ALAMEDA, Calif. — With two upgrades in hand, the city-owned electric utility in Tacoma, Wash., has a $200 million revenue bond deal on the calendar next week.
Fitch Ratings upgraded Tacoma Power to AA-minus from A-plus, giving it double-A-level ratings across the board. Standard & Poor’s upgraded the rating to AA from AA-minus, and Moody’s Investors Service affirmed its Aa3 rating.
The upgrade reflects a sustained, strong financial position, according to Standard & Poor’s. “The rating reflects our view of the utility’s favorable power supply position, financial risk profile, and good unrestricted liquidity,” analyst Peter Murphy said in a statement.
The largest portion of the deal, tentatively about $150 million, is to come as taxable Build America Bonds, along with a smaller tax-exempt series, and $25.6 million in clean renewable energy bonds.
The federal government granted the CREB authority to the utility in 2009 to help finance new generating equipment at two of its dams.
The utility will benefit from federal legislation approved in March, when the Hiring Incentives to Restore Employment Act authorized issuers to sell direct-pay CREBs and receive a direct federal subsidy payment equal to 70% of their interest costs, as an alternative to providing tax credits to investors.
The utility also received a $4.7 million stimulus grant for the new generator at its Cushman dam, one of the projects that benefits from the CREB authority.
The Tacoma utility serves more than 166,000 customers in a 180-square-mile territory that goes well beyond city limits. Almost half of its customers are outside Tacoma’s boundaries, including the Army’s Fort Lewis and McChord Air Force Base.
According to Moody’s, the utility has a competitive rate structure, with rates below Seattle City Light and “significantly below” the area’s main investor-owned utility, Puget Sound Energy.
“The utility’s relative competitiveness to the local investor-owned utility and Seattle City Light is considered a positive and should provide Tacoma Power greater rate flexibility,” the Moody’s report said.
Though it owns its own hydroelectric facilities, most of the utility’s power is sourced from the Bonneville Power Administration, which is a credit strength in the eyes of Moody’s.
“The utility’s credit quality is supported by power sourced from low-cost hydro generation, demonstrated historical willingness to raise rates, current strong liquidity level, low debt ratio at year-end 2009, and substantial debt amortization over the next five years,” Moody’s said in its ratings report.
Moody’s noted that the utility has planned $500 million in capital expenditures over the next five years, about 60% debt financed and 40% from net revenues.
Next week’s deal will increase the utility’s outstanding debt about 41%, according to Moody’s, with about $100 million more expected before 2014.
“While the new debt issuance is sizeable for the utility, aggregate debt levels at year-end 2014 are forecasted to be 22% higher relative to year-end 2009 since the Utility is scheduled to amortize a substantial amount of principal,” according to Moody’s.
Additionally, Tacoma Power has steadily reduced its leverage ratio over time with a debt ratio of 36% in 2009 compared to 45% in 2006.
JPMorgan is managing the bond sale. Foster Pepper PLLC is bond counsel. Montague DeRose and Associates LLC is financial adviser.
