SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to the city of Garland, TX's subordinate lien electric utility system revenue refunding bonds, new series 2016A and 2016B.
Proceeds from the series 2016A bonds will refund outstanding series 2007 bonds and pay the costs of issuance. Proceeds from series 2016 will refund outstanding commercial paper obligations and pay the costs of issuance.
Fitch has also taken the following rating actions:
--$58.4 million electric utility system revenue bonds, series 2007, 2008, 2009, 2011, 2011A and 2013 upgraded to 'AA' from 'AA-';
--$94.6 million electric utility system revenue refunding bonds (subordinate lien), new series 2014 & new series 2015 affirmed at 'AA-'.
The Rating Outlook is Stable.
The series 2016A and 2016B bonds are payable on a subordinate lien basis from net revenues of Garland, TX's, electric utility system, known as Garland Power & Light (GP&L). Outstanding senior lien obligations are payable prior to outstanding subordinate lien obligations.
KEY RATING DRIVERS
TEXAS RETAIL UTILITY: GP&L serves approximately 69,000 retail customers in a strong service territory located just outside the city of Dallas. The utility also serves as a wholesale provider to several municipal and cooperative retail systems under varying contractual terms.
SUFFICIENT BUT CHANGING POWER SUPPLY: GP&L's power supply remains sufficient to meet its retail needs, although market conditions have altered GP&L's historical reliance on Texas Municipal Power Agency's (TMPA, 'A+'/Stable) coal-fired power plant with a significant increase in market purchases and a growing amount of contracted renewable power. Directly owned natural gas-fired units are aging but provide valuable capacity and flexibility.
ROBUST LIQUIDITY: A sizable rate-mitigation fund (RMF) will enable GP&L to offset increased obligations to TMPA through fiscal 2018. The RMF balance exceeds previous expectations, as financial outperformance over the past few years has delayed the RMF's anticipated drawdown. At the end of fiscal 2015, the RMF totaled approximately $177.5 million and total system unrestricted cash amounted to $228.4 million or 295 days cash on hand.
PLANNED USE OF RESERVES: Projected cash flow and liquidity metrics are adequate for the rating. The planned use of available cash is expected to reduce Fitch's calculated debt service coverage to below 1x in fiscal 2018. Rating concerns are offset to some degree by the system's strong liquidity levels and historical trend of outperforming conservative financial projections.
RECOVERY ADJUSTMENT CHARGE: GP&L's competitive rates and flexible rate structure are viewed as supportive of the rating. The city has full rate-setting authority, and the system's recovery adjustment factor can be adjusted by GP&L on a monthly basis to capture costs in a timely manner without requiring city council approval.
ELEVATED DEBT PROFILE: The upgrade of the senior lien revenue bonds reflects the robust projected annual debt service coverage following this transaction as well as the closed nature of the lien. GP&L's all-in debt profile is elevated compared to similarly rated retail systems. Future debt issuances are expected to increase the system's debt burden but are not expected to materially affect the ratings.
WHOLESALE BUSINESS INCREASES RISK: GP&L's wholesale business could weigh on the rating if not offset by strong liquidity levels and sufficient controls to reduce market and credit risks. Significantly reduced liquidity levels beyond what is currently projected for fiscal 2018 could negatively affect the rating.
GP&L is a municipally-owned, electric services provider serving a retail customer base of approximately 69,491 (fiscal 2015). The electric system also provides wholesale electric services to several municipal and cooperative utilities along with providing ancillary services in the ERCOT market. GP&L is an integrated utility with generation, distribution, and transmission assets.
CHANGING POWER SUPPLY
The utility's power supply is changing both in terms of technologies and fuel mix due to low natural gas prices and the increased competitiveness of renewable resources, particularly wind. GP&L's historical reliance on coal has been reduced as market prices have eroded the competitiveness of TMPA's Gibbons Creek Steam Electric Station (GCSES). In addition, recently contracted purchase power agreements (PPAs) for wind began delivering to the system in fiscal 2016, marking a transition towards a greater reliance on intermittent resources that will grow as additional resources begin commercial operations in fiscal 2017.
TMPA members, including GP&L, have authorized a potential sale of GCSES. Fitch views a potential sale as credit neutral for GP&L given the utility's recently reduced reliance on the plant and its likely ability to replace the lost capacity and energy along similar or better economic terms.
STRONG LIQUIDITY; INCREASED EXPENSES
To date, GP&L has successfully managed an on-going but temporary period of increased TMPA obligations that runs through fiscal 2018. In fiscal 2015, GP&L's debt service coverage and coverage of full obligations were 1.93x and 1.07x, respectively. While all-in coverage levels are low for the rating, the utility outperformed Fitch's expectations for fiscal 2015, as better than anticipated cash flow deferred the budgeted $29.7 million draw on the utility's RMF. Coverage of the senior lien obligations alone following the issuance of the series 2016A bonds is projected to increase to above 10x.
The RMF totaled approximately $177.5 million at the end of fiscal 2015, providing GP&L with strong liquidity and flexibility to manage increased financial obligations through fiscal 2018 while preserving rate-raising flexibility. Outperformance of previous projections has preserved the RMF by delaying a cumulative draw of $57.6 million from fiscal 2013-2016. Management currently projects transfers from the RMF to total $10 million in fiscal 2017 and $78.4 million in fiscal 2018.
SIGNIFICANT WHOLESALE BUSINESS
GP&L is a qualified scheduling entity within the ERCOT market and maintains a significant wholesale business providing power to other municipal and cooperative utilities under various contract terms. GP&L currently provides full- or partial-requirements service to six contracted customers for various terms through December 2022. Each contract has its own heat rate or fixed-rate price, depending on the nature and term of the provided services. In addition, GP&L sells renewable resources under long-term PPAs to several utilities under terms and conditions that mirror those between GP&L and the renewable project developer. These contracts extend as far as 2036.
Fitch views the system's wholesale operations as presenting a higher degree of business risk than is typical for most retail public power utilities. While GP&L maintains prudent risk management policies and practices, a significant expansion of this business without sufficient liquidity or commensurate controls could ultimately lead to negative rating pressure.
ELEVATED DEBT LEVELS
GP&L's adjusted debt-to-FADS is elevated for the rating at 7.3x in fiscal 2015. Likewise, debt-to-customer and debt-to-capitalization were also elevated at $6,071 and 51.6%, respectively.
Following this refunding, GP&L will have approximately $45.1 million in senior debt outstanding (closed lien), approximately $140.9 million in subordinate lien debt outstanding, and approximately $29.9 million in outstanding commercial paper (CP) and privately placed notes, which carry a third lien on net revenues. Fitch's upgrade of the senior revenue bonds reflects the significantly higher projected coverage for those bonds following the refunding.
GP&L retains a private note program that extends for three years with a total capacity of $139.2 million. The program is being used by GP&L to finance the development of a transmission project. The current outstanding balance of the program is approximately $14.9 million. While the project's actual costs will dictate the amount of debt issued under the program, Fitch views GP&L as having sufficient debt capacity at the current rating level to absorb the full amount. Once completed, GP&L will receive annual payments from the ERCOT market to satisfy the associated debt service obligations for developing the transmission project, helping to offset the financial impact of the debt.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Public Power Rating Criteria (pub. 18 May 2015)
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