The Southern California Public Power Authority is planning to sell next week $53 million of revenue refunding bonds to refinance short-term debt used for its purchase of the Tieton Hydropower Project in Washington for two of its member utilities.
The Tieton Hydropower Project revenue refunding bonds, Series 2010 A and B, are backed by take-or-pay contracts between the authority and Burbank Water and Power and Glendale Water and Power.
The bonds will pay off tax-exempt and taxable notes that the authority issued in November 2009 to buy the hydropower plant.
Citi is the underwriter for the deal, which is expected to be priced on Wednesday. Public Financial Management Inc. is financial adviser Fulbright & Jaworski and Curls Bartling PC are co-bond counsel.
“In November, SCPPA issued short-term notes to finance the acquisition of the project. This bond issuance is only refinancing those notes with these bonds, since the notes mature in mid-August,” a source close to the deal said.
The proceeds also will be used to fund a debt-service reserve account for the 2010 series bonds.
The authority provides joint financing for its member municipal utilities, including 12 electric utilities and one irrigation district in Southern California, which combined deliver electricity to more than two million customers.
The issuance is structured as tax-exempt Series A bonds and taxable Series B bonds, and the proceeds will be used to refund the 2009 tax-exempt and taxable notes, respectively.
“It is being structured for 30-year fixed-rate level debt service. The taxable bonds are being amortized first, and then tax-exempt bonds will be amortized longer around the taxable bonds for level debt service,” the source said.
Richard Helgeson, general counsel for SCPPA, said the transmission system associated with the project is used by private entities, and therefore there had to be a taxable issue.
“The Benton Rural Co-op actually maintains and uses the transmission system,” Helgeson said. “Because of the private questions relating to it, this could not be tax-exempt. The generating station, however, is completely tax-exempt to be used only by SCPPA members.”
The project is a powerhouse constructed at the base of the U.S. Bureau of Reclamation’s Tieton Dam on the Tieton River in Yakima County, Wash. A 21-mile, 115kV transmission line connects the power plant substation to the electric grid.
The interim note proceeds were used to acquire the 13.6 MW Tieton Hydropower project from Tieton Hydropower LLC. The project began commercial operation in 2006, and the average annual generation from the project is expected to be around 48,000 mega-watt hours.
Moody’s Investors Service gave an A1 to both the $37 million of Tieton Hydropower Project revenue refunding bonds, Series 2010A, and the $16.365 million of taxable Tieton Hydropower Project revenue refunding bonds, Series 2010B. Standard & Poor’s rated the offering AA-minus. The bonds are not insured.
The bonds are backed by the unconditional take-or-pay contracts with Glendale and Burbank. Each has a 50% obligation with SCPPA to buy the Tieton Project power output and pay debt-service costs.
The contract requires a participant to pay operating and maintenance and debt-service expenses regardless of whether it takes project capacity or energy or whether the project is operable or operating. There is a step-up provision should either participant default on its payment, a sum-sufficient rate covenant, and a maximum annual debt-service reserve.
Moody’s also factored in the value that the hydroelectric project brings to the utilities’ renewable energy portfolio. The current offering is one of several projects Burbank and Glendale have implemented to meet expected state requirements for renewable energy, Moody’s said.
The rating agency also cautioned that the utilities could be impacted if an auction-type cap and trade system is implemented to address greenhouse gas emissions. This would “require them to purchase carbon credits to offset the higher-than-average carbon emissions of their resource portfolios,” it said.
“In the beginning, Glendale, Burbank, and Los Angeles were planning to jointly purchase this project.” said William Fox, assistant general manager of utility financial planning and risk management for Glendale Water and Power. “Los Angeles subsequently determined they were unable to participate.”
Fox cited the “economics of the project and its contribution to our renewal portfolio standard” as reasons why Glendale and Burbank bought the project outright on a fifty-fifty basis.
“The project was initially purchased with short-term notes in order to ensure a timely closing. This transaction will put in place the permanent project financing with 20-year bonds. We prefer to purchase projects when it is financially prudent to do so since we retain ownership and control. After the bonds are paid off in 20 years, we will have renewable energy at a very low operating cost.”
Moody’s noted that hydropower is a low-cost source of energy but is vulnerable to droughts. It also factored in the energy cost adjustment mechanism that permits monthly cost recovery for fuel, but also took into consideration the exposure to natural gas price volatility. Even as resource diversity and adequacy provide a natural hedge on the energy side of the electric business, a shift away from coal-fired generation will pose additional exposure to natural-gas price volatility and potentially create load-balancing problems, it said.
Moody’s maintains a Aa3 rating on Glendale’s electric revenue bonds. It noted that Glendale’s participation in SCPPA has resulted in significant contingent liabilities through “take or pay” obligations, but these sources, combined with spot market and other purchases, result in a more economical and diverse mix than the city can generate internally. The ratings agency maintained its A1 rating on Burbank electric revenue bonds.