DALLAS — San Antonio aims to get a jump on a busy week in the municipal bond market with a $650 million refunding for the city’s CPS Energy Utility.
The bonds are scheduled to price Tuesday through negotiation with Bank of America Merrill Lynch and Barclays as co-senior managers. Eight other firms are included in the syndicate.
The calendar shows that issuers plan $9.19 billion of muni debt this week, compared with $6.83 billion last week. With several large deals in the market, the total could rise, according to industry experts.
“My guys are telling me this looks like the biggest week of the year,” said Noe Hinojosa Jr., chief executive of Estrada Hinojosa & Co., co-financial advisor with PFM Asset Management. “People are trying to get ahead of the holiday.”
The deal’s value is listed on the preliminary official statement as $650 million, but it could range from $450 million to $900 million, according to Paula Gold-Williams, chief financial officer at CPS Energy.
“We have authorization from our board to do as much as $900 million,” Gold-Williams said. “It looks like we’ll probably do $450 million to $650 million.”
The pricing starts with a retail order period that could push institutional pricing into Wednesday, Gold-Williams said. Though Texas does not have an income tax, the strength of San Antonio’s tax-exempt credit typically proves attractive to retail investors there and elsewhere.
The current offering will refund several maturities of Series 2005 and 2006 bonds. At the same time, the utility will cash defease 2013 and 2014 maturities of new Series 2006A bonds. Net present-value savings is estimated to be 7.85% of the refunded bond proceeds, according to analysts.
“We’ve been looking at this deal for two or three months,” Gold-Williams said. “We’ve seen that we can get above 5%, and in some cases more than 7%.”
Even though the city carries high ratings in its own right, the bonds will be insured by Assured Guaranty Municipal Corp., which is rated AA-minus by Standard & Poor’s and Aa3 by Moody’s Investors Service. On March 20, Moody’s placed AGM on review for possible downgrade.
The upcoming bonds, which will be issued as senior-lien debt, carry higher ratings of AA from Standard & Poor’s, Aa1 from Moody’s and AA-plus from Fitch Ratings, all with stable outlooks. The city’s junior-lien revenue bonds are rated a notch lower.
San Antonio, which last week won voter approval of a record $596 million of general obligation bonds, carries triple-A ratings on its GO debt.
The utility bonds are secured by the net revenue pledge of CPS electric and natural gas systems. An additional bonds test provides coverage of 1.5 times maximum debt service and 1.0 times on all junior-lien debt. While senior-lien bonds carry a debt-service reserve, junior-lien ones do not.
CPS represents a virtual electric and gas monopoly in an area that includes all of Bexar County and parts of seven adjacent counties. The San Antonio metropolitan statistical area had a 2.1 million population in 2010, more than double what it was 1980. The service area is not open to retail competition.
CPS is separately managed from the city but the City Council has final rate-making authority.
CPS electricity rates are consistently well below U.S. and regional averages, according to Moody’s. The average residential monthly revenue per kilowatt-hour in fiscal year 2011 was 9.1 cents. Surveys show San Antonio’s combined electricity and gas bills among the lowest of the major cities in Texas and in the United States. The next CPS electric rate increase was anticipated in both 2013 and 2014 of 3% to 4%. The 2013 increase was delayed because of stronger 2012 financial results than expected.
In nearby Austin, which partners with San Antonio in the South Texas Project nuclear power plant, the city-owned utility has not raised electric rates since 1994, which the city’s financial advisor warns could lead to a credit downgrade. Austin is considering rate increases and will make a decision on how high to go in June.
In analyzing San Antonio’s rates, Moody’s Dan Aschenbach noted that high levels of poverty in the region are a constraint.
Also, CPS, like Austin Energy, makes substantial revenue transfers to the city’s general fund. In fiscal 2012, which ended Jan. 31, transfers amounted to $286.9 million and represented almost 14% of utility gross revenues. That is well above the U.S. public power utility general fund transfer median of 7%, Aschenbach pointed out.
About one-third of CPS’ electrical load in 2011 was supplied by the existing two-unit STP nuclear facility. A plan to add two STP reactors from Toshiba, the company that built the failed reactors at Fukushima Daiichi power plant in Japan, was placed on hold after the 2011 nuclear meltdown in Japan. The U.S. Nuclear Regulatory Commission published its near-term task force recommendations in response to the Fukushima accident.
“Moody’s believes the report is a credit positive for utilities because it is expected to establish more certainty regarding reactor safety at existing nuclear units,” Aschenbach wrote.
The balance of electrical demand of CPS is supplied by 15 gas-fired plants and two coal plants. San Antonio issued $550 million of debt earlier this year to buy the 800-megawatt Rio Nogales plant to diversify fuel mix to gas.
Amid long-term growth, sales of CPS energy and customer revenues sagged in 2009 as the effects of the 2008 recession made their major impact. Since then, the utility’s sales have grown sharply, indicating a strong economic recovery. The San Antonio area has been a major beneficiary of the Eagle Ford Shale project of South Texas, which is considered one of the largest U.S. energy plays in a generation. San Antonio also benefits from a major military presence.
Standard & Poor’s analyst Judith Waite said that the indicators offer strong support for the city’s high rating.
“In our opinion, those strengths include a strong, growing economy that the utility serves, very competitive electricity rates, diverse-fuel generating capacity, strong financial metrics and good management,” Waite wrote.