ATLANTA -- For the second time in less than two months, a large North Carolina municipal power agency plans to come to market with a bond issue more than $1 billion in size.
But this time, with the recent improvement in market tone, North Carolina Municipal Power Agency No. 1 expects to find investors much more friendly.
Officials at the power agency are confident they can avoid what befell their sister issuer North Carolina Eastern Municipal Power Agency on Sept. 22 when it priced, then canceled, a $1.45 billion revenue refunding deal. North Carolina Eastern bailed out after potential investors became spooked by skyrocketing interest rates.
North Carolina Municipal Power Agency No. 1 plans to price a $1.39 billion offering Wednesday through an underwriting syndicate led by Goldman, Sachs & Co.
Both North Carolina Eastern and North Carolina No. 1 are members of Electricities of North Carolina Inc., a joint municipal power agency.
"Right now, we are feeling much more comfortable about the market [than in late September] and have decided to focus on the Agency No. 1 refunding before we give North Carolina Eastern another go," said Al M. Conyers, treasury manager at ElectriCities. North Carolina Eastern does not plan to sell its refunding issue before early next year, he added.
In selling the refunding bonds, North Carolina No. 1 would advance-refund up to $1.09 billion of debt originally sold to finance its Catawba Unit No. 2 nuclear power plant. at current interest rates, Conveys said, the refunding would generate present value savings of about $60 million, or 5%.
In addition, the refunding would change a number of security provisions currently applicable to the agency's debt, Conyers said. This would allow the agency, he noted, to issue variable-rate securities and substitute debt-service reserves with a letter of credit, surety bonds, or bond insurance. The refunding would also permit more leeway in reinvestment, he said.
Conyers said that following the upcoming sale, the authority plans to issue a variable-rate offering between $200 million and $250 million to refund remaining high-coupon debt.
Portfolio managers eyeing North Carolina No. 1's upcoming issue agreed that next week may be a good time to come forward with the sale, given the recent decline in interest rates and the thinning of forward supply. Yesterday, the Bond Buyer 30-year revenue bond index was calculated at 6.57%, down 13 basis points from 6.70% the previous Thursday.
Today's Bond Buyer calculates 30-day visible supply at $6.58 billion, including $4.72 billion of negotiated sales and $1.86 billion of competitive sales.
The portfolio managers warned, however, that the market remains unpredictable and could be vulnerable if issuers rush to sell negotiated debt next week to take advantage of lower rates.
"They have a lot going for them, now that the market has improved so much in the last several weeks," said a portfolio manager for a large mutual fund. "But there is always the chance they could get caught in a downdraft, like North Carolina Eastern did," continued the manager, who declined to be identified. "It will clearly be the biggest test so far of the strength of the post-election market."
Eugene W. Devlin, a vice president of investment banking at Goldman, said the underwriting syndicate is currently planning to structure the deal into six separate types of fixed-income securities.
A little less than half of the issue, or $494 million, would consist of serial bonds maturing between 1994 and 2008. Another portion would be divided between $175 million of zero coupon debt maturing between 2008 and 2012 and $467 million of term bonds maturing in 2012, 2016, and 2020.
The remaining debt would be divided into $39.7 million of Goldman's indexed Caps bonds, due in 2017; $39.7 million of its Periodic Auction Reset Securities, due in 2018; and $39.7 million of its Inverse Floating Rate Securities, also due in 2018.
One co-managing underwriter close to the deal said that syndicate members yesterday were targeting price levels in which uninsured term bonds due in 2020 would yield between 6.50% and 6.60%.
"I think we'll have a very reasonable week coming up to sell these bonds," Devlin said.
The investment banker noted that the only other large issues definitely scheduled for that time period are three general obligation deals: an offering of $110 million from New York and an offering of $124 million from Pennsylvania on Tuesday, and a $400 million California issue planned Wednesday. But Devlin acknowledged that a slew of negotiated deals are also waiting in the wings and could affect the timing of the sale.
Last week, Moody's Investors Service, Standard & Poor's Corp., and Fitch Investors Service Inc. each awarded the upcoming issue an A rating, the same as that placed on outstanding Catawba electric revenue bonds.
Standard & Poor's, however, revised its ratings outlook for the agency to negative from stable, citing concerns about the agency's ability to remain competitive with other power providers in North Carolina.
In particular, Standard & Poor's is concerned about a power sell-back agreement with Duke Power Co. Because it will be scaled back sharply after 1995, and ended altogether by 2001, the power agency will be required to pass on the expense of excess nuclear generating capacity.
According to present estimates, the agency's wholesale costs will increase at 6% a year, rising from 5 cents per kilowatt hour this year to 8.4 cents per kilowatt hour in 2001. This will occur, Standard & Poor's added, despite a $300 million rate stabilization fund.
"If many of the participants continue to rely on electric funds to heavily subsidize governmental activities, then the financial position of these cities' enterprise fund could deteriorate and lead to a downward adjustment of the agency's rating within the single-A category," Standard & Poor's said.
"Some combination of increased planning at the participant level, improved load growth, or a profitable sale of excess capacity or energy could lead to a return of the agency's stable outlook," the rating agency added.
Both Fitch and Moody's expressed some concerns about the eventual costs of replacing the stream generator at Catawba No. 2, which has suffered from corrosion. A replacement schedule for the plant has not yet been determined.
Edward Krauss, a Moody's vice president, said he does not expect the changes in the security provisions envisioned by the refunding to detract from the credit quality of the agency's debt.
North Carolina Municipal Power Agency No. 1 owns a 75% undivided interest in Catawba No. 2, a six-year-old facility that is one of two nuclear units located in York County, S.C. The agency serves 19 participants in a 40-county region in the central part of the state, including the cities of High Point, Gastonia, and Lexington. Participants share monthly power project costs on a take-or-pay basis.