AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to the following revenue bonds issued by the City of San Antonio, TX:
--Approximately $539 million electric and gas systems revenue refunding bonds, new series 2016.
Bond proceeds will be used to refund outstanding senior lien bonds issued for San Antonio City Public Service Energy (CPS Energy) and pay costs of issuance. Bonds are expected to price on June 28, 2016 via negotiated sale.
In addition, Fitch affirms the following outstanding San Antonio electric and gas system revenue bond ratings:
--$3.5 billion senior lien obligations at 'AA+';
--$1.9 billion outstanding junior lien obligations at 'AA+';
--$360 million outstanding commercial paper (CP) notes at 'F1+' and a corresponding bank note rating of 'AA+' on each series of CP.
The Rating Outlook is Stable.
SECURITY
Senior lien bonds are secured by net revenues of the combined electric and gas system, operating as CPS Energy. The junior lien bonds are secured by CPS Energy net revenues after the payment of debt service on the senior lien bonds. CP repayment is secured by a third lien on net revenues.
KEY RATING DRIVERS
COMBINED ELECTRIC AND GAS SYSTEM: CPS Energy provides retail electric and natural gas services to the city of San Antonio. The service area continues to enjoy modest but consistent growth.
STRONG FINANCIAL METRICS: Financial margins for bondholders were strong in fiscal 2016 with 2.5x Fitch-calculated debt service coverage of revenue bonds and 1.7x all-in coverage after the large transfer made annually to the city's general fund. Liquidity remained healthy with 220 days of operating cash.
COMPETITIVE RATES: Electric rates are low for the region. Both electric and gas rates have automatic adjustment mechanisms that management employs routinely to recover fuel costs.
DIVERSE, LONG GENERATION PORTFOLIO: CPS Energy enjoys a competitively priced generation portfolio and is in a long resource position, resulting in the need for some amount of wholesale activity to balance assets with demand. CPS Energy continues to add renewable purchase power agreements to achieve its self-elected renewable portfolio standard.
MODERATE CAPITAL DEMANDS: The utility's debt burden and equity position are average for the rating. Additional capital projects estimated at approximately $3.2 billion over the next five years are expected, although debt levels and rate increases should remain manageable.
RATING SENSITIVITIES
WEAKER FINANCIAL MARGINS: The Stable Outlook reflects San Antonio City Public Service's (CPS Energy's) consistently strong financial metrics. However, a sustained decline in financial margins as a result of increased operating costs and/or a reluctance to increase rates could result in rating pressure.
CREDIT PROFILE
CPS Energy provides exclusive electric service to 778,095 primarily residential electric customers and to 337,400 primarily residential gas customers. CPS Energy is the sole supplier of electricity in its service area and is not subject to retail competition introduced in Texas in 2000. Municipal utilities in the state have the option to offer retail competition in their services areas and CPS Energy has indicated no intent to do so.
The customer base is large and diverse, and San Antonio continues to attract new industry to the service area. CPS Energy owns sufficient generation totaling 6,353 megawatts (MW) to serve its own native load with a system all-time peak of 4,911 MW in 2011. Coal is still the predominant fuel type (42% of energy in 2015) but this is expected to decline in 2018 with the deactivation of its oldest coal plant in favor of greater natural gas-fired and renewable resources. Remaining coal-fired resources are compliant with existing environmental regulations. The planned closure of the older Deely coal unit should reduce CPS Energy's exposure to potentially stricter future regulations.
STABLE RETAIL SERVICE AREA; INCREASED WHOLESALE ACTIVITY
Retail sales growth has averaged 1.8% over the past decade. CPS Energy management projects annual retail energy and gas sales growth to average around 1.5% and 0.9%, respectively as a result of extensive investments in energy efficiency programs and industry-wide technology changes that offset customer and load growth in the service area.
In addition to its retail customer base, CPS Energy sells energy under firm contracts to 10 cities and cooperatives under fixed-price contracts with termination dates ranging from 2016-2023. Short-term energy sales within the Electric Reliability Council of Texas (ERCOT) are also made when CPS Energy's assets are competitive with short-term energy prices in the market. However, in the past four years in the ERCOT market, low natural gas prices, the addition of substantial wind generation and transmission capacity, and mild weather in much of the state have contributed to low energy prices.
Wholesale sales, including the firm contracts, increased to a peak of 33% of total megawatt hour (MWh) sales in fiscal 2015, up from 13% in 2010, reflecting the long generation position of the utility. Very low market prices in ERCOT in fiscal 2016 reduced short-term market opportunities and wholesale sales fell to 23% of MWh sales, which still included firm contracted sales to other utilities. Fitch views the potential revenue fluctuation that may result from short-term energy sales as a limited risk, given the low margin provided by this type of wholesale activity in relation to CPS Energy's overall financial profile. Even with very low market prices in fiscal 2016, CPS Energy's overall financial profile remained consistent with fiscal 2015.
COMPETITIVE RATES; SOME RATE PRESSURE
Rates are competitive, and regular rate increases have occurred historically approximately every two years. CPS Energy rates must be approved by the San Antonio City Council. The last base rate increase occurred in February 2014 at 4.25% for both the electric and gas system, which was slightly below the amount requested by CPS Energy of 4.75%. Prior to 2014, the last rate increase had not occurred since 2010.
While overall financial performance has been healthy, management's decision to forgo rate action may also reflect some rate sensitivity in the service area, despite the utility's comparatively low rates. Both electric and gas rates have automatic fuel adjustment factors, adjusted monthly, that help recover variable fuel costs in a timely manner.
CONSISTENTLY STRONG FINANCIAL PERFORMANCE
CPS Energy's financial performance has remained strong for a number of years. With the rate increase implemented in fiscal 2015, Fitch-calculated debt service coverage (DSC) improved to 2.47x on the senior and junior lien revenue bonds and to 1.71x with general fund transfers factored in. Financial performance in fiscal 2016 was similar with senior lien DSC of 2.52x and coverage of 1.74x after the transfer.
CPS Energy's consistent financial performance is supported by sound financial policies and rate setting that target minimum all-in DSC of 1.5x. Although CPS Energy makes a large annual transfer to the city's general fund equal to up to 14% of gross revenues, consistent financial margins for bondholders and competitive rates mitigate concerns about this practice. Management's financial and rate model indicates continued strong financial margins without electric or gas system base rate increases over the next two years.
Unrestricted cash of $337 million at the end of fiscal 2016 provides 84 days cash and investments on hand. CPS Energy has additional restricted reserves that include $544 million in the repair and replacement fund. CPS Energy deposits 6% of gross revenues annually into the repair and replacement fund.
Debt levels are above average at $7,783 debt per electric customer. Free cash flow is typically less than annual depreciation. Reinvestment in the system, as well as new asset investment, has been funded primarily via debt, although CPS Energy forecasts a decreasing reliance on debt funding as a percentage of overall capital spending over the next decade. CPS Energy targets maintaining a debt-to-equity ratio below 65%.
For more information see Fitch's report, 'San Antonio City Public Service, Texas', dated Nov. 3, 2015, and available at www.fitchratings.com.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Fitch Internal Liquidity Worksheet (pub. 13 Jun 2013)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710906
Rating U.S. Public Finance Short-Term Debt (pub. 17 Nov 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873508
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=1005839
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005839
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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