Fitch Rates Lower Colorado River Authority, TX's Rev Bonds 'A'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings assigns its 'A' rating to the following Lower Colorado River Authority, TX's (LCRA) bonds:

--Approximately $102.5 million refunding revenue bonds, series 2015A;

--Approximately $97.5 million refunding revenue bonds, series 2015B.

Proceeds will be used to refund existing debt and pay costs of issuance. The savings are expected to be structured into the next five years (fiscals 2016-2020) with no extension to the final maturity in 2037. Bonds are expected to price during the week of March 16.

In addition, Fitch affirms its 'A' rating on the following:

--$1.72 billion revenue and refunding revenue bonds, and bank note rating on the commercial paper notes, series B at 'A'.

The Rating Outlook is Stable.

SECURITY

Bonds are secured by a gross revenue pledge of LCRA's system. Pledged revenues do not include LCRA Transmission Services Corporation (LCRA TSC) business activity but do include the raw-water business line.

KEY RATING DRIVERS

REGIONAL WHOLESALE SUPPLIER: LCRA supplies energy to over 1 million people in central Texas through 34 wholesale power agreements that extend through 2041. LCRA's outstanding debt has final maturities out to 2040.

RESOLUTION OF CUSTOMER DISPUTES: LCRA has reached settlements with seven of the eight customers that alleged breach of the wholesale power agreements and ceased purchasing power in fiscal 2013. These eight customers accounted for 24% of LCRA's electric load the year prior. The resolution of litigation now provides greater financial certainty.

CASH FLOW PRESSURE MANAGEABLE: Following the loss of customers, LCRA's decision not to raise rates on remaining customers resulted in cash flow pressure. LCRA has managed lower revenues through expenditure reductions, realignments, the spend-down of reserves and the increased use of debt-funding of capital. Fitch expects that LCRA will continue to manage cash flow pressures effectively through fiscal 2016, when debt service payments decrease.

LIMITED CAPITAL NEEDS: Debt levels are moderate and the majority of LCRA's consolidated $1.15 billion five-year capital plan is projected to fund transmission projects (separately financed and secured by LCRA TSC, rated 'A+' by Fitch).

LOAD RELEASE PROVISIONS: LCRA's 2041 wholesale power agreements have load release provisions that allow customers to reduce purchases from LCRA over time by up to 35% of their total load. A number of customers have already exercised this option for some portion of their load. The load release provisions introduce uncertainty regarding future load requirements, which are the basis for LCRA's fixed cost recovery.

EXCESS GENERATION CAPACITY: Costs associated with capacity in excess of wholesale customer loads are expected to be offset by excess energy sales into the ERCOT market. Effective management of the authority's resources, as well as stronger market prices and related revenue, could offset rates paid by wholesale customers.

RATING SENSITIVITIES

DECLINE IN RESERVES: Although not projected by management in fiscals 2015 and 2016, declines in operating reserves below the LCRA board's minimum policy levels of two months' operations could result in negative rating pressure.

CREDIT PROFILE

LCRA is the largest public power wholesale provider in Texas and also manages and distributes water supply and controls flooding along the lower Colorado River in Texas. LCRA's consolidated revenues consist primarily of wholesale electric revenues, which provided 63% of total combined revenues in fiscal 2014. Transmission revenues provided 31% of revenues, although they are not pledged to these bondholders, and water and irrigation services provided the remaining revenues.

Wholesale power is sold via 34 long-term wholesale power agreements that extend to 2041. LCRA also had nine wholesale power agreements that extended to 2016, eight of which have been the subject of recent litigation. Seven of those agreements were terminated in the past year based on settlements between LCRA and the respective customers. One contract (Kerrville Public Utility Board) is the subject of ongoing litigation, and one (Guadalupe Valley Electric Cooperative) remains effective through 2016.

Given new lower load requirements from fewer customers and recent investment in additional generation assets, LCRA is subject to excess generating capacity and energy production that is available for sale into the ERCOT market. Market sales occur by economic dispatch, requiring LCRA's generation assets to be competitive within the ERCOT market in order to make those sales.

MANAGEMENT CHANGES APPEAR PROMISING

Phil Wilson took over as General Manager of LCRA in February 2014. Mr. Wilson's background includes state government and prior experience in the Texas electric industry. A number of additional senior management changes have also occurred that include managers with backgrounds in the competitive electric industry, business strategy and development, legal and regulatory expertise and finance.

The new leadership team at LCRA appears promising in that it includes individuals with expertise in the power business line, and specifically in energy trading, which has become more important given LCRA's long position in the market. Management's renewed emphasis on customer relations in the power business line and its ability to navigate multiple constituencies in the politicized water business line will also be important.

Despite management turnover, Fitch expects LCRA's overall risk profile to remain consistent with its core businesses, with energy hedging activities serving to confine potential cost exposures to the wholesale customers.

LOSS OF CUSTOMERS RESULTED IN FINANCIAL PRESSURE

The rating downgrade in October 2012 reflected anticipated declines in LCRA's revenues as a result of the unexpected early wholesale power agreement terminations with the eight customers that ceased purchasing power in mid-fiscal 2013. As litigation proceeded with the non-paying customers, LCRA stopped purchasing energy in the ERCOT market on behalf of the eight customers but continued to bill customers for remaining fixed costs due under their wholesale power agreements. LCRA has used a number of tools to manage the revenue impacts, including expenditure reductions, spend-down of cash reserves, increased use of debt and the economic dispatch of available energy into the ERCOT market.

DEBT SERVICE COVERAGE FELL IN FISCAL 2014; SHOULD REMAIN LOW NEXT 2 YEARS

LCRA took a $59.5 million write-off in fiscal 2014 for its uncollected electric revenues to date. As a result, Fitch-calculated consolidated debt service coverage declined to 1.19x, although LCRA's calculation remained above the board-policy target of 1.25x. Consolidated coverage includes the affiliate LCRA TSC, with revenues that are not pledged to LCRA bondholders. Fitch-calculated debt service coverage without the revenues of LCRA TSC was below 1x, reflecting management's planned use of reserves. LCRA expects consolidated debt service coverage to remain at or near the 1.25x policy level in fiscals 2015 and 2016 with results similar to fiscal 2014. Debt service coverage is expected to improve in fiscal 2017 when a distinct decline in debt service costs is scheduled to occur.

CASH LEVELS ADEQUATE FOR LCRA SYSTEM; STRONG AT CONSOLIDATED LEVEL

Cash levels for the generation business line declined in fiscals 2013 and 2014 due to lost revenues. However, cash levels throughout the LCRA system remained acceptable and in line with management's reserve target equal to between two and three months' of operating expenses. Cash reserves were around $185 million at the end of fiscal 2013 and $186 million at the end of fiscal 2014. The three-month operations target for cash was around $140 million at fiscal year-end 2014, which management expects to exceed in the next two years. Consolidated unrestricted LCRA cash is also healthy at $300.7 million or 189 days funds on hand.

Additional information is available at www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Revenue Supported Rating Criteria' (June 3, 2014);

--'U.S. Public Power Rating Criteria' (March 18, 2014);

--'Lower Colorado River Authority' (Oct. 14, 2013)

--'Fitch Downgrades Lower Colorado River Authority's Revs to 'A', Outlook Stable' (Oct. 2, 2012);

--'U.S. Public Power Peer Study' (June 12, 2014).

Applicable Criteria and Related Research:

U.S. Public Power Peer Study -- June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749789

Lower Colorado River Authority, Texas

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=718963

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981063

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Contacts

Fitch Ratings
Primary Analyst
Kathy Masterson
Senior Director
+1-512-215-3730
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Committee Chairperson
Christopher Hessenthaler
Senior Director
+1-212-908-0773
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Kathy Masterson
Senior Director
+1-512-215-3730
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Committee Chairperson
Christopher Hessenthaler
Senior Director
+1-212-908-0773
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com