DALLAS - With plans to nearly double its debt load in the next five years, the Lower Colorado River Authority in Texas is preparing to issue nearly $300 million of refunding and new-facility bonds in an increasingly competitive energy market.
The Austin-based energy wholesaler will offer the bonds in two tranches, with $190 million for the deregulated wholesale power business and $100 million for the state-regulated Transmission Services Corp. that operates transmission lines.
Morgan Stanley is senior manager, with First Southwest Co., Goldman, Sachs & Co., JPMorgan, Merrill Lynch & Co., Rice Financial Products Co., and Wachovia Bank NA as co-managers.
OBP Muni is the financial adviser to the LCRA, and Fulbright & Jaworski is bond counsel.
The deal is tentatively scheduled for next week, but that could change based on market conditions. The LCRA sold $202.6 million of refunding and improvement revenue bonds back in May.
The debt is rated A by Standard & Poor's and A-plus by Fitch Ratings. Moody's Investors Service rates the bonds for the wholesale operations A1 and assigns an A2 rating to the transmission-contract debt. The rating agencies see the outlook as stable. The LCRA's $1.45 billion of outstanding revenue debt retains the same ratings.
The authority is considering insuring the bonds and is taking bids. The fixed-rate bonds reach final maturity in 2038.
The LCRA board approved the issue in October based on staff recommendations on financing options.
"Recent market conditions indicate that an issuance of long-term fixed-rate debt is more favorable than short-term variable-rate debt," according to a presentation from chief financial officer Brady Edwards. "Staff also recommends including the financing of new capital improvements with such long-term fixed-rate debt given market conditions."
As a public nonprofit that receives no tax support, the LCRA operates two lines of wholesale business, water and electricity. The agency operates dams and provides flood control as well as water and wastewater services on the Colorado River in Texas.
As an electric power wholesaler, the LCRA provides energy to 34 cities, eight electric cooperatives, and one investor-owned utility in Texas.
Created by the Texas Legislature in the Depression year of 1934 amid President Franklin Roosevelt's push for rural electrification, the LCRA today also operates more than 30 public parks, recreation areas, and river access sites along the Highland Lakes and lower Colorado River.
Texas lawmakers deregulated the state's wholesale energy market in 1995 but left transmission services under the control of the Public Utility Commission. The LCRA's 15-member board of directors, appointed by the governor and confirmed by the Texas Senate, can set wholesale power rates to compete with investor-owned or publicly owned providers.
The agency does not have any taxing authority nor does it receive any appropriations from the state budget, leaving it completely self-supporting through the sale of electricity, water, and related services.
Wholesale electric sales provided the LCRA with 74% of operating revenues in fiscal 2008, with TSCorp. providing about 16%.
In rating the authority's debt on the power side of the business, analysts considered the strength of the contracts with its wholesale utility customers.
"The uncertainty about contract extensions had in recent years hindered the authority's ability to make definitive decisions regarding long-term planning for additional generation," Standard & Poor's analysts wrote. They cited "the mismatch between the final debt maturity of LCRA's debt obligations (2036) and the potential for those customers that have not yet extended their contracts to completely or partially exit the LCRA system after 2016."
"The authority is still in the middle of contract negotiations, providing time to develop a strategy should some of its customers elect not to extend contracts," Standard & Poor's said. "To date, however, 13 of the authority's wholesale customers have not yet extended their contracts beyond 2016; these customers account for roughly two-thirds of LCRA's total load profile, while about 42% of its total revenue-secured debt matures after 2016."
Fitch analysts also said they were "increasingly concerned with the limited progress to date in extending wholesale customers' long-term contracts with LCRA beyond the current maturity date of 2016 and the resulting uncertainty regarding power supply planning. Fitch will be monitoring LCRA's ability to adequately balance future load requirements with its power supply development."
However, Standard & Poor's analysts said that, given the rural base of most the authority's power buyers, "we feel the risk of any of LCRA's existing distribution customers choosing to opt in to retail electric competition is remote."
Despite the uncertainty, the LCRA is in the midst of an expansion that is expected to double its debt load. Its $2.7 billion in capital spending over the next five years includes $928 million in transmission system improvements.
Projections indicate about 80% of the projects will be debt funded, either from parity revenue bonds or tax-exempt commercial paper. The wholesale power side has $287 million of commercial paper capacity, while the transmission side can issue $90 million. JPMorgan Chase & Co. provides liquidity support for the tax-exempt notes through three revolving credit commitments.
To discontinue using the LCRA as their wholesale provider, utility customers must provide notice by June 2011. Otherwise, contracts are automatically extended through 2041. To aid in planning, the agency will now receive two years' notice if a customer wants to end a contract, and the authority will remain provider of last resort.
The LCRA's largest customer, Pedernales Electric Cooperative, has agreed to terms for a contract extension.
While the authority is the state's largest hydropower producer, that source accounts for only 3% of its generation in fiscal 2008, with 59% fueled by coal and 38% from natural gas.
Among public power suppliers, the LCRA fits the norms as determined by Standard & Poor's in a June report on the sector. With a record of stability, 88% of the public power utilities are rated A-minus or better, according to analysts.
"Overall, the public power sector's ratings are stronger than those of the investor-owned electric utilities sector, which have stabilized since the early part of this decade," analysts wrote.
"One of the hallmarks of the U.S. public power sector is its ability to maintain credit stability even during periods of extraordinary energy-price inflation such as over the past year," Standard & Poor's noted. "How the sector copes with ever-more aggressive demands - from lawmakers and regulators - for cleaner air and commodity-price pressures will be an almost unending test of its fiscal and management strengths and energy strategies, and it is far from certain that every utility will be able to preserve its credit standing."