Bond deal will help get southern California electric utilities off coal
5 min read
The Southern California Public Power Authority plans to price $700 million in tax-exempt revenue bonds to fund projects that support replacing coal-fired combustion at a Utah power plant with a new natural gas and hydrogen plant nearby.
Lead manager Wells Fargo will hold a retail order period Tuesday, ahead of institutional pricing on Wednesday.
Cabrera Capital Markets, Siebert Williams Shank & Co. and Ramirez & Co are co-managers. PFM Financial Advisors as municipal advisor and Norton Rose Fulbright as bond counsel round out the finance team.
The bonds are rated Aa1 by Moody’s Investors Service and AA-minus by Fitch Ratings. Both assign stable outlooks.
Roughly 75% of the power generated by the Utah plant is transmitted across a 488-mile system of electric lines, called the Southern Transmission System, providing power to several utilities in southern California, including the Los Angeles Department of Water and Power.
SCPPA is a joint powers authority that owns and operates electric generation, transmission, and physical gas assets on behalf of its 12 members, consisting of 11 municipal electric utilities and one irrigation district, all in southern California. Its primary mission has been to provide financing for its member utilities.
The currently coal-fired Intermountain Power Plant in Lynndyl, Utah, is owned and operated by the Intermountain Power Agency, a Utah political subdivision.
IPA separately financed the actual conversion of the plant. It sold $797.6 million of power supply revenue bonds in 2022 for that project.
SCPPA’s upcoming bond sale will pay for related investments in the Southern Transmission System renewal project.
IPA is in the process of repowering the plant from an 1,800-megawatt coal fired project to a smaller 840-megawatt natural gas and hydrogen-fired generation project, according to a Fitch Ratings report.
The LADWP and other southern California utilities take the lion’s share of power generated by the Intermountain Power Project, and continued reliance on coal was not tenable to meet state and local renewable and clean energy targets and requirements in California.
In anticipation of the repowering, Fitch analysts said, related investments are being made to the STS project that will include an estimated $2.13 billion in capital spending to accommodate the smaller size of the repowered natural gas plant and extended life of the repowered plant once completed.
Though the renewal project will not increase the capacity of the transmission system, the project will extend its useful life and allow LADWP to receive increasing amounts of renewable energy from solar and wind resources located near or interconnected to the plant with the reduction of the plant’s power generation to 840 watts, said Ellen Cheng, an LADWP spokeswoman.
The transmission system is an integral part of the department’s effort to distribute 100% renewable electricity by 2045, and a viable resource to transmit new clean energy and greenhouse gas-free resources to LADWP, she said.
The proceeds will cover part of the cost of the $2.13 billion STS renewal project, an upgrade to the facilities that will enter service from May 2024 to April 2027 as various projects come online, said Michael Webster, SCPPA’s executive director.
Transmission improvements include rebuilding and expanding the AC/DC converter stations at either end of the 488-mile line in Adelanto, California and Delta, Utah, not only in response to the plant repowering, but also as the system taps expanded wind, solar and geothermal power sources, Webster said.
Other improvements are replacement of the Intermountain AC switchyard and Adelanto AC switchyard, which will include synchronous condensers needed to support the reduction in power from the plant, Fitch analysts said.
“For the project to operate at a high reliability we needed to upgrade the terminals at both ends,” Webster said. “We also needed switchyard equipment for DC, (direct current), and AC, (alternating current), which will help with the voltage requirements for the lines.”
The idea behind the project is “to build new facilities next door to the existing facilities. We can construct and do cutover from the existing terminals to the new terminals, so the risk is low.”
The Southern Transmission System was developed in 1986 in conjunction with the Intermountain Power Project, according to bond documents. The Intermountain Power Project came online in 1987.
LADWP is the project manager and operating agency for IPP, Fitch said, including the southern transmission system renewal project. In addition to being the project’s largest purchaser, LADWP is leading the project construction at the STS renewal project as well as the repowering of the IPP generation project.
The IPP consists of a two-unit, 1800-megawatt, coal-fired, steam-electric generating plant and a switchyard in central Utah near Lynndyl; the transmission lines; and water rights and coal supplies.
Intermountain Power Agency is replacing the coal-fired generation facilities with 840-megawatt natural gas-fired combustion turbine generating units. The new natural gas generating units will be designed to use 30% renewable hydrogen fuel at start-up in 2025, transitioning to 100% hydrogen fuel by 2045, according to an online roadshow for investors.
The project is being developed as part of the individual utilities’ commitment in 2013 to stop burning coal at the facility by 2025.
LADWP has been reducing the share of polluting coal power in its overall energy mix over the last few years. The Intermountain facility is its only remaining coal-fired plant since it sold its stake in the Navajo generating station in Arizona in July 2016. The Arizona plant closed in 2019.
Since 2010, 270 coal-fired power plants across the U.S. have closed or received a definite retirement date, according to the Sierra Club.
Outside California, economics are as much a factor as environment. Coal is the most expensive fuel for electricity generation on the market, costing around $79 per megawatt-hour versus $18 per MWh for wind power and $35 per MWh for utility scale solar power with storage, according to the Natural Resources Defense Council. Natural gas power plants generate power at around $63 per MWh.
Though the project will usher in a greener future for the transmission line, the issuer never contemplated issuing green bonds because the project will include coal until the transition to the new plant is completed, said Aileen Ma, chief financial and administrative officer of the SCPPA.
The six utilities that have participated in the Southern Transmission System, LADWP, Anaheim, Riverside, Pasadena, Burbank and Glendale, will make payments on the bonds until 2027, when the project completes its transition off coal.
After that, LADWP, Burbank and Glendale, the only three who will continue to receive power from the project, will make the bond payments until the final maturity in 2053. LADWP will be responsible for 90.5% of the payments after June 16, 2027.
“Nearly all of the debt service for the new debt issued for the STS Renewal Project will be repaid after July 2027, owing to capitalized interest during construction,” Moody’s analysts wrote in an April 4 rating report. “However, a small share of the new STS Renew Project’s bond debt service will be allocated to the existing STS project participants according to their share under their current transmission service contracts.”
By 2027, LADWP will be responsible for the bulk of payments.
The AA-minus rating assigned by Fitch “reflects the credit quality of LADWP given the requirements of unconditional payments,” said Kathy Masterson, a Fitch senior director. “The construction risk is reflected in LADWP’s rating and credit quality.”
The project participants are required to pay operating and fixed costs, including debt, for the project on a monthly basis as outlined by an annual budget prepared by SCPPA, Fitch said.
“Participants are required to make a payment whether or not the transmission lines are operational and whether or not the construction on the renewal project is completed,” according to the Fitch report.
