DALLAS - Austin Energy will finance some of its innovative power projects while aiming for lower interest costs with $404 million of revenue bonds.
The issue includes $323 million of tax-exempt and $81 million of taxable Series B bonds under a separate lien from previously issued debt. Both series are expected to price the week of May 11, through negotiation with book runner Goldman Sachs and six co-managers.
"We should get a pretty healthy response, given where the markets are," said Mark Dombroski, chief financial officer for Austin Energy. "Our cash position is greatly improved. Our liquidity position is pretty strong."
Terry Thornton, vice president for Goldman Sachs, is lead banker on the deal, with Dennis Waley, managing director at Public Financial Management Inc., as financial advisor.
Norton, Rose, Fulbright is bond counsel.
Standard & Poor's rates the bonds AA-minus, as does Fitch Ratings. Moody's Investors Service rates them A1. Outlooks from all three are stable.
The bonds are subordinate to two liens of combined utility system bonds that are now closed to new issuance. As of Sept. 30, 2014, $178 million was outstanding under those two liens, according to Standard & Poor's.
The rate covenant for the combined lien bonds requires 1.25 times debt service coverage.
"However, when the prior lien bonds are no longer outstanding, the rate covenant will become weaker in our view, requiring only that rate cover debt service by 1.0 times," S&P analyst Peter Murphy wrote in his April 27 report. "Similarly, the prior lien bonds benefit from debt service reserve, but the electric system bonds do not require a debt service reserve."
Austin Energy's five-year capital program includes an estimated $1.2 billion in planned investments, Fitch analyst Christopher Hessenthaler wrote.
"The majority of the capital program will be financed with additional debt, with excess cash flow making up the balance of expected funding sources," Hessenthaler wrote.
In March, the Austin City Council approved an energy plan that includes a 500 megawatt combined-cycle gas-fired power plant, designed to phase out the utility's coal-fired Fayette Power Project and the older, gas-fired Decker Power Plant.
"Fitch notes the current capital plan does not reflect the potential construction of the 500 MW combined cycle plant, which could represent a sizeable increase in planned spending," Hessenthaler said.
Austin will scale back use of the Fayette plant in 2020. The city-owned utility will create a cash reserve fund for retirement of Austin's share of the plant in 2022.
Austin Energy plans to produce 55% of its power with renewables by 2025 under the new plan. The previous goal was 35% by 2020.
The plan also calls for development of 600 megawatts of utility-scale solar power, with additional rooftop solar.
The upcoming bonds will take out $160 million of tax-exempt commercial paper and $32 million of taxable commercial paper, some of which was used for the city's district cooling plants.
District cooling requires chiller plants that pipe chilled water to nearby buildings during the day. At night the water is refrozen, using lower-cost energy, often generated by wind or solar power.
One beneficiary of the chiller technology is Austin's former Seaholm Power Plant on the banks of Lady Bird Lake. The former gas-fired power plant has been converted to serve as the anchor to high-rise residential development and provide a home for the new Austin Central Library. The cost of creating the Seaholm District on the banks of Lady Bird Lake in downtown Austin is estimated at $2 billion.
There are currently two chiller plants downtown, with a third on the way. The downtown system cools about 10 million square-feet of space, including Austin City Hall.
The downtown system also features the largest ice thermal storage system in Central Texas. Austin Energy also has district cooling plants in the Domain and the Mueller developments.
The district energy systems have paid dividends elsewhere in the nation, including Phoenix, where electricity use has been lowered by 13%, according to Austin Energy.
In Austin, The University of Texas campus has not relied on Texas's ERCOT electric grid since 1929 due to its use of its own district energy system.
"The system works for 10 million square feet of space in downtown Austin," said Jim Collins, Austin Energy's On-Site Energy Resources Director. "When it is completed, we can substantially increase our capacity to keep downtown Austin cool. Downtown is booming and a central system makes it more compact and energy-efficient."
Austin Energy says that it already procures more wind and solar power than any other similar utility in the nation.
In April Austin Energy issued a request for proposals that includes options for both power purchase agreements and direct ownership for up to 600 megawatts of solar generation. Proposals are due by May 15.
The newly adopted city plan envisions that Austin Energy will acquire the solar energy by 2017 if available and affordable. If not, Austin Energy will continue to pursue the solar goal within the 2025 time frame. The utility operates under affordability goals set by the Austin City Council that require the electric utility to not increase rates more than 2% a year and to keep electric bills in the bottom 50% of all electric utilities in Texas.
"To determine the costs of the various initiatives, an independent feasibility study will be required before major contracts are awarded and debt is issued," Hessenthaler said. "Fitch will continue to monitor the plan's impact, if any, on AE's credit quality as each of the various initiatives are considered and pursued."
Austin's 2014 population, estimated at roughly 878,000, has grown more than 25% since 2000, according to Fitch.
"Wealth indicators for the area are comparatively high and the city's February 2015 unemployment rate of 3.0% is exceptionally low relative to state and national averages," Hessenthaler noted.
In a separate report, Fitch Ratings called Austin the most overvalued housing market in the nation. The capital city is 20% overvalued, according to the Dec. 19 report by analyst Stefan Hilts, and homes in Texas generally were seen as 11% overvalued.
The report came in the wake of falling energy prices that have led to layoffs and bankruptcies in energy-producing regions of the state. However, Austin, with its large government and University of Texas presence, has traditionally withstood downturns that affected other parts of the state.
In the financial crisis of 2008, Austin's economy was virtually unruffled.
