AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'F1+' rating on Guadalupe Valley Electric Cooperative's (GVEC) $75 million authorized commercial paper (CP) notes program.
SECURITY
The CP notes are general unsecured obligations of GVEC.
KEY RATING DRIVERS
SUBSTANTIAL LIQUIDITY AND STRONG LONG-TERM RATING: The 'F1+' rating on GVEC's expanded CP note program broadly reflects GVEC's substantial liquidity sources, including an expanded $75 million revolving credit facility provided by CoBank, ACB (IDR's rated 'AA-'/'F1+' by Fitch), as well as the utility system's strong 'AA-' long-term rating.
TIMING COULD BE A CONCERN: Although liquidity facilities are in place, the timing provisions in GVEC's note program and credit facility agreements could provide a limited window for fully accessing bank funds in the very unlikely event of a failed rollover.
GROWING DISTRIBUTION SYSTEM: GVEC is a transmission and distribution cooperative whose service area benefits from being located east of San Antonio and about 40 miles south of Austin. Electric distribution service is provided to approximately 73,500 customers and an estimated population of 182,000. Energy sales grew 7% in 2013.
EVOLVING POWER SUPPLY: GVEC has given its long-standing energy supplier, Lower Colorado River Authority (LCRA; rated 'A+' by Fitch), notice that it will not renew its power supply contract after June 2016. The cooperative will be responsible for procuring its own power supply needs as a result. GVEC has entered into a set of contracts for about 45% of its total power needs starting in mid-2016. These contracts are medium-term in duration (5.5 to 10.5 years). Additional long-term power sources are being explored.
SOLID FINANCIAL METRICS: GVEC's financial metrics compare well to similarly rated retail distribution systems with debt service coverage (DSC) of 2.87x in FY 2013 (1.47x coverage of full obligations) and a reasonable debt-to-FADS of 4.8x. Days cash on hand is light (50 days), but overall liquidity is stronger (287 days). Equity to capitalization, at 53.2%, is in line with the group median.
RATING SENSITIVITIES
FAILURE TO MANAGE EVOLVING POWER SUPPLY: GVEC's inability to manage its evolving power supply could exert additional downward pressure on the long-term rating, thereby weakening support for the short-term rating.
CREDIT PROFILE
CP PROGRAM EXPANDED
GVEC is expanding its commercial paper program to $75 million from $50 million, and amending certain provisions in the related documents. Most notably, J.P. Morgan will be replaced as Trustee by Amegy Bank, a subsidiary of Zions Bancorporation (rated 'BBB-'/'F3' by Fitch).
GVEC's principal motivation behind the proposed expansion is to enhance liquidity to address short-term cash flow volatility and timing issues. GVEC continues to experience strong growth throughout its service territory, due in part to the development of oil and gas activities within the Eagle Ford shale. Although a large portion of the costs incurred by GVEC to serve this load are paid for by developers, the initial costs are often paid by GVEC and later reimbursed. Similarly higher energy costs are also recovered over time from users, but may be charged to GVEC ahead of retail rate adjustment.
AMPLE LIQUIDITY SOURCES
The 'F1+' is supported by an expanded standby credit facility with CoBank for $75 million which is specifically available for the principal payment of GVEC's commercial paper program should the utility need to utilize it. The short-term rating is also supported by an additional $70 million in lines of credit with CoBank and National Rural Utilities Cooperative Finance Corporation (CFC, not rated by Fitch). These lines of credit extend for one year and both of which are fully available.
These facilities, coupled with GVEC's unrestricted cash and investments ($15.8 million at July 31, 2014), provides coverage of well over 1.25x the maximum size of the CP notes program. Together with GVEC's 'AA-' long-term rating, this amount of liquidity is sufficient for the 'F1+' rating.
SOLID FINANCIAL PERFORMANCE
Total outstanding debt approximates $191 million, including outstanding commercial paper. Total debt includes public bonds issued in 2007, loans from CFC and CoBank and a series 2011 private placement. Long-term debt matures through 2041 and debt service declines steadily over time. Total debt to funds available for debt service was a reasonable 4.8x in 2013.
Additional information is available at 'www.fitchratings.com'.
This rating action was informed by the sources of information identified in Fitch's U.S. Public Power Rating Criteria, Criteria for Assigning Short-Term Ratings Based on Internal Liquidity, and Revenue-Supported Rating Criteria.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria' (March 18, 2014);
--'Rating U.S. Public Finance Short-Term Debt' (Dec. 9, 2014).
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841
Rating U.S. Public Finance Short-Term Debt
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724680
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=868454
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