NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms its 'BBB+' rating assigned to the $121.2 million power supply system revenue refunding bonds series 2012 issued by Sam Rayburn Municipal Power Agency (SRMPA or the agency), TX.
The Rating Outlook is Stable.
Bonds are secured by net revenues of the agency, which are derived from payments received under take-or-pay power supply contracts with the three member cities.
KEY RATING DRIVERS
STABLE MEMBERS: The 'BBB+' rating reflects the stable credit quality of the underlying members. SRMPA's members are characterized by a small but primarily residential customer base and slow growth, and negligible distribution system debt but above-average SRMPA debt (approximately $10,500 per customer).
TAKE-OR-PAY AGREEMENT: SRMPA's members have unconditional take-or-pay power purchase agreements with a 100% step-up provision. Fitch notes, however, that given the size of each member a default by any individual member may be difficult to absorb by any other member.
LONG-TERM FIXED-PRICE SUPPLY: SRMPA's electricity requirements net of its share of federal hydro purchases are met under a fixed-price requirements power supply agreement (RPSA) with Entergy Wholesale Operations Marketing, LP (EWOM or Entergy) (not rated by Fitch). The RPSA extends through the life of the debt.
RATE COMPETITIVENESS: Wholesale rates to members have remained steady despite some increases associated with below-average hydro generation. The rates of SRMPA participants are now competitively priced given rate increases at neighboring systems.
COUNTERPARTY RISK: While the RPSA between SRMPA and Entergy is backed up by a purchase money security interest in Entergy Power Inc., and guaranteed by Entergy Corp., SRMPA remains exposed to Entergy's counterparty risk.
MEMBER CREDIT QUALITY: The rating on the bonds is based on the credit quality of the members together with the step-up provisions that mitigate against a payment default. A change in the credit quality of the members could affect the rating.
Full Requirements Joint Action Agency
SRMPA is a municipal corporation organized to provide full requirements electric supply to its three members located in eastern Texas. The agency's members (cities of Jasper, Liberty and Livingston) are all located in the SERC Reliability Corporation (SERC) region of Texas and are therefore outside the nodal market recently implemented in the Electric Reliability Council of Texas (ERCOT).
Take-or-Pay Contracts with Members
Member's power supply needs are met pursuant to unconditional take-or-pay contracts that run through 2021, thereby matching up with the maturity of the outstanding bonds. The take-or-pay contracts have an unlimited step-up provision. SRMPA does not own any generation, but receives its power from Entergy under the RPSA. The RPSA was entered into in exchange for SRMPA's ownership interest in a coal plant. SRMPA is also entitled to a portion of the output of two federal hydro projects and Entergy's contract obligations are net of the hydro output.
Since December 2011, SRMPA has been serving an additional 545 MW of load through ETI and Vinton Public Power Authority under a separate project, Cambridge. Although there is overlap of power supply between Cambridge and SRMPA's legacy load obligations, Cambridge is a separately-secured project account with cascading unwind provisions. The agency's net revenues and other funds established under the Indenture are not commingled with Cambridge and the project is independent from the legacy agency operations that secure SRMPA's payment on the series 2012 bonds.
Fitch notes the agency's strategy, as part of Cambridge, to secure long-term power supply for its members after the expiration of RPSA in 2021. Although the agency's bonds are not secured by Cambridge revenues, the extent and scope of Cambridge demands additional oversight from management. Importantly, the financial effect of Cambridge has been positive for the agencies members, contributing approximately $11 million of operating income during fiscal 2013.
The agency has generally exhibited stable financial performance with debt service coverage (DSC) historically ranging between 1.2x and 1.3x. However, Fitch calculated DSC for fiscal 2013 slipped to 1.1x, due to cooler than normal summer weather and higher operating costs related to unanticipated substation and infrastructure work. In order to meet the 1.20x DSC covenant required under the 2012 bond indenture, SRMPA raised rates for the month of September 2013 and applied approximately $1.4 million from the rate stabilization fund toward the calculation of DSC as permitted under the indenture. On this basis, the DSC ratio improves to 1.26x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria' (March 18, 2014);
--'U.S. Public Power Peer Study' (June 13, 2014).
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
U.S. Public Power Peer Study -- June 2014