DALLAS – San Antonio’s CPS Energy, one of the nation’s largest public power utilities, plans to price about $435 million of bonds Nov. 3.
The deal is the only new-money issue this year for CPS, which refunded about $320.5 million of 2007 bonds in July, for net present value savings of nearly $37 million. CPS has about $5.6 billion of debt outstanding, according to Moody’s Investors Service.
The deal will be one of CPS’ largest since 2012, said Linda Bennett, senior director of finance.
“In 2012, we issued $521 million of taxable debt, but those bond proceeds were used primarily to finance the acquisition of a gas-fired power plant, as well as some of our electric distribution projects,” she said.
With double-A ratings, the bonds are expected to attract institutional investors, with no retail order period planned, Bennett said.
“Every indication we can see is that the supply looks good that week and investor demand appears strong,” she said.
About $200 million of the junior-lien variable-rate bonds will be issued in two equal series as soft puts to be remarketed in five years.
“We expect a strong response from the market, particularly because we have variable rate debt,” Bennett said. “We wanted to do a mixture of long-term fixed-rate and short-term variable-rate.”
The level of variable-rate debt in the utility’s debt portfolio will rise from about 14% currently to about 17% after this sale, Bennett said.
With the Federal Reserve indicating that it plans to raise the base interest rate by the end of the year, rates across all maturities are expected to increase. That would benefit holders of variable-rate bonds, as they would get the benefit of rising interest rates.
Jeffrey Timlin, principal at Sage Advisory Services in Austin, said the structure of the variable-rate bonds could appeal to mutual funds looking to add shorter maturities to their portfolios.
“For those people who still feel that inflation could be factor, then obviously, that type of structure would benefit from a rising rate environment,” Timlin said. “Because spreads are so low between a variable rate and a fixed rate, they are looking for that upside.”
The two variable-rate tranches have separate underwriters. The $100 million Series C is pricing through Citigroup Global Markets, led by managing director Steven Dworkin. The same sized Series D is managed solely by RBC Capital Markets, with managing director Paul Neuhedel in charge.
The $235 million of senior-lien fixed-rate bonds maturing through 2039 are pricing through senior manager Wells Fargo Securities, led by managing director Rick Molke.
CPS uses three financial advisors: Daniel Hartman, managing director and co-head of the utilities group for Public Financial Management; Don Gonzales, managing director for Estrada Hinojosa & Co.; and Raul Villasenor, senior vice president at First Southwest Co.
The senior-lien bonds are rated AA by Standard & Poor’s, Aa1 by Moody’s Investors Service and AA-plus by Fitch Ratings. Fitch also rates the junior-lien bonds AA-plus; Moody's and S&P rate them a notch lower at Aa2 and AA-minus respectively. Outlooks are stable.
The rating recognizes the ownership of CPS by Aaa-rated San Antonio, the nation's 7th largest city, Moody’s said.
“Also important to the Aa1 rating is CPS's strong liquidity profile with net unrestricted working capital as a percentage of operating expenses far exceeding the Moody's median for other Aa city-owned utilities,” Moody’s analyst Dan Aschenbach wrote.
The CPS five-year capital improvement plan through 2020 is budgeted at about $2.7 billion. About 59% of the capital plan is funded by new debt averaging about $244.6 million of bonds per year.
The bonds come to market as CPS is dealing with chief executive Doyle Beneby’s plan to depart for Chicago-based New Generation Power International, a renewable-based power generation company.
After the CPS board urged Beneby to reconsider the move, he agreed to push back his departure date to Oct. 31. CPS named chief financial officer Paula Gold-Williams to become acting chief executive as the utility negotiated with Beneby while planning a search for his successor.
Beneby’s decision could become a credit factor, as Moody’s cited management performance as one of the reasons CPS’ senior-lien rating is one notch higher than other rating criteria would suggest.
New Generation placed Beneby’s photo prominently on its Web site after the Sept. 16 announcement of his hiring, with chairman Chirinjeev Kathuria calling him “well-respected within the energy industry, especially for his dedication to spreading the benefits of renewable energy to serve electricity consumers.”
Before moving to CPS in 2010, Beneby was a top executive at Florida Power & Light Co., Consumers Energy Co., PECO Energy, ComEd and Exelon Power, where he served as president. He has been an independent director of Capital Power Corp. since April 2012.
Under Beneby, CPS solidified its ranking among the top solar power utilities in the nation in a campaign called the “New Energy Economy.”
Among the top providers of power is OCI Solar Power, which is expanding generation near the Alamo 6 solar plant in Pecos County. CPS plans to add 95 megawatts of solar power to its current 134 megawatts by the end of this year.
Coal still accounts for 42% of CPS power generation, according to Fitch Ratings, but that ratio is expected to decline in 2018 with deactivation of the company’s oldest coal-fired plant and replacement with natural-gas-fired generators.
According to the American Public Power Association, CPS is the nation’s fourth largest public power utility by megawatts of electricity and the fifth largest in the number of customers. CPS claims the top spot among public utilities that provide both gas and electric service.
CPS has more than 760,000 primarily residential electric customers and about 335,000 primarily residential gas customers.
The public utility is not subject to retail competition introduced in Texas in 2000. Municipal utilities in the state have the option to offer retail competition in their services areas but CPS Energy has not taken that route.
Despite signs of weakness in the Texas economy due to depressed oil prices and pressure from the federal budget sequester, San Antonio’s economy – built on tourism, manufacturing and military installations -- has proven resilient so far, analysts said.
“Despite the vulnerability to federal budgetary priorities given the large number of military installations in and around San Antonio, new health care and energy jobs are further diversifying the economic base,” said S&P analyst Theodore Chapman. “Some of the growth has ebbed with the Eagle Ford Shale oil and gas exploration and production because of the downturn in commodity prices since 2014.”
