SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings assigns the following rating to the City of San Antonio, Texas' bonds, issued on behalf of San Antonio City Public Service (CPS):
--$521 million electric and gas systems revenue bonds, (taxable) new series 2012 'AA+'.
In addition, Fitch affirms the following CPS ratings:
--$3.8 billion outstanding senior lien obligations at 'AA+';
--$897.6 million outstanding junior lien obligations at 'AA+';
--$130 million outstanding commercial paper notes at 'F1+'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
COMBINED SYSTEM: The utility is a combined municipal utility that provides retail electric and natural gas services to the City of San Antonio.
SOLID FINANCIAL PERFORMANCE: Financial margins have been consistent and healthy at over 2.2 times (x) debt service coverage, or 1.5x including the large 14% general fund transfer, in recent years.
STRONG POLICIES AND PLANNING: CPS exhibits strong management practices, including responsive, long-range financial and rate forecasting that reflects rapidly changing market conditions.
COMPETITIVE RATES: Electric rates are low for the region. CPS offers the community highly competitive power prices, resulting in sustained rate flexibility. Both electric and gas rates have automatic adjustment mechanisms to recover fuel costs.
DIVERSE, LONG GENERATION PORTFOLIO: CPS enjoys a competitively priced and sufficient generation portfolio, resulting in competitive rates and rate flexibility. In practice, CPS is usually in a long resource position, resulting in some amount of off-system sales to balance assets with demand.
POWER SUPPLY CHANGES: CPS announced in June 2011 its decision to deactivate one of its two coal-fired power plants by 2018, the Deely Plant (871 MW). CPS is now purchasing an existing 800 MW natural gas plant (the Rio Nogales plant located in Seguin, TX) to replace the Deely capacity with natural gas-fired generation. In the next six years, the capacity will be in excess of CPS' own demand.
SIZABLE CAPITAL DEMANDS: The utility's debt burden and equity position are average. Additional capital needs in the range of $3 billion over the next five years, which includes the purchase of Rio Nogales, will require additional debt funding; debt levels and rate increases should remain manageable.
STABLE SERVICE AREA: The San Antonio service area continues to enjoy growth, albeit at a slower pace, resulting from ongoing military spending in the area.
SHORT-TERM RATING: The 'F1+' ratings on CPS' tax-exempt CP programs are based on the internal liquidity support of CPS and dedicated revolving credit agreement.
SECURITY:
The senior lien bonds, including the series 2012 bonds, are secured by net revenues of the combined electric and gas system. The junior lien bonds are secured by net revenues after the payment of debt service on the senior lien bonds. Commercial paper repayment is secured by a third lien on net revenues.
CREDIT PROFILE:
Stable Service Area
CPS provides exclusive electric service to 716,622 primarily residential electric customers and to 324,702 primarily residential gas customers. CPS is the sole supplier of electricity in its service area and is not subject to retail competition unless the city council determines that CPS will opt into retail electric competition that is required in ERCOT for non-municipal utility and cooperative service areas. CPS' customer base is large and diverse, and San Antonio continues to attract new industry to the CPS service area. While electric usage declined from 2009 through 2010, it recovered in fiscal 2011. In addition to its retail customer base, CPS sells wholesale electricity to a number of regional cities and cooperatives under contracts ranging from two to seven years.
Vertically Integrated Utility
CPS owns and operates roughly 5,900 mega-watts (MW) of generating capacity. The J.K. Spruce II unit, a 775 MW coal-fired unit, was brought on line in May 2010 and 190 MW of natural-gas peaking units came on line in December 2010. The new resources are replacing older, less efficient units, which are being retired. In addition, CPS continues to acquire a significant amount of renewable energy through various long-term purchase power agreements. Of the 883 MW of purchased power renewable resources, approximately 97% is wind resources from West Texas.
Rio Nogales Power Plant Purchase
In June 2011, CPS announced it would deactivate the Deely plant by 2018, 15 years ahead of schedule, in lieu of spending the estimated $565 million to install scrubbers to bring it into compliance with potential new Environmental Protection Agency (EPA) emissions standards. The plant closure and strategic decision to invest in a baseload natural gas plant alternative, renewable energy and efficiency savings are components of San Antonio's 'New Energy Economy Initiative'.
CPS has decided to purchase a 10-year old natural gas-fired combined cycle plant (Rio Nogales power plant). The plant has a nameplate capacity of 800 MW and is located in Sequin, TX, which is adjacent to CPS' service area. The plant's geography is advantageous, and CPS will not need to build any transmission to interconnect the facility. In an agreement with the current owner, Tenaska, CPS anticipates closing the purchase of the facility in April 2012, funded with proceeds from the Series 2012 bonds. CPS will own and operate the plant along with its fleet of 20 non-nuclear generating units.
The Rio Nogals plant capacity will replace the Deely plant, once the Deely plant closes in 2018, as currently envisioned. In overall cost planning, the purchase of the Rio Nogales plant replaces the anticipated cost of environmental improvements at Deely that would have likely been needed to maintain the plant. However, in the interim six years until Deely's closure, CPS will take additional power supply risk in that the plant is excess to its native demand. In order to mitigate the financial risk of this position, CPS anticipates entering into a heat rate call option for 480MW or approximately two-thirds of the plant's capacity.
The call option to be sold by CPS requires the buyer to make a fixed payment (call option premium) to CPS subject to the plant meeting certain availability criteria. In addition, the buyer of the option would have the right to call on the energy from two-thirds of the plant. CPS would be compensated for fuel and other variable expenses at an agreed upon heat rate during each hour that the plant is dispatched.
CPS envisions selling this option for a price that would provide sufficient fixed revenues to cover the debt service associated with the bonds through 2018, although coverage of fixed and variable costs associated with the plant will depend, in part, on market conditions. Even under scenarios where CPS may pay a portion of these costs, it does not appear to create a material decline in the financial position. CPS has determined that the costs of the plant will gradually be brought into the rate base over the next six years, beginning in fiscal 2015.
Stable Financial Performance
CPS' financial performance has hovered in a consistent range for the past five years. Fiscal year end Jan. 31, 2011 generated Fitch calculated annual debt service coverage of 2.33x on the senior and junior bonds and an all-in 1.59x coverage when general fund transfers are included. Management's financial projections indicate continued financial margins slightly better than this level. Management's financial policies include an internal target of 1.5x all-in coverage. With unrestricted cash of $814 million, including its repair and replacement fund, or 243 days cash on hand, CPS' liquidity levels are strong. While debt levels are moderately high and continue to increase, CPS continues to exhibit its ability to service this level of debt.
Rates are competitive, and regular rate increases occur approximately every two years. The next rate case is expected in summer 2012 for implementation in Fiscal 2013. Both electric and gas rates have automatic fuel adjustment factors that help recover variable fuel costs in a timely manner.
Sizable Capital Needs
CPS has identified approximately $3 billion of capital improvement projects that it will undertake over the next five years. A significant amount of the capital program will be to make improvements to the electric distribution system. CPS is pursuing an ambitious energy conservation program called Save for Tomorrow Energy Plan (STEP) which is expected to reduce load growth through energy efficiency projects. Even with its STEP program, CPS still anticipates electric load growth of around 1% annually. The capital improvement program identifies various transmission and generation projects. The capital improvement program is expected to be funded by a combination of 70% debt financings and 30% internally generated funds.
Commercial Paper Program
The 'F1+' rating on CPS' tax-exempt commercial paper program is supported by its liquidity position and a $450 million revolving credit facility provided by State Street Bank and Trust Company and Bank of America, N.A. The revolving credit agreement is a dedicated facility that will cover the payments on the notes if the notes are unable to be remarketed. The revolving credit agreement expires on Nov. 1, 2012. In addition to its revolving credit facility, CPS had available cash and investments of approximately $814 million that could be used to support the CP program, if needed. CPS currently has $130 million outstanding in commercial paper notes.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 20, 2011;
--'Public Power Rating Guidelines', March 28, 2011;
--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity', dated June 20, 2011;
--'US Public Power Peer Study', June 20, 2011.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=665815
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637129
U.S. Public Power Peer Study ￢ﾀﾔ June 2011
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=636311
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