NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating on Brazos Electric Power Cooperative's (Brazos) implied senior secured obligations.
Fitch maintains a rating on Brazos' implied senior secured obligations because the cooperative does not have any publically held debt. The rating takes into account Brazos' $2.38 billion of outstanding debt on a consolidated basis as of Dec. 31, 2013, which consists primarily of mortgage notes payable to the Federal Financing Bank.
The Rating Outlook is Stable.
SECURITY
Brazos' 2010 mortgage indenture grants senior secured bondholders a first lien on substantially all of its real and tangible personal property, including its member power sales contracts.
KEY RATING DRIVERS
Large Texas Cooperative: Brazos is a large generation and transmission (G&T) cooperative principally serving 16 Texas distribution cooperative members pursuant to long-term, all-requirements power sales contracts through 2045.
Stabilizing Financial Metrics: The cooperative's cash flow metrics are stabilizing near Fitch's 'A' rating category medians, following construction-related rate increases that drove higher debt service coverage ratios in 2009 and 2010. Improving balance sheet metrics are approaching the medians, and a recently amended and extended $700 million line of credit facility adds considerably to available liquidity.
Robust Transmission Operations: Regulated transmission operations constituting the largest proportion of net margins are a valuable, currently stable component of the cooperative's overall financial position.
Competitive Rates: Relatively sizable proportions of natural gas-fired generation (77%) and market exposure (up to 30%, by design) introduce potential wholesale rate volatility that has ultimately benefitted Brazos in recent years. The newly commissioned Sandy Creek Energy Station helps diversify fuel sources with 388 megawatts (MW) of additional coal-fired generation, and heat rate call options provide some market protection. Moreover, a monthly power cost recovery factor (PCRF) supports the timely recapture of costs.
Growing, Solid Member Systems: Robust sales growth averaging near 4% annually and a largely residential base contributing well over half of megawatt-hour sales enhance Brazos' overall system operations. Consolidated member equity ratios have grown to more than 50%, and the three largest members representing two-thirds of total sales exhibit healthy financial metrics.
RATING SENSITIVITIES
Various Exposures Require Consideration: While currently well managed, various risks of fuel price, energy cost, and interest rate movements requiring the cooperative's active management could add costs in adverse market or economic conditions. Brazos' competitive wholesale rate provides some headroom for these or other unforeseen purposes.
CREDIT PROFILE
Brazos is a large G&T cooperative with 2,667MW of owned and contracted capacity, providing electric service to 16 Texas distribution cooperative members and one municipality pursuant to long-term, all-requirements contracts through 2045. The members, in turn, serve a rapidly growing retail customer base (555,084) in 68 counties principally to the west of the Dallas/Fort Worth metropolitan area and northwest of Houston. Highly residential member sales near 60% of the total add stability to the cooperative's overall revenue base.
STABILIZING FINANCIAL METRICS
Brazos' financial metrics are settling near Fitch's 'A' rating category medians. This follows a period of considerable growth from 2008-2010, during which the cooperative added nearly $1 billion of debt. Steadily improving operating margins - including from its regulated transmission assets - are driving the positive changes. Transmission operations contribute the largest proportion of overall net margins.
Debt service coverage and coverage of full obligations equaled 1.26x and 1.16x, respectively, in 2013, which was in line with the medians. Moreover, the ratios of (i) equity to capitalization and (ii) debt to funds available for debt service improved to 19.5% and 9.8x, respectively, from 13.8% (2009) and 15.1x (2011). The rating category medians are 23.5% and 9.4x.
Fitch noted during its prior review in 2012 that Brazos' more limited capital plans and corresponding deleveraging would be an important indicator of its longer-term financial strength.
ADDITIONAL LIQUIDITY
Brazos adds substantially to available liquid resources with a recently amended and extended $700 million syndicated credit facility expiring February 2019. The cooperative plans to use the facility for interim financing needs of capital projects potentially in 2017 and to make a deposit with the Rural Utilities Service's cushion of credit program for the prescribed 5% rate of return. Cash on hand and liquidity on hand were in line with the medians at 117 days and 409 days, respectively, in 2013.
Brazos continues to collect rate revenues from its members for the approximately 18 months of debt service obligations it deposits in the cushion of credit program. This provides some protection against an unexpected shift in short-term borrowing rates under the syndicated facility.
GOOD MEMBER FINANCIALS
Brazos' three largest members representing two-thirds of total sales likewise demonstrate healthy financial metrics solidly in support of the cooperative's 'A' rating. The three members' debt service coverage registered approximately 2.3x in 2013 (consolidated) and similarly strong equity ratios equaled 50%. Cash on hand was more modest at about 84 days, but largely residential customer bases and limited leverage are offsets. In addition, all member ratios were improved from Fitch's prior review of two years ago.
BROAD POWER SUPPLY STRATEGY
On balance, Brazos' power supply strategy has benefitted its members' retail rates. A preponderance of natural gas-fired generation (77%), coupled with market purchases for up to 30% of power needs, by design, has kept costs low. While the heightened exposure to a single fuel source and market conditions could ultimately introduce volatility, Brazos' active management and competitive wholesale rate provide headroom to negotiate adverse conditions. In addition, the cooperative's monthly PCRF helps ensure the timely recapture of costs.
The cooperative recently diversified fuel sources with 388MW of additional coal-fired capacity through two purchase power agreements, the larger of which (233MW) is with its wholly-owned subsidiary. Moreover, heat rate call options and forward purchases provide a degree of protection against market conditions.
Additional information is available at 'www.fitchratings.com'.
This action was informed by the sources of information identified in Fitch's U.S. Public Power Rating Criteria.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria' (March 18, 2014);
--'U.S. Public Power Peer Study Addendum - February 2014' (Feb. 7, 2014);
--'2014 Outlook: U.S. Public Power and Electric Cooperative Sector' (Dec. 12, 2013);
--'Brazos Electric Power Cooperative, Texas' (June 15, 2012).
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841
U.S. Public Power Peer Study Addendum -- February 2014
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735601
2014 Outlook: U.S. Public Power and Electric Cooperative Sector (Calm Under Pressure)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725447
Brazos Electric Power Cooperative, Texas
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681665
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=833141
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