie Ann Wrigley Global Institute of Sustainability at Arizona State University. “The SRP goals address the need to balance the reduction of carbon emissions with those key customer values.”

SRP has 1.06 million retail customers and is among the largest public power utilities in the U.S. Residential customers account for 48% of the district's revenues.

“The breadth of the customer base and the lack of concentration among the potentially volatile commercial and industrial customer classes contribute to expected revenue stability,” S&P’s Bodek said. “Commercial customers contribute 32% of revenues and industrial customers, a modest 8%.”

After a severe downturn in the housing market after the 2008 global financial crisis, Phoenix and its suburbs in Maricopa and Pinal counties have returned to a pattern of steady growth. The Phoenix-Mesa-Scottsdale metropolitan area was the second highest among metropolitan areas in numeric growth over the past year, with 96,268 people moving to the area. The most recent population estimate of 4.86 million makes the metro area one of the nation’s most populous. In raw numbers the metro area has ranked first in growth for three years.

The largest concentration of customers is in Maricopa County, with household effective buying income levels that are slightly above the U.S. median.

“The absence of active retail competition within the service territory mitigates exposure to customers' legal right to choose alternative energy providers,” Bodek said.

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Primary bond market Utilities Revenue bonds Salt River Project Agricultural Improvement & Power District Arizona