DALLAS - With energy prices soaring to record levels, San Antonio will market $290 million of revenue bonds for a coal-fired plant and other projects that will help diversify power sources for the city's CPS Energy utility.

The bonds, expected to price June 5, are part of a five-year, $5.2 billion, capital improvement plan that is updated annually. CPS plans to issue $240 million in September to fund the balance of construction through April 2009, and $450 million in 2010 for various projects. The utility also expects to offer a natural gas prepay bond issue sometime this year.

Lehman Brothers is senior manager on the upcoming deal, with Morgan Stanley, Cabrera Capital Markets, Banc of America Securities LLC, Coastal Securities, and RBC Capital Markets as co-managers. Public Financial Management Inc. and Estrada Hinojosa & Co. are co-financial managers.

The upcoming bonds carry ratings of AA from Standard & Poor's, Aa1 from Moody's Investors Service, and AA-plus from Fitch Ratings. The utility carries the same ratings on $3 billion of outstanding senior lien and $402 million of subordinate lien bonds. All three agencies praised CPS' financial management, diversity of power sources and rapidly growing service area.

In February, CPS named Paula Gold-Williams senior vice president and chief financial officer, replacing Rick Williamson, who retired after 37 years with the utility. Gold-Williams joined CPS in 2004 as controller and rose to chief administrative officer.

Steve Bartley, former executive vice president of strategy and external relations, was also promoted to deputy general manager.

CPS is one of two city-owned utilities that rank among the largest in the nation. The San Antonio Water System provides water and sewer service for rapidly growing Bexar County, which includes San Antonio, and surrounding suburbs.

CPS provides electric service to 674,000 customers in virtually all of Bexar County and portions of seven adjacent counties. The utility also provides retail gas service to 317,000 customers in the metro area.

The primary sources of power are three coal plants and the South Texas Project Nuclear Plant, in which CPS holds a 40% stake with partners Austin Energy and investor-owned NRG Energy. The coal and nuclear plants provide 76% of the utility's power, with the rest coming from gas-fired plants and wind energy.

CPS's new debt will fund construction of the 750-megawatt J.K. Spruce II coal-fired power plant that broke ground in 2006 with completion expected in 2010. So far, the project is on time and under budget, officials said.

CPS also has announced a major new electricity efficiency program to mitigate the need to build further new generation capacity. Over the next few years over $100 million is expected to be spent on various customer demand reduction programs.

Just as with investor-owned utilities, the public power providers have had to deal with volatile fuel prices, including escalating coal prices due to soaring transportation costs. Coal, the cheapest fuel, is shipped by diesel-powered locomotives. Coal is also considered the most environmentally harmful fuel due to carbon emissions that contribute to global warming.

"Coal, which has been and will remain America's fuel mainstay, has historically been stable in price and supply," Standard & Poor's noted in an outlook on the public power sector Jan. 29. "But prices have been more volatile recently because of increasing demand as several large base load plants come online in the next five years, and as cleaner coal technologies spur its use as a fuel in areas that previously would not have built coal plants."

The rising costs have prompted public utilities to "seek relief from federal regulators, and, in some cases, such as with Texas Municipal Power Agency, planning additional rail access to alternative carriers," analysts noted. "Other utilities are exploring alternative modes of transportation, such as barge or truck, to achieve the same result."

Despite the hardships, public utilities retain advantages over investor-owned utilities in that they are more risk-averse and less profit-oriented, Standard & Poor's said. Some, such as CPS Energy, are also allowed to pass on rising fuel costs to the customers, they added.

 

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