DALLAS — San Antonio is preparing to issue up to $400 million of junior-lien revenue bonds for its electric utility CPS Energy.

CPS is also adding $150 million to its $450 million commercial paper program through State Street Bank and Trust and Bank of Tokyo-Mitsubishi.

CPS, one of the nation's largest municipal utilities, has a nearly $2.7 billion capital construction plan over the next five years.

The new bonds are expected to price June 26 through negotiation with a syndicate led by Citi and RBC Capital Markets. Public Financial Management Inc. and Estrada Hinojosa & Co. serve as financial advisors, with McCall, Parkhurst & Horton and Escamilla, Poneck & Cruz as co-bond counsel.

Maturities on the junior-lien bonds extend to 35 years. Outstanding junior lien debt is $894 million and subordinate to $4.05 billion in senior lien obligations. The junior-lien bonds do not have a debt service reserve fund.

With ratings near the top of the scale, the bonds are expected to find a ready market among risk-averse investors, officials indicated.

"These bonds are going to be long-dated, so with that, we're expecting very good interest from institutional investors," said Linda Dzierzanowski, senior director of finance for CPS. "With interest rates near historic lows, we still think market conditions are still very favorable."

Yields on the Municipal Market Data scale ended as much as six basis points higher last week amid more than $1 billion in outflows from municipal bond funds. The 10-year yield rose two basis points through Thursday to 2.11% and the 30-year yield increased four basis points to 3.28%. The two-year rose one basis point for the week to 0.30%.

Standard & Poor's rated the bonds AA-minus with a stable outlook and affirmed the senior-lien ratings at AA, both with stable outlooks.

"The stable outlook reflects our expectation that city council will continue to support management's financial policies, which include maintained strong financial metrics," said Standard & Poor's credit analyst Judith Waite. "We expect that management's plan to implement gradual rate increases will not impair CPS Energy's competitive position since other power suppliers will likely raise rates."

Fitch Ratings rated the new bonds AA-plus with a stable outlook.

"Financial margins have experienced some pressure in recent years as a result of increased borrowing and delayed rate increases," wrote Fitch analyst Kathy Masterson. "However, financial margins remain healthy at over 2.1x debt service coverage, or 1.5x all-in coverage including all obligations and the large 14% general fund transfer."

Moody's Investors Service rated the junior-lien bonds Aa2, while maintaining the Aa1 senior-lien rating.

The commercial paper notes earned top ratings from the analysts.

"The rating reflects both the credit strength of San Antonio CPS including its strong financial position and sound internal liquidity and the liquidity support provided through the revolving credit agreements with three highly rated banks," wrote Moody's analyst Dan Aschenbach.

Dzierzanowski said CPS is expanding its commercial paper program to improve its financial profile.

The San Antonio City Council approved raising the short-term lending authority to $600 million, prompting CPS to seek liquidity providers to support the notes. State Street and Bank of Tokyo each took on an additional $75 million to their $150 million, while JP Morgan continues its $150 million commitment.

"It seems liquidity has freed up in the last six months," Dzierzanowski said, citing Basel III international banking agreements to strengthen bank capital requirements by increasing liquidity and leverage.

With San Antonio's economy on increasingly solid footing, CPS was able to postpone rate increases that had been expected in 2012 through increased efficiency, Dzierzanowski said. The utility expects to raise rates in 2014.

Analysts consider CPS' electric rates low for the region.

"In practice, CPS is usually in a long resource position, resulting in the need for some amount of wholesale sales to balance assets with demand," Fitch's Masterson noted.

CPS is in the process of expanding its renewable energy portfolio while replacing older coal-fired plants with lower emission gas-fired generation and energy efficiency programs.

CPS Energy last raised $521 million through revenue bonds in March 2012 to buy an investor-owned natural gas-powered plant in Rio Nogales. It was the first time that CPS bought a power plant instead of building one.

At the same time, CPS announced that it would close its Deely coal plant in 2018 to avoid a $565 million expense to install scrubbers required under anticipated federal Environmental Protection Agency standards.

CPS' last new coal plant, the 750-megawatt J.K. Spruce, went online in 2010.

Some of the proceeds from the upcoming bonds will be used to update the South Texas Project nuclear power plant near the Gulf of Mexico in Matagorda County. CPS holds a 40% stake in the project and has backed out of negotiations on building two additional reactors at the site.

The South Texas Project was a candidate for fast-tracking of new nuclear power generation capacity before the Fukushima Daichi nuclear power plant catastrophe in Japan in 2011 threw the brakes on nuclear power planning.

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