SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings assigns the following ratings to the city of San Antonio, Texas' electric and gas systems variable rate junior lien revenue refunding bonds, issued on behalf of San Antonio City Public Service (CPS):
--$50 million, series 2012A 'AA+/F1+';
--$50 million, series 2012B 'AA+/F1+';
--$50 million, series 2012C 'AA+'.
Bond proceeds will be used to refund outstanding variable rate bonds, series 2004. The bonds are expected to price on Oct. 23, 2012.
Separate from the junior lien bonds above, Fitch assigns its 'F1+' rating to CPS' commercial paper (CP) notes, series B and series C. The 'F1+' rating on series A is affirmed, as noted below. The CP notes are secured by a third lien pledge on net revenues, subordinate to senior and junior lien bonds. Fitch assigns its 'AA+' bank note rating to each series of CP that reflects CPS' potential obligation to repay draws on its revolving credit facilities, if drawn on to repay CP.
Finally, Fitch affirms the following outstanding CPS ratings:
--$4.2 billion outstanding senior lien obligations at 'AA+';
--$897.6 million outstanding junior lien obligations at 'AA+';
--$180 million outstanding commercial paper (CP) notes at 'F1+'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
COMBINED SYSTEM: The utility is a combined municipal utility that provides retail electric and natural gas services to the city of San Antonio. The service area continues to enjoy modest but consistent growth.
SOLID FINANCIAL PERFORMANCE: Financial margins have been consistent and healthy at over 2.2x debt service coverage, or 1.5x all-in coverage including all obligations and the large 14% general fund transfer, in recent years.
STRONG POLICIES AND PLANNING: CPS exhibits strong management practices, including responsive, long-range financial and rate forecasting that reflects rapidly changing market conditions. Management sets rates to achieve a minimum of 1.5x all-in coverage.
COMPETITIVE RATES: Electric rates are low for the region. CPS offers the community highly competitive power prices, resulting in sustained rate flexibility. Both electric and gas rates have automatic adjustment mechanisms to recover fuel costs.
DIVERSE, LONG GENERATION PORTFOLIO: CPS enjoys a competitively priced and sufficient generation portfolio, resulting in competitive rates and rate flexibility. In practice, CPS is usually in a long resource position, resulting in some amount of off-system sales to balance assets with demand.
POWER SUPPLY CHANGES: CPS is in the process of changing its generation portfolio to include more renewable generation and to replace older coal-fired resources with lower emission gas-fired generation and energy efficiency programs.
SIZABLE CAPITAL DEMANDS: The utility's debt burden and equity position are average. Additional capital needs in the range of $3 billion over the next five years, which includes the purchase of Rio Nogales, will require additional debt funding; debt levels and rate increases should remain manageable.
SHORT-TERM RATINGS: The 'F1+' rating on CPS' tax-exempt CP program is based on the long-term rating of CPS and internal liquidity support, including three revolving credit agreements totaling $450 million and unrestricted cash and investments totaling approximately $760 million in August 2012.
Senior lien bonds are secured by net revenues of the combined electric and gas system. The junior lien bonds, including the series 2012A, 2012B, and 2012C bonds are secured by net revenues after the payment of debt service on the senior lien bonds. Commercial paper repayment is secured by a third lien on net revenues.
STABLE SERVICE AREA
CPS provided exclusive electric service to 728,307 primarily residential electric customers and to 328,300 primarily residential gas customers in fiscal 2012. CPS is the sole supplier of electricity in its service area and is not subject to retail competition unless city council determines that CPS will opt into retail electric competition. CPS' customer base is large and diverse, and San Antonio continues to attract new industry to the CPS service area. While retail electric grew modestly in 2010 and 2011 at 1%-2%, sales grew by over 6.5% in fiscal 2012 (Jan. 31 fiscal year). In addition to its retail customer base, CPS sells wholesale electricity to a number of regional cities and cooperatives under contracts ranging from two to seven years. These sales increased in fiscal 2012 and 2011 to between 20%-24% of total sales, up from 13%-15% previously. Wholesale revenues from sales to other utilities can be more variable than retail sales. Wholesale activity is expected to increase further in fiscals 2013 through 2017 with the acquisition of the Rio Nogales Power Plant.
VERTICALLY INTEGRATED UTILITY
CPS owns and operates roughly 6,580 mega-watts (MW) of generating capacity. The J.K. Spruce II unit, a 780 MW coal-fired unit, was brought on line in May 2010 and 190 MW of natural-gas peaking units came on line in December 2010. The new resources are replacing older, less efficient units, which are being retired. In addition, CPS continues to acquire a significant amount of renewable energy through various long-term purchase power agreements. Of the 913 MW of purchased power renewable resources, approximately 94% is wind resources.
RIO NOGALES POWER PLANT PURCHASE
In April 2012, CPS purchased a 10-year-old natural gas-fired combined cycle plant (Rio Nogales power plant) from Tenaska. The plant has a maximum capacity of 750 MW and is located in Seguin, TX, which is adjacent to CPS' service area. The plant's geography is advantageous, and CPS will not need to build any transmission to interconnect the facility. The purchase was funded with debt. CPS will own and operate the plant along with its fleet of 21 non-nuclear generating units.
The Rio Nogales plant capacity will replace the Deely plant, once the Deely plant closes in 2018. In June 2011, CPS announced it would deactivate the Deely plant by 2018, 15 years ahead of schedule, in lieu of spending the estimated $565 million to install scrubbers to bring it into compliance with potential new Environmental Protection Agency (EPA) emissions standards. In overall cost planning, the purchase of the Rio Nogales plant replaces the anticipated cost of environmental improvements at Deely that would have likely been needed to maintain the plant. However, in the interim years until Deely's closure, CPS will take additional power supply risk in that the plant is excess to its native demand. In order to mitigate the financial risk of this position, CPS has entered into a heat-rate call option for a portion of the plant's capacity. The remaining capacity will be kept for native demand in case of an outage of another plant but, as is the case with the rest of the generation fleet, may be dispatched in the ERCOT market on a day-ahead basis, when economical.
STABLE FINANCIAL PERFORMANCE
CPS' financial performance has hovered in a consistent range for the past five years. Fiscal year end Jan. 31, 2012 generated Fitch calculated annual debt service coverage of 2.38x on the senior and junior bonds and an all-in 1.60x coverage when general fund transfers are included. Management's financial projections anticipate continued financial margins slightly better than this level. Management's financial policies include an internal target of 1.5x all-in coverage. With unrestricted cash of $815 million, including its repair and replacement fund, or 211 days cash on hand, CPS' liquidity levels are strong. While debt levels are moderately high and continue to increase, CPS continues to exhibit its ability to service this level of debt.
Rates are competitive, and regular rate increases occur approximately every two years. The last base-rate increase occurred in February 2010 at 7.5% for the electric system and 8.5% for the gas system. CPS has not requested a rate increase since that time. Management anticipates the next likely rate request would become effective in fiscal 2015. Both electric and gas rates have automatic fuel adjustment factors that help recover variable fuel costs in a timely manner.
SIZABLE CAPITAL NEEDS
CPS has identified approximately $3 billion of capital improvement projects that it will undertake over the next five years. A significant amount of the capital program will be to make improvements to the electric distribution system. CPS is pursuing an ambitious energy conservation program called Save for Tomorrow Energy Plan (STEP) which is expected to reduce load growth through energy efficiency projects. Even with its STEP program, CPS still anticipates electric load growth of around 1% annually. The capital improvement program (CIP) identifies various transmission and generation projects. The CIP is expected to be funded by a combination of 59% debt financings averaging around $358 million in new debt annually (the CIP and debt amounts include $521 million in series 2012 bonds issued in March 2012 to purchase the Rio Nogales plant).
COMMERCIAL PAPER PROGRAM
The 'F1+' rating on CPS' tax-exempt CP program is supported by CPS' long-term rating, its liquidity position, and three $150 million revolving credit facilities provided by JPMorgan Chase Bank, State Street Bank and Trust Company, and Bank of Tokyo-Mitsubishi. The revolving credit agreements can only be drawn by CPS for purposes of paying principal outstanding on the CP notes if the notes are unable to be remarketed. The three revolving credit agreements expire on Dec. 31, 2014. In addition to its revolving credit facilities, CPS has available cash and investments that could be used to support the CP program, if needed.
TERM MODE BONDS
The series 2012A, 2012B and 2012C bonds are being issued in the term mode and the ratings only apply to the bonds while in the term mode. The ratings on the series 2012A and 2012B bonds reflect a maturity date of Dec. 1, 2027 and initial mandatory tender periods that are two and three years, respectively. The rating on the series 2012C bonds reflects the 2027 maturity date and the four-year initial mandatory tender period. Bondholders are subject to the mandatory tender but payment of the purchase price at the mandatory tender date is secured only by remarketing proceeds. In a failed remarketing, bondholders retain the bonds and receive a higher 'stepped' interest rate. A failed remarketing does not result in an acceleration of the bonds, nor a cross-default to any of CPS' other outstanding debt.
For more information on CPS, see Fitch's Report 'San Antonio City Public Service', dated March 15, 2012, and available at www.fitchratings.com.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Revenue Supported Rating Criteria' (June 12, 2012);
--'U.S. Public Power Rating Criteria' (Jan. 11, 2012);
--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity' (June 15, 2012);
--'Rating U.S. Municipal Short-Term Debt' (Dec. 8, 2011);
--'US Public Power Peer Study', June 20, 2012.
Applicable Criteria and Related Research:
U.S. Public Power Peer Study -- June 2012
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity
U.S. Public Power Rating Criteria
Kathy Masterson, +1-415-732-5622
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Dennis Pidherny, +1-212-908-0738
Alan Spen, +1-212-908-0594
Source: Fitch Ratings