DALLAS — In an effort to acquire cleaner energy sources, San Antonio is using $521 million of taxable revenue bonds to buy an 800-megawatt natural gas power plant for city-owned CPS Energy.

The bonds went to market Monday through negotiation with JPMorgan as book-runner with co-managers Morgan Stanley, Goldman Sachs & Co. and a syndicate of eight other underwriters. Public Financial Management Inc. serves as co-financial advisor with Estrada Hinojosa & Co. Fulbright & Jaworski is co-bond counsel with Escamilla, Poneck & Cruz.

“Right now, orders are looking pretty good,” said Paula Gold-Williams, chief financial officer for CPS. “We were getting quite a bit of interest, so we decided to go to market today with retail orders followed by institutional.”

The bonds carry ratings of AA from Standard & Poor’s, Aa1 from Moody’s Investors Service and AA-plus from Fitch Ratings, with stable outlooks.

“We have also affirmed the Aa1 rating on the utility’s outstanding $3.78 billion senior-lien electric and gas revenue bonds and Aa2 rating on its outstanding $897.6 million of junior-lien bonds,” wrote Dan Aschenbach, senior vice president at Moody’s. “The difference in the long-term rating between the senior- and subordinate-lien bonds reflects the lien position and lack of a debt-service reserve fund for subordinate-lien debt.”

CPS will use proceeds from the bonds to buy the 800-megawatt Rio Nogales combined-cycle natural gas plant in nearby Seguin. The utility is buying the power plant from its current owner, Tenaska Capital Management, to replace the 871-megawatt J.T. Deely plant, an older coal-fired power plant in San Antonio.

The utility announced last June that it will close the Deely plant in 2018 to avoid a $565 million expense to install scrubbers under anticipated federal Environmental Protection Agency standards. CPS Energy expects to close on the purchase of the Rio Nogales plant in April and hire all 30 of its employees.

The deal makes CPS one of the first utilities in the nation to make a proactive transition from older coal-fired power to a much cleaner natural-gas-fired power.

“We have not purchased a plant like this before,” Gold-Williams said. “We typically have built our own fossil-fuel generation plant or we’ve done PPA [power purchase agreement] deals. Our goal is to diversify our portfolio with a plant that is nearby.”

President and chief executive officer Doyle Beneby said the deal supports the CPS strategy of diversification and risk management.

Purchasing the plant allows CPS Energy to avoid a minimum of $1 billion in costs that would have been required to keep Deely — the utility’s oldest coal plant — operational and compliant with expected environmental regulations, Beneby said.

“This agreement is a short- and long-term win for our ratepayers and the South Texas economy, as well as our community’s air quality,” he said. “We are avoiding the continuous costs of environmental retrofits to Deely, starting with a $565 million scrubber. This investment is in power that does not emit particulate matter or sulfur dioxide and supports abundant natural gas resources in Texas, rather than coal from Wyoming.”

Purchase of the Rio Nogales plant follows the recent completion of the 750-megawatt, coal-fired plant, J.K. Spruce, which provides low-cost base-load electricity. CPS also added four quick-start gas-fired peaking units to minimize particulate, sulfur and nitrogen oxide emissions.

In 2011, coal accounted for 40.6% of electricity generated for the utility, nuclear fuel 38.9%, natural gas 5.2% and purchased power 4.4%. Wind, solar, and landfill gas accounted for the other 10.9%.

The bond sale for Rio Nogales also comes as natural gas prices hover near historic lows, a contrast with the price of gasoline that is causing political ripples.

“Gas is a cleaner fuel and there is plenty of it in the ground in Texas,” said Dave McCurdy, president and CEO of the American Gas Association. “CPS Energy’s purchase of an existing plant is a smart move for its ratepayers and the timing could not be more right.”

In terms of supply, San Antonio is sitting on a treasure trove of newly discovered natural gas in the Eagle Ford play covering 24 counties of South Texas.

David Blackmon, Texas state director of America’s Natural Gas Alliance, an industry lobbying group, called the Eagle Ford discoveries as “game-changing” at a conference in San Antonio earlier this month. According to a study by the University of Texas at San Antonio, the Eagle Ford shale formation is expected to have an economic impact of $2.9 billion and create 12,600 jobs.

The new supplies of natural gas are expected to add pressure to falling prices, which, in turn, could reduce incentives for new production. Natural gas has fallen from about $13 per thousand cubic feet to this month’s decade-low price around $2.30.

“Eagle Ford’s advantage is that the play has a lower break-even point and produces low-cost natural gas, as well as higher priced condensate, oil and natural gas liquids,” the UTSA study said. “Therefore margins are more favorable than many other shale plays.”

Another potentially limiting factor relates to the availability of suitable water, the study found. The fracture stimulation process that enables the natural gas and oil to be extracted from shales with such low permeability requires a large amount of water. This comes as South Texas remains in a withering drought.

“Although the amount of water needed for shale development is a very small percentage of the region’s overall water use, producers are seeking ways and technologies to reduce their water consumption,” the UTSA study said.

San Antonio’s two public utilities, CPS and the San Antonio Water System, are acutely aware of the relationship of water and power on both, officials say.

“One of the biggest challenges facing San Antonio is allowing for continued economic growth while protecting our environment and natural resources for generations to come,” San Antonio Mayor Julián Castro said last year at the first joint meeting of CPS and SAWS boards of directors.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.