Fitch Ratings, in a Nov. 15 statement about the bond rating of the Lower Colorado River Authority (LCRA), noted that this power generator faces some financial and operating pressures related to the defection of a number of its customer municipal and cooperative utilities.
“Nine customers have either terminated their wholesale power agreements early or given notice of reduced purchases, claiming LCRA is in breach of contract,” Fitch reported. “The load loss creates immediate revenue pressure as litigation related to the early termination proceeds between LCRA and its customers.”
LCRA management intends to preserve financial margins through expenditure reductions, market energy sales and the use of revenues planned for capital investment in fiscal 2013, Fitch added. The expenditure reductions needed are meaningful and come on top of cost reductions already implemented. LCRA may consider rate increases beyond fiscal 2013, it added.
LCRA’s scheduled loss of ten of its wholesale generation customers in 2016 (nine of whom have or plan to reduce purchases in fiscal 2013), and load release provisions in the 2041 contracts will result in longer-term changes to the customer profile, Fitch said. The unplanned loss of load in fiscal 2013 has accelerated the pressure.
LCRA is completing investments in two generation plants: its share of the coal-fired Sandy Creek Energy Station and the Ferguson Replacement Project. Load loss will reduce LCRA’s sales at a time when generating capacity and fixed costs are increasing, Fitch noted.
Aside from the 2016 customers than have terminated early, there is a potential for further load loss through the load release provisions in the 2041 contracts, Fitch pointed out. “Widespread use of the load release provisions could curtail sales over time, further narrowing the base on which the fixed costs must be recovered,” it added.
A rating downgrade in October reflected the changes in LCRA’s operating profile as a result of the early contract terminations with seven customers that ceased buying power in September 2012 and accounted for 17% of LCRA’s load. The seven customers include the City of Boerne, Central Texas Electric Cooperative, Fayette Electric Cooperative, the City of Georgetown, the City of Kerrville, San Bernard Electric Cooperative, and the City of Seguin.
Since October, New Braunfels Utilities (NBU) provided LCRA with notice of termination on Nov. 13, 2012, and Guadalupe Valley Electric Cooperative (GVEC) notified LCRA it will cease purchasing 20% of its load on Dec. 1, 2012, based on LCRA’s alleged breach of contract, Fitch reported. GVEC accounts for 12% of LCRA’s load. NBU will cease purchasing its full load from LCRA on Jan. 1, 2013.
There are multiple lawsuits pending between LCRA and the various defecting customers, Fitch noted. Timing for resolution is uncertain given multiple venues and time involved in potential appeals. “While in time, LCRA may prevail in the legal cases with the nine customers, the revenue impact from lower sales is occurring now, while the legal cases proceed,” it said.
LCRA has stopped purchasing energy for the seven customers that began buying power from other providers in September but continues to bill these customers for contract costs, Fitch said. If GVEC and NBU begin purchasing from others as they have indicated, LCRA will take similar steps in order to reduce its cost exposure. LCRA plans to mitigate the net revenue loss from the early contract termination through further expenditure reductions, the use of above-budget net revenues from fiscal 2012 that might have otherwise been used for capital spending, and the possible short-term use of reserves.
Fitch said LCRA does not anticipate increasing rates to remaining generation customers in fiscal 2013, although LCRA has the ability in its amended (2041) wholesale power agreements to do so with 180 days notice to customers. LCRA is considering the use of rate increases after fiscal 2013 and has begun discussing the possibility with its customers, Fitch added.
LCRA has a mix of generation resources that provide 3,045 MW of net dependable capacity, with the largest resource being the coal-fired Fayette Power project (1,035 MW). Historically, the resource portfolio was supplemented with market purchases during brief periods of peak demand to meet overall load. Market purchases may be used less following the load loss, Fitch noted. Current generation investment includes 200 MW of new coal-fired capacity at Sandy Creek and replacement of an older simple cycle natural gas unit, the Ferguson plant, with a new 540-MW combined cycle plant. “The investments are being funded, in part, with debt issuance, which will increase LCRA’s fixed costs over time,” Fitch pointed out.
LCRA files latest lawsuit due to customer defections
LCRA said in a Nov. 15 statement that it has asked a state district judge to keep GVEC, one of the nonprofit utility’s wholesale power customers, from unilaterally violating its long-term contract. LCRA’s lawsuit, filed in state district court in Travis County, comes less than one week after GVEC declared that it intends to purchase a portion of its energy requirements from other providers beginning Dec. 1. In its contract with LCRA, GVEC agreed to purchase all of its energy needs from LCRA until 2016.
“LCRA has honored its contract with GVEC since 1974 and intends to continue honoring it until it expires in 2016. GVEC does not have the same intentions,” said LCRA General Manager Becky Motal. “We are confident a judge will agree with us. GVEC does not have the right to walk away from its commitment.”
The suit asks the judge to review the contract and to rule that GVEC has violated its terms. It also asks the judge to rule that LCRA continues to adhere to the contract terms and is not in breach.
Last year, 33 utilities signed long-term contracts with LCRA that continue until 2041. However, 10 other wholesale power customers – including GVEC – did not renew their contracts with LCRA beyond June 2016. In the renewed contracts, the long-term customers were granted the option to purchase a portion of their load from other power providers. LCRA said it offered all of its customers the option to reduce their load requirements over time as part of the negotiations to extend those contracts until 2041. Eight of the customers who did not take that opportunity are claiming that they should be allowed to terminate their contracts earlier than 2016.
“If these customers are allowed to end their contracts four years early, rates for our other customers likely will go up,” said Motal. “There’s no joy in heading to the courthouse to resolve these differences, but these customers have left us with few options. We have a responsibility to protect the interests of everyone we serve.”
Motal said the customers who want to end their contracts early not only face uncertain rates on the open power market, but also are adding to that with the legal costs associated with keeping them as LCRA customers for the duration of their contracts. Those customers also run the risk of having to pay LCRA for costs under the current LCRA contracts and other costs incurred on their behalf due to their default under the contracts, the authority noted.
LCRA’s financial planning for its current fiscal year and beyond, and the viability of bonds issued to purchase assets used to service the loads of all of its wholesale power customers (including GVEC), are based upon the existence of the long-term contracts and GVEC’s proposed actions are not in the public interest, the authority said.
LCRA provides energy services to municipalities and cooperatives in Central Texas, who, in turn, provide retail service to hundreds of thousands of customers. LCRA said it offers competitively priced power and stands ready to become even more competitive in the wholesale power marketplace. The 2012-2013 LCRA Business Plan has a $40m reduction in costs and a freeze in nonfuel wholesale power rates until 2017. All customers – including GVEC – will benefit from that freeze in nonfuel rates, the authority said.