Municipal bond sales for public power fell to an 11-year low in 1990, because of a lack of new plants to build and high-coupon bonds to refund. Indications are, however, that the market is on its way back up -- but the going will be slow.

Only $5.19 billion of public power bonds were issued last year, down 35% from $8 billion in 1989, and the smallest amount in more than a decade, according to figures compiled by Securities Data Co./Bond Buyer. Not since 1980, when $3.6 billion was issued, had public power authorities sold so few bonds. Last year's figure had more in common with those in the late 1970s when issuers sold between $4.5 billion and $5 billion of bonds a year from 1976 through 1979, according to The Bond Buyer's records.

Only one issuer kept 1990 from being a complete washout. The Washington Public Power Supply System sold $2.35 billion of refunding bonds and thus accounted for 45% of the year's power volume.

Most of the other big-names issuers of the 1980s -- among them the Intermountain Power Agency, the Southern California Public Power Authority, the Municipal Electric Authority of Georgia, -- were absent in 1990. In fact, only seven of the 25 largest issuers during 1988 and 1989 sold any bonds at all last year.

Part of the blame for last year's sluggish market falls on a new-money sector that is financing no more than a handful of large-scale generating plants. Issuers sold $2.41 billion of new-money bonds for public power last year, far below those sold during the peak years of 1984 ($8.05 billion) and 1985 ($8.88 billion). Tax reform inflated sales in 1985, but cut deeply into total new-money sales in 1987 and 1988 ($1.93 billion and $1.11 billion, respectively), underwriters said, because issuers stockpiled so much money before the proposed deadlines for the tax law changes. The new-money market moved upward in 1989, with $2.38 billion, and 1990, but it remains well below levels during the early 1980s.

"The construction cycle is still on the downside," said Eugene Devlin, vice president of investment banking at Goldman, Sachs & Co. "A lot of joint-action agencies were formed in the late 1970s and have built their 'base-load' plants by now."

"Nineteen-ninety was probably the trough of the construction cycle," said Bradford Higgins, managing director of the public power group First Boston Corp. "It's not a booming industry anymore, but a mature industry trying to best manage what it already has."

Most of the underwriters interviewed could think of only one major project that is now under construction -- the 500-megawatt Cross Generating Station Unit 1 being built by the South Carolina Public Service Authority. Mr Devlin also mentioned the 450-megawatt Stanton 2 unit being planned by the Orlando Utilities Commission in Florida, but the commission's chief financial officer, Mark Mazak, said its deck financing for the project will not begin in earnest until 1993.




Senior Manager ($ mills.)

1 Salomon Brothers $1,954

2 Smith Barney 1,660

3 Lehman Brothers 1,230

4 Goldman Sachs 827

5 Dean Witter 720

6 Merrill Lynch 658

7 Dillon Read 598

8 First Boston 531

9 Donaldson Lufkin 290

10 PaineWebber 285

Issues under $5 million are excluded.

Source: Securities Data Co.

The Municipal Electric Authority of Georgia built eight generating plants and a $4.2 billion debt burden during the 1980s. But according to Don L. Stokley, its president and general manager, MEAG will be selling bonds in the 1990s only for transmission lines and capital improvements.

Mr. Stokley said he does not expect baseload plants to be needed until after the year 2000, "and while we may want to build some gas turbines for peaking-load power, even that's iffy." Load growth projections for his region have declined in recent years, to just 2.8% to 3% a year from 4% to 4.4% a year, he said.

The Los Angeles Department of Water and Power also has no plans to build new base-load generators during the 1990s, and even peakload power needs "have been taken care of through the mid-1990s," according to Norman Powers, its chief financial officer.

The public power market also is suffering a drought of refundings, which sustained new-issue volume after new-money financings slowed to a trickle in 1986. Refunding issues dropped last year to $2.79 billion, the total. The threat of tax reform brought refundings to their peak in 1985 and 1986, with $14.31 billion and $14.87 billion, respectively.

The opportunities for refundings are few and far between at current interest rate levels, underwriters and agency officials said, because rates have not moved appreciably below their lows of 1987, when the last wave of advice refundings occurred.

"We'll need a drop of 50 to 75 basis points, to the 61/4% to 61/2% range for A-rated power agencies, to bring out refundings," Mr. Devlin said. "Some issuers still have 8 1/4% bonds outstanding that would be good candidates for advance refundings at these levels."

Mr. Stokley of MEAG and Mr. Powers of DEWAP agreed, saying rates would have to fall to the 61/4% to 61/2% range for them to refund bonds, and even then, the amounts would be small at best.

Rates would have to drop even further to bring Orlando Utilities into the refunding market, Mr. Mazak said.

"We have $131 million of 85/8% bonds and $166 million of 81/2% bonds that we'd love to refund, but rates would have to get down to 6% to 61/4% because of the federal penalty on transfer of funds," he added.

WPPSS almost single-handedly kept the refunding market alive in 1989 and 1990 with $3.9 billion of refundings, but R. Scott Clements, its manager of treasury services, said that refunding program was completed last November.

"There's a nominal amount, perhaps $200 million, that could be refunded if WPPSS's long bond rate dropped to 7%" from its current range of 71/4% to 73/8%, he said.

Some issuers have visited the refunding market this year -- enough of them to push the total to $2.29 billion in the first five months. This year's biggest issue so far is a $370 million refunding by the South Carolina Public Service Authority, its first bond issue since November 1988.




Senior Manager ($ mils.)

1 Goldman Sachs $5,766

2 Merrill Lynch 3,511

3 Lehman Brothers 3,254

4 Smith Barney 2,512

5 Salomon Brothers 1,898

6 First Boston 1,860

7 Donaldson Lufkin 1,049

8 PaineWebber 401

9 Prudential Securities 360

10 John Nuveen 268

Issues under $5 million are excluded.

Source: Securities Data Co.




Senior Manager ($ mils.)

1 Goldman Sachs $1,507

2 First Boston 877

3 Lehman Brothers 777

4 Smith Barney 660

5 Merrill Lynch 481

6 John Nuveen 264

7 PaineWebber 167

8 Morgan Stanley 113

9 BT Securities 100

10 Dean Witter 31

All long-term issues are included.

Source: Securities Data Co.

Underwriters feel more certain that the new-money sector will show renewed vigor in the 1990s, although it is unlikely to approach the rarefied levels of the early 1980s.

"There's more discussion of new power needs now than in previous years," Mr. Higgins said. "There's no talk of 1,500-megawatt facilities, but of peaking-load and intermediate-load projects, such as combustion turbines and hydroelectric plants, to optimize use of current facilities.

The next wave of base-load projects is now expected for the late 1990s, he said, but although bond sales will increase, the issues will be smaller than in the 1980s because they will be for smaller, more discrete projects.

"The next [construction] phase will be 'add-ons,' rather than building all-new plants," Mr. Devlin said. "We'll see a steady stream of new-money financings, but not a return to the funding levels of the 1980s."

The Los Angeles Department of Water and Power, for example, has a five-year plan for capital improvements that involves $1.4 billion of bond sales through 1996, Mr. Powers said. The list of projects is headed by construction of the $900 million Coso Geothermal Project, which will use about $450 million of bonds, and the $180 million repowering of Harvard Generating Station, which will use $90 million of bonds. Mr. Powers said the remaining funds will be used for routine improvements, such as substations and distribution systems.

Orlando Utilities plans to sell $400 million of bonds to finance its 75% share of the Stanton 2 project -- half in 1993-94 and the rest in 1996-97, according to Mr. Mazak. The commission also plans to sell $70 million to $80 million a year, on average, for "ongoing capital improvements," such as substations and transmission lines, he said.

It WPPSS ever gets the go-ahead to complete its partially built Projects 1 and 3, Mr. Clements said the system would raise an estimated $2.7 billion of new money through the bond market. But the decision to complete the plants is not up to WPPSS, but to the regional power planning council, he said.

Public power utilities may begin to emulate their investor-owned cousins and start buying electricity from independent power producers instead of building their own generators, underwriters said.

Because independent producers will not use tax-exempt bonds to finance construction, such a move would surely reduce the municipal market's financing role, they said. They added, however, that tax-exempt financing still makes it cheaper for public power utilities to build their own plants.

DEWAP, for example, has been buying power from other generators for several years, Mr. Powers said. "There's generating capacity available all over the Southwest," he added.

Orlando Utilities was required by Florida law to solicit bids from independent power producers before it could obtain in a license to build Stanton 2, Mr. Mazak said.

"We received three solid bids and found tax-exempt financing was still cheaper," he said, in part because Orlando already owns sufficient land to build the plant.

WPPSS dominated the public power market in 1990 with its four refundings totaling $2.35 billion. Trailing in the distance were the New York State Power Authority with $353 million, the North Carolina Municipal Power Agency No. 1 with $285 million, the Northern California Transmission Agency with $284 million, and the Jacksonville, Fla., Electric Authority with $267 million.

In the first five months of 1991, the South Carolina Public Service Authority was the leading issuer by San Antonio, Tex., with $357 million, the New York State Power Authority with $314 million, DEWAP with $250 million, and the Southern California Public Power Authority with $240 million.

Goldman, Sachs & Co. was the leading senior manager for public power issues in 1990, with 10 issues totaling $1.51 billion, and in the first five months of 1991, with six issues totaling $791 million.

First Boston Corp. was a distant second in both 1990 and 1991 to date, with $877 million and $452 million, respectively.

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