November 11, 2008
Fitch Rates Lower Colorado River Authority’s (TX), $300MM Rfdg and Improve. Revs, Ser 2008A ‘A+’
Fitch Ratings has assigned an 'A+' rating to Lower Colorado River Authority's (LCRA), $300 million refunding and improvement revenue bonds, series 2008A. The Rating Outlook is Stable. In addition, Fitch affirms LCRA's outstanding revenue bonds at 'A+' and LCRA's tax-exempt and taxable commercial paper (CP) programs at 'F1+'. Proceeds from the 2008A bonds will refund outstanding commercial paper, fund certain improvements to the system, and pay costs of issuance. The bonds are expected to price on Dec. 3, 2008, depending on market conditions.
Key rating factors supporting the 'A+' rating include a competitive and diverse mix of power resources, a large geographic customer base in central Texas with 43 wholesale electric customers; a rate structure that provides timely fuel and purchased power cost recovery, and stable financial performance. Consolidated debt service coverage has been historically consistent at approximately 1.4 times (x), which is considered adequate for a wholesale power provider.
The rating also includes increasing competition with the deregulated Electric Reliability Council of Texas (ERCOT) market, including competition for long-term power supply to LCRA's traditional wholesale customers and large capital needs associated with new generation construction and environmental improvements. Fitch is becoming increasingly concerned with the limited progress to date in extending wholesale customers' long-term contracts with LCRA beyond the current maturity date of 2016 and the resulting uncertainty regarding power supply planning. Fitch will be monitoring LCRA's ability to adequately balance future load requirements with its power supply development.
LCRA has signed amended contracts with 30 customers for about 28% of its load. LCRA's board may consider a contract extension with Pedernales Electric Cooperative, its largest customer (33% of load) by the end of 2008. Discussions are ongoing with the remaining customers, who are negotiating as a collective group known as the Wholesale Power Alliance (WPA). The successful negotiation of new contracts and the particular terms of those contracts will be a key credit driver. The amended contracts to date have varied terms. Of note are terms that include an ability of the customer to scale down (referred to as 'load-release') its all-requirements purchases from LCRA over time to 70% of the original 'all requirements' load.
LCRA operates a fleet of generation assets that are primarily coal (1,043 megawatts (MW)) and natural-gas (1,540 MW) fired. LCRA's portfolio is 52% coal-fired on an energy sales basis. Natural gas-fired generation provides another 33% of energy sales. During the last few years of natural-gas price volatility, LCRA's generation has experienced greater stability compared to market prices, given the predominance of coal. LCRA's rate structure has a fuel and purchased power cost recovery component that allows LCRA to recovery real-time variable costs from its customers on a timely basis, which is a positive credit factor. LCRA has some small hydroelectric generation and it relies on purchased power, including wind, to meet the remaining system needs. The system had a peak of 3,211 MW in summer 2008.
LCRA demonstrates solid financial performance as a wholesale entity, balancing additional costs with increased billing to customers. On a consolidated basis, including all business lines, LCRA had debt service coverage of 1.4x in fiscal 2008. Without the Transmission Services Corporation (TSC) business line, which is not pledged to bondholders, LCRA had 1.34x debt service coverage. The TSC operates as a regulated transmission provider within Texas and typically exhibits round 1.5x debt service coverage for its own bondholders.
Projected debt service coverage is expected to stay in a similar range. LCRA has $2.7 billion in capital spending projected over the next five years, although this includes $928 million in transmission system improvements. The capital estimates include the new generation discussed above and will be predominantly debt financed. The result will be the planned addition of $2.2 billion in new LCRA and TSC debt, an approximate doubling of the current outstanding principal amount of $2.6 billion.
The 'F1+' ratings on LCRA's tax-exempt CP notes and LCRA's taxable CP notes are based on both the internal liquidity support of LCRA and dedicated revolving credit agreements specific to each program. The tax-exempt program is supported by a recent increase to the revolving credit facility provided by JPMorgan Chase Bank (rated 'AA-/F1+', Stable Outlook by Fitch) to $287.5 million. The taxable program is supported by a $40 million revolving credit facility provided by JPMorgan Chase Bank and West LB AG (rated 'A-/F1', Stable Outlook). The revolving credit facilities are dedicated facilities that will cover the payments on the notes if the notes are unable to be remarketed. In addition to the revolving credit facility, LCRA has internal liquidity of approximately $206 million as of fiscal year-end 2008 (June 30, 2008) that could be used to support the CP programs, if needed.
LCRA is a public power wholesale provider in Texas serving eight electric cooperatives, 34 cities, and one investor-owned utility. The utility also provides regional water and wastewater services in its service area, and manages water supplies and controls flooding along the Colorado River of Texas. LCRA manages its operations through four primary business units: Wholesale Power Services, Transmission Services, Water Services, and Community Services. Wholesale Power Services accounts for about 77% of operating revenues, followed by Water Services at 5%, and transmission support services at 17%. Revenues originally associated with transmission have been shifted from LCRA to its affiliate TSCorp, a nonprofit corporation. TSCorp was formed to separate LCRA's transmission business from electric generation as required under the Texas electricity restructuring legislation (Senate Bill 7), and allow LCRA to provide transmission services throughout Texas, for LCRA and other contracted entities.