DALLAS - The Lower Colorado River Authority, one of the largest public utilities in Texas, will test the waters of the bond market later this week with two refunding revenue bond issues worth nearly $369 million.

The deals include $202 million issued in the name of the LCRA and $167 million issued in the name of the nonprofit transmission company created by the authority to operate in a deregulated environment. Both issues take out commercial paper.

Both issues carry ratings of A from Standard & Poor's, A1 from Moody's Investors Service, and A-plus from Fitch Ratings. The financial team was evaluating its options for bond insurance.

Lead underwriters on both deals are Morgan Stanley, Bear, Stearns & Co. and Lehman Brothers. Co-managers include First Southwest Co., Goldman, Sachs & Co., JPMorgan, Merrill Lynch & Co., Rice Financial Products Co., UBS Securities LLC, and Wachovia Bank NA.

OBP Muni is financial adviser, with McCall, Parkhurst & Horton serving as bond counsel. The bonds are tax-exempt.

In issuing its ratings on the debt, Moody's noted that the LCRA's "strong reliability record continues to be a key credit strength."

"A credit weakness is that LCRA debt maturity extends to 2034," analysts wrote. "The wholesale customers must take almost all of their requirements from LCRA."

The competitive market also holds risks, Moody's noted. "If LCRA's wholesale price increases above the competitive market, the rating could go down."

With soaring fuel prices, local utilities that have depended on the LCRA for power have had to choke down rate increases.

In New Braunfels, south of the LCRA's headquarters in Austin, the public utility announced last month that local electric rates will rise by 0.01 cents starting in June. That follows an equivalent rate hike at the start of April.

The previous rate hike was blamed on the rising cost of coal delivery used to generate power for the LCRA, while the new increase came from rising natural gas prices, according to New Braunfels Utility.

"The volatility of the natural gas market is having such a profound effect on the cost of producing electricity that LCRA cannot ignore the impact and is passing the cost onto their wholesale customers," NBU spokeswoman Gretchen Reuwer said in a prepared statement.

While the LCRA has signed amended contracts with 31 customers for about 30% of its load, it continues to negotiate terms with the remaining large customers, which represent the balance, Fitch analysts noted.

"Looking forward, the successful negotiation of new contracts and the terms of those contracts will be a key credit driver. Fitch will continue to monitor the LCRA's contract negotiation process, as this also impacts how the LCRA will plan for and finance generation needs beyond existing contracts, given the customers growing needs and that the Electric Reliability Council of Texas is projected to be short of capacity beginning in 2010."

Formed in 1970, ERCOT was the successor to the Texas Interconnected System, created in 1941 to allow Texas utilities to share power. ERCOT is one of nine regional electric reliability councils supervising the Texas electric grid under the North American Electric Reliability Corp.


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