DALLAS - Arizona's Salt River Project, one of two major power providers in the Phoenix area, will offer the municipal market $833 million of highly rated public-power revenue bonds in the largest deal of the week.
An infrequent visitor to the muni market, SRP does not have any other bond issues planned after this one, according to Steve Hulet, corporate treasurer and senior director of financial services.
"SRP's six-year financial plan includes capital expenditures to meet future electric system growth and replacement of aging infrastructure," Hulet said. "We would anticipate funding a portion of that capital plan with bond issues. However, SRP has no specific plans for a bond sale following the currently proposed sale."
When SRP does come to market, it usually brings large amounts of debt. The agency was considering an issue of up to $1.5 billion before it was downsized.
"The transaction is now expected to be at a lower level," Hulet said. "Nonetheless, the size of any refunding deal is dependent on the market conditions."
The deal will produce about $300 million of new money for SRP's capital projects, with the rest of the bonds refunding outstanding debt for savings.
Refunding issues have proven very rewarding for most issuers over the past year as rates have hovered around historic lows.
"SRP has threshold savings targets it uses to determine the desire to refund bonds," Hulet said. "Currently, the markets are meeting those threshold targets for refunding a good portion, if not all, of the district's outstanding 2004 Series A, 2005 Series A, and 2006 Series A revenue bonds."
Hulet expects investor interest from bond funds, separately managed accounts, bank portfolios and insurance and trust companies.
"SRP has been very pleased to have a strong group of loyal investors over the years," he said. "We would expect that many of those same investors would have an interest in participating in this bond sale."
Goldman Sachs & Co. is book runner on the deal, with managing director Jill Toporek as lead banker. Toporek, who joined Goldman in 2006, has managed the company's Energy Group for nearly 15 years.
Co-managers are Bank of America Merrill Lynch & Co., Citi, JPMorgan and Morgan Stanley.
Michael Mace, managing director at Public Financial Management Inc., is financial advisor.
The law firm of Chiesa Shahinian & Giantomasi, formerly known as Wolff & Samson, is bond counsel.
With final maturity in 2036, the tax-exempt serial bonds, carry ratings of Aa1 from Moody's Investors Service and AA from Standard & Poor's, with stable outlooks.
SRP is Moody's second-highest rated public power provider behind the Tennessee Valley Authority.
"A rating factor that has driven the SRP rating strength is its well-established and well managed financial operations and conservative financial planning," lead analyst Dan Aschenbach wrote.
Based in Tempe, Ariz., SRP serves 984,000 retail electric service customers in parts of Maricopa, Gila, and Pinal counties. As of 2012, it was the fourth-largest public power utility in the U.S. in terms of customers and revenues and the second-largest when gauged by megawatt-hour sales.
With this deal, SRP will have $4.5 billion of senior debt outstanding, according to Standard & Poor's.
Both ratings agencies noted SRP's vulnerability to regulation at some of its coal-fired plants, including the Navajo Generating Station near Page, Ariz., and the Four Corners plant, both on the Navajo reservation. The NGS is SRP's second-largest source of power behind the Palo Verde nuclear plant. Coal accounts for nearly half of SRP's power supply, compared to about 18% from nuclear, 11% from gas, 13% from renewables and 2.4% from hydro power.
"If the costs of emissions remediation or generation resource needs materially weaken the utility's financial profile, negative rating implications could follow," S&P analyst David Bodek said. "We do not expect to raise the rating in the next two years."
The Los Angeles Department of Water and Power has sold its interest in the Four Corners plant and plans to sell its 21.2% stake in the NGS before its lease expires in 2019. LADWP is the second-largest stakeholder in NGS after SRP.
The Navajo Generating Station supplies the power for the Central Arizona Project, a canal that diverts water from the Colorado River to the Phoenix area. In addition to power the Salt River Agricultural & Improvement District provides water from reservoirs and canals in the arid region.
Issues SRP is dealing with in its service area include a battle over fees charged for rooftop solar installations.
The SRP Board recently approved a new price plan for residential customers who add solar or other technologies to generate some of their energy. The price plan includes a demand charge to recover fixed costs related to the solar customer's service facilities and their use of the grid. The price plan also reduces the price the customer pays per kilowatt hour for energy.
SolarCity Corp., filed a lawsuit against the District in Arizona Federal District Court on March 2, 2015, alleging that SRP acted unlawfully to preserve its existing monopoly.
"While it is too soon to predict the outcome of this matter, the District believes the lawsuit is without merit and will aggressively defend the suit," according to SRP's bond prospectus.
