Fitch affirms Lower Colorado River Authority’s commercial paper notes

Fitch Ratings affirms the following Lower Colorado River Authority, Texas (LCRA) ratings:

–$250 million authorized tax-exempt commercial paper notes, series A at ‘F1+’.

The Rating Outlook is Stable.

Fitch is not reviewing its other outstanding ratings for LCRA (rated ‘A+’, Stable Outlook) at this time.

KEY RATING DRIVERS:

SHORT-TERM RATING: The ‘F1+’ rating on LCRA’s commercial paper program is based on the strong combined liquidity support of LCRA’s cash reserves and dedicated revolving credit agreement with JPMorgan Chase Bank.

ADEQUATE FINANCIAL MARGINS: LCRA’s adequate financial metrics include consistent debt service coverage above 1.25 times (x) on an unconsolidated basis, primarily for its wholesale power system, which is in line with rating category medians for wholesale providers.

CHANGING CUSTOMER BASE: Power revenues are derived from long-term power sales contracts with a diverse mix of 43 municipal and cooperative utility systems across central Texas. After June 2016, only 33 of the systems have extended their power supply contract with more flexible purchase terms, which would create greater planning uncertainty for LCRA.

SUFFICIENT POWER SUPPLY: LCRA’s coal and natural gas fired generation portfolio is relatively competitive with other regional providers, and variable costs are recovered in a timely fashion through a fuel recovery surcharge that can be adjusted with board action. This provision will not change with the amended contracts, which will continue to permit the authority to recover its costs, including 1.25x debt service coverage (per Board adopted financial policies) on outstanding debt.

MODERAL CAPITAL NEEDS: Capital needs appear manageable and include investment in new generation and generation upgrades designed to position LCRA competitively within the Electric Reliability Council of Texas (ERCOT) market.

SECURITY

Bonds are secured by a gross revenue pledge of the LCRA system. Commercial paper notes have a parity pledge with long-term bonds. Bonds are additionally secured by a debt service reserve fund for each series funded at 50% of average annual debt service.

CREDIT SUMMARY

The commercial paper program is supported by a $250 million revolving credit facility provided by JPMorgan Chase Bank (rated ‘A+/F1’ on Rating Watch Negative by Fitch). The revolving credit agreement is a dedicated facility that may only be used by LCRA to cover the payments on the notes if the notes are unable to be remarketed. The revolving credit agreement expires on May 19, 2014. In addition to the revolving credit facility, LCRA had reserves of approximately $194.5 million in the revenue fund as of May 31, 2012 that could be used to support the CP programs, if needed.

As of May 31, 2012, LCRA had $117.6 million in outstanding tax-exempt CP notes.