LOS ANGELES -- An Alaska electric cooperative's recent refinancing of federal loans in the capital markets might foreshadow similar efforts by other cooperatives that have several billion dollars of high-coupon federal loans outstanding, industry officials said this week.
The Chugach Electric Association Inc., Alaska's largest electric utility, made its market debut when it sold $314 million of taxable first mortgage bonds last month to prepay its debt to the Rural Electrification Administration and the Federal Financing Bank.
Chugach's deal might mark "the tip of the iceberg" for similar transactions, said Alan Spen, a senior vice president of Fitch Investors Service Inc. He added that to meet capital needs, electric cooperatives may require "a greater reliance on the public markets in the future."
Concern over the level of future available funds from the federal government is driving some of the interest in public debt sales, industry officials said, along with factors such as the possibility that cooperatives in the strongest financial position could receive low priority for whatever money is available.
"This is clearly an industry in transition," said Steven Carosso, a managing director of Smith Barney, Harris Upham & Co., lead manager on the Chugach deal.
The recent financing marked a distinct break from the Chugach's historical funding methods.
Like most other electric cooperatives, Chugach traditionally relied on loan programs administered by the Rural Electrification Administration to meet its long-term financing needs. Congress established the administration in 1935 to provide electricity to the nation's rural areas and to finance qualified rural electric service systems, with a preference for nonprofit entities.
As of June 30, 1991, Chugach had $160 million of direct loans from the REA outstanding and another $186 million in Federal Financing Bank debt guaranteed by the REA.
Chugach officials faced a dilemma, however, because some of their Federal Financing Bank loans carried interest rates as high as 15.1%.
Typically, such loans either cannot be prepaid or can entail prepayment penalties that make a refinancing uneconomical, observed Mr. Carosso.
In 1986, however, Congress added special wording under Section 311 of the Rural Electrification Act to permit REA-qualified borrowers in Alaska to refinance their Federal Financing Bank debt without paying a prepayment penalty.
In exchange for this privilege, Chugach became subject to certain conditions.
For example, Section 311 required Chugach to use private sources of capital to refinance high-interest loans. In addition, Chugach also had to repay -- at a discount -- direct REA loans that carried attractive interest rates of 2% and 5%. Section 311 also barred Chugach from seeking federal financial assistance for generation, transmission, or distribution facilities after the prepayment occurred.
But after weighing the pros and cons of breaking away from the federal financing system, Chugach officials concluded that it was "time to take the plunge," said Evan Griffith Jr., executive manager of finance and planning for the association.
From an economic standpoint, the refinancing made sense because the interest rate on the new taxable bonds would be less than the weighted average interest rate on the Federal Financing Bank loans, Mr. Griffith said.
Furthermore, Chugach received an incentive to give up its 2% and 5% REA loans because it was entitled to a discount of about $45 million on the $160 million balance outstanding to the administration.
Perhaps as important, however, Chugach officials wanted to "ensure our access to future capital markets," Mr. Griffith said.
Officials at Chugach and other large generating and transmission cooperatives currently fear that future access to REA funding may be limited as a result of a trend toward decreased federal support for the program. And the new Federal Credit Reform Act also is expected to complicate the availability of funds.
Mr. Griffith said that Chugach officials also are concerned over a proposed rule by the REA that would establish a "means test" for loans guaranteed by the administration, a process that could lower the chances for financially healthy entities to borrow at attractive rates.
Officials at other cooperatives across the nation also have expressed similar worries as those that drove Chugach to the public markets.
"Everybody's concerned about what kind of access" will be available for federal funds later this decade, said Leo Payne, vice president of finance at Oglethorpe Power Corp. in Tucker, Ga. "Is it going to be there when I need it?"
But since other cooperatives do not benefit from the special legislation that paved the way for Chugach's financing, their ability to enter the public markets will hinge on developments in Washingtong D.C.
"The issue is whether or not they can get another piece of legislation passed" that allows them to refinance high-coupon Federal Financing Bank debt without paying the stiff penalties that currently make such deals uneconomical, said Mr. Carosso.
Previous legislation had permitted certain cooperatives that were most in need to prepay about $2 billion of high-coupon federal debt in the late 1980s, Mr. Carosso noted. Electric cooperatives still have several billion dollars of such loans that could be economically refinanced.
But industry observers noted that legislative changes are fraught with politics.
Certain cooperatives that might benefit most from a subsidized interest rate are concerned that wide-spread prepayments might somehow diminish a revolving fund for such loans, sources said.
Wallace Rustad, director of government relations for the National Rural Electric Cooperative Association, noted that federal officials also consider it a loss to permit refinancings of high-coupon loans if the government fails to receive adequate compensation in return.
Accordingly, attempts by other cooperatives to move forward on such refinancings will entail "a considerable amount of time and effort," Mr. Payne said. He added that Oglethorpe currently is setting a higher priority on refinancing its outstanding tax-exempt pollution control bonds.
But Mr. Payne said it heartened him to see Chugach receive a good market reception. "That's important to us" in setting precedent, he noted.
Chugach paid taxable rates of 8.08% on $52 million of bonds due in 2002 and 9.14$ and $262 million of bonds due in 2022. Moody's Investors Service rated the bonds A3, Standard & Poor's Corp. rated them A, and Fitch Investors Service rated the bonds A-plus.
"We would take a very hard look at doing an issuance on our own" if the legislation was in place to permit a similar refinancing, said Cyrus Rilee, manager of finance at Plains Electric Generation and Transmission Cooperative Inc. in Albuquerque, N.M.
Like other utilities with ongoing capital funding needs, access to funds is a key issue for Plains, Mr. Rilee said. If a transition to public debt sales is necessary, Mr. Rilee said Plains would be best positioned by entering the market on its own schedule. It's always better to enter the market "when you want to, not when you have to," he said.
