September 23, 2008
Fitch Rates San Antonio (CPS Energy) Texas’ $319MM Electric & Gas Revs ‘AA+'; Outlook Stable
Fitch has assigned an 'AA+' rating to San Antonio, Texas' (the city) $319.44 million of electric and gas systems revenue bonds, new series 2008A, issued on behalf of CPS Energy. Proceeds of the new series 2008A bonds will refund outstanding Series 1998A bonds for savings. The bonds are expected to price on Oct. 7, 2008. Fitch also affirms the 'AA+' long-term rating on CPS Energy's outstanding senior ($2.9 billion) and subordinate ($402 million) bonds and the 'F1+' rating on outstanding commercial paper ($450 million). The Rating Outlook is Stable.
The 'AA+' credit rating reflects strong management practices, a diverse and low-cost power supply portfolio, ongoing investment in generation needed to meet load growth, stable financial performance, a significant capital plan and sizable debt needs, and a large and diverse customer base. Bonds are secured by pledged net revenues of the electric and gas systems that provide retail service in and around the city of San Antonio (general obligation (GO) bonds rated 'AA+' by Fitch). The electric system accounts for the majority of CPS Energy's combined revenues, 86% in fiscal 2008.CPS Energy has a low-cost diverse power supply portfolio that includes a significant portion of coal-fired and nuclear-fired generation. The utility is long in its power supply position and is able to meet native load requirements, including its system peak of 4,407MW (megawatts), from its own resources with a 16% reserve margin at the time of the peak. Deregulation of the ERCOT market in Texas had not had a credit impact on CPS Energy, which has not opted into the competitive market.
Rates are below average compared to other municipal utilities and investor-owned utilities in ERCOT, reflecting CPS Energy's low-cost resource portfolio. Rates include a variable fuel cost adjustment that recovers actual fuel and transmission costs on a monthly basis. The city council's decision in May 2008 to approve only a 3.5% rate increase compared to the 5% base rate increase recommended by the CPS Energy Board and Citizens Advisory Committee is a credit concern given the future capital costs of the utility and Fitch's historical assessment of the utility's rate flexibility.
CPS Energy has demonstrated strong historical and projected financial performance. Debt service coverage of 2.29 times (x) and coverage of 1.55x after the utility's sizable transfer to the city's general fund (14% of revenues) was in line with historical performance. Projections indicate that coverage after the transfer should remain at least above the utility's internal target of 1.5x. Cash reserves are healthy at $893 million, or 293 days operating cash, although these will be spent down as the capital program proceeds.
The capital plan is significant with current estimates at between $4.5 and $5.2 billion over the next five years. However, the projects included in the plan may change and costs of new generation options under consideration by CPS Energy are uncertain at this time. Regardless of the actual projects chosen, CPS Energy will begin to add significant new debt to its balance sheet after a period over the last 10 years of funding much of its capital needs (including new generation) from ongoing revenues. Total outstanding debt has increased to approximately $4 billion from $3 billion in the last five years and may approach $8.5 billion in the next seven years.
CPS Energy provides exclusive retail electric service to 674,000 customers in virtually all of Bexar County and portions of seven adjacent counties. Additionally, the utility provides retail gas service to 317,000 customers within the city of San Antonio and surrounding areas. The customer base is large and diverse with a peak demand of 4,407MW. CPS Energy owns three coal plants (1,455MW) and 40% of the South Texas Project Nuclear Plant (1,088MW) that combined, provided 76% of its kWh sales in fiscal 2008.
Fitch will monitor CPS Energy's substantial capital plan as final decisions are made about which projects to include and costs estimates are developed. Rating maintenance will depend on the continued ability to meet financial targets in the range of historical levels. The rating will also depend on timely cost recovery through rates, which are subject to City Council approval. CPS Energy's rate advantage to other utilities in Texas has historically been viewed by Fitch as providing the utility with comfortable rate flexibility and liquidity that could be tapped if needed. Reluctance to raise rates as expenditures are increased could limit CPS Energy's financial flexibility in the future and place pressure on the rating.
For more information regarding the CPS Energy rating see Fitch Report 'San Antonio, Texas (CPS Energy)' dated May 30, 2008.