AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns its 'A' rating to the following Lower Colorado River Authority, TX's (LCRA) bonds:
--Approximately $135 million refunding revenue bonds, series 2015D.
Proceeds will be used to refund existing debt and pay costs of issuance. The savings are expected to be structured into the initial years with no extension to the final maturity in 2032. Bonds are scheduled to price on Sept. 2.
In addition, Fitch affirms the 'A' rating on the following:
--$1.52 billion revenue and refunding revenue bonds, and bank note rating on the commercial paper notes, series B.
The Rating Outlook is Stable.
SECURITY
Bonds are secured by a gross revenue pledge of LCRA's system, including generation and water revenues. Pledged revenues do not include LCRA Transmission Services Corporation (LCRA TSC) revenues but do include certain payments owed from LCRA TSC to LCRA.
KEY RATING DRIVERS
REGIONAL POWER AND WATER 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 but debt service payments decline significantly beginning in fiscal 2017.
RESOLUTION OF CUSTOMER DISPUTES: LCRA has reached settlements with all 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 provides greater financial certainty.
CASH FLOW PRESSURE MANAGEABLE: LCRA managed lower revenues in fiscals 2013 through 2015 following the loss of those customers, with expenditure reductions, realignments, the spend-down of reserves and the increased use of debt-funding of capital. Fitch expects financial margins to improve after fiscal 2015 with full recovery by fiscal 2017, when debt service payments decrease.
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
COMPETITIVE RATES: The Lower Colorado River Authority's ability to maintain competitive wholesale rates compared to the ERCOT market could impact customer decisions to exercise further load release provisions. The Stable Outlook reflects Fitch's expectation that LCRA's management of its cost structure should result in stabilization of LCRA's load.
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, but are separately pledged to transmission revenue bondholders. Water and irrigation services provided the remaining revenues.
Wholesale power is sold via 35 long-term wholesale power agreements, 34 of which extend to 2041. LCRA also had eight wholesale power agreements that extended to 2016, which were the subject of recent litigation. Those agreements have all been terminated based on settlements between LCRA and the respective customers.
Given new lower load requirements after 2016, 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. Actual revenues received from market sales are used to offset the fuel rate charged to wholesale customers.
RECENT MANAGEMENT CHANGES
The new leadership team at LCRA 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.
FINANCIAL PRESSURE IN FISCALS 2014-2016 SHOULD RESOLVE BY 2017
The rating downgrade in October 2012 reflected anticipated revenue and debt service coverage declines as a result of the unexpected early wholesale power agreement terminations with the eight customers that ceased purchasing power in mid-fiscal 2013. The pressure was expected to be temporary for the remaining term of the customer contracts through fiscal 2016. LCRA used a number of tools to manage the revenue impacts, including expenditure reductions, cash reserves and the increased use of debt.
The result of the customer loss was lower debt service from pledged revenues of 1.1x in fiscal 2014, as reported by LCRA. Only consolidated revenues are provided in LCRA's audited financial statements, which includes non-pledged LCRA TSC revenues. Consolidated Fitch-calculated debt service coverage showed similar pressure in fiscal 2014 as it declined to 1.19x (typically over 1.4x), although LCRA's calculation remained above the board-policy target of 1.25x.
LCRA expects debt service coverage from pledged revenues to remain modest but above 1.0x in fiscals 2015 and 2016. Full recovery to over 1.25x is expected in fiscal 2017. Consolidated debt service coverage is expected to remain at or near the 1.25x policy level in fiscals 2015 and 2016. Continued declining debt service scheduled in future years should help relieve fixed cost pressures at LCRA.
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, combined 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. Operating cash reserves were around $185 million at the end of fiscals 2013 and 2014 and increased to $200 million at the end of fiscal 2015, based on unaudited financial information. The three-month operations target for cash is around $107 million. Total consolidated unrestricted LCRA cash is also healthy at $300.7 million or 189 days funds on hand at the end of fiscal 2014.
Additional information is available at www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989901
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989901
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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