DALLAS - As part of what San Antonio Mayor Phil Hardberger calls "Mission Verde," city-owned CPS Energy has already spent $369 million on sustainability-related projects, with plans to invest $5.3 billion more in the next 12 years.

e_SDLqWe must begin building a 21st Century energy infrastructure with distributed energy," Hardberger said in his state of the city address last month. "This world will replace our current infrastructure, which is based on large, mostly fossil-fueled generating plants that transmit energy to consumers on a one-way grid."

The so-called Smart Grid starts this year with installation of advanced electric and gas meters that will provide a two-way communication between the company and the customer. The meters will allow new rate structures such as time-of-use that will help customers control their energy use and make it easier for CPS to manage demand, company executives said.

"CPS Energy is transforming itself from a company focused on providing low-cost power to a company providing competitively priced power from a variety of sustainable sources," deputy general manager Steve Bartley said in a recent presentation to the CPS Energy Board of Trustees.

In the meantime, the electric and gas utility plans to raise $450 million from system revenue refunding bonds to take out commercial paper for major projects.

The bonds have ratings of AA from Standard & Poor's and Fitch Ratings, strong enough to whet investor appetite without insurance, based on recent market experience, bond traders say. Moody's Investors Service has not yet changed or affirmed last year's Aa1 rating.

CPS plans a retail pricing on Feb. 25, with institutional orders the next day.

"This is the first time we've had a full day of retail orders," said Paula Gold-Williams, chief financial officer of CPS. "We're hoping for good demand, but the markets are unusual. Our financial adviser tells us it's a pretty good time to go to market."

Public Financial Management Co. shares advisory duties with Estrada Hinojosa & Co.

The senior manager on the underwriting team is Merrill Lynch & Co., with JPMorgan, Citi, Coastal Securities Inc., Loop Capital Markets, Siebert Branford & Shank Co., and Sterne Agee as co-managers.

Bond counsel duties are shared by Fulbright & Jaworski and West & Associates.

The CPS deal will be the largest in Texas so far this year. Last year, electric power deals fell 54% in the state to $678 million, and utilities dropped 17% to $5.6 billion.

The industry has been whipsawed by soaring fuel prices in the first half of 2008 and the collapse of energy prices in the second half. At the height of the run-up, Standard & Poor's issued a sector report favoring those utilities that had diversified extensively into "green" - verde, in Spanish - energy production.

"Green power is gaining ground with increased investment from utilities and rising demand from the public for the so-called 'free fuel' of renewable energy," analysts wrote. "On the flip side, consumers have the option to pay more to be served with green power in certain markets, and demand for this sort of optional energy could decline as rising gasoline and food prices take a bigger chunk from consumers' monthly budgets."

As part of its "Save For Tomorrow Energy Plan," San Antonio aims to conserve 771 megawatts of energy, the equivalent of a large electrical generator, by 2020.

As it goes about the business of strengthening its environmental reputation, CPS is keeping a sharp eye on finances to maintain its coveted double-A rating, analysts say.

"CPS Energy's major challenge is providing adequate generating capacity to meet the rapidly increasing energy demand of San Antonians," Standard & Poor's said. "Its capital spending program is estimated to be about $2.9 billion over the next five years."

Currently, the utility carries $3.2 billion of senior-lien debt, with about $400 million of junior-lien bonds. The junior liens are rated AA-minus by Fitch and Standard & Poor's, with Aa2 ratings from Moody's.

The largest project on CPS' radar screen is the plan to build two new reactors at the nuclear power plant known as the South Texas Project in Matagorda County on the Gulf Coast. CPS is a 40% owner of the two existing reactors, with Austin Energy, that city's public utility, owning 16%. The investor-owned NRG Energy Inc. owns 44% of the plant.

Last week the Austin City Council opted out of the new reactor, leaving CPS as a 50% stakeholder in the proposed expansion. Consultant WorleyParsons said that Austin might have had to pay $2 billion or more over the next seven years to participate in the project. Taking on such debt could result in a credit downgrade and higher borrowing costs, Parsons said.

As Austin rejected participation, NRG signed agreements with a consortium headed by Toshiba America Nuclear Energy Inc. to build the advanced boiling-water reactor. Under the agreement, Toshiba's partnership known as Nuclear Innovation North America will enter into a $500 million credit facility for material and equipment to start construction.

At present, CPS carries about $1.4 billion of debt for the existing South Texas Project. The fact that coal and nuclear power provide about 75% of CPS's supply is one reason the utility's rates are lower than others in the state, according to Standard & Poor's.

"The coal units' availability has been at or close to 100% in the past five years," analysts noted. "Availability of the nuclear units has been slightly lower, about 90%, due in part to the scheduled refueling that occurs every 18 months. However, two outages illustrate the less predictable availability of nuclear plants."

Actual issuance of debt for the new reactors is some years off, as the application goes through the approval process. However, the South Texas Project application qualified for federal protection of any costs incurred through regulatory delay under a program designed to encourage development of nuclear power.

Analysts factored the future debt in their stable outlooks for the utility.

"Although we believe increased debt financing of new capacity will likely weaken financial metrics, if management can gradually increase rates in the next several years, they will maintain a reasonably strong level of protection for debt holders," Standard & Poor's analysts wrote.

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