Fitch Maintains Lower Colorado River Authority on Negative Watch due to ERCOT Market Weakness
Fitch Maintains Lower Colorado River Authority on Negative Watch due to ERCOT Market Weakness
(The following statement was released by the rating agency)Fitch Ratings-Austin-15 March 2021:
Fitch Ratings has maintained the Rating Watch Negative (RWN) on the Lower Colorado River Authority, TX's (LCRA) 'AA-' Issuer Default Rating (IDR) and bond rating on the following LCRA bonds:
--$1.4 billion revenue bonds;
--Bank bond rating on commercial paper series B.
LCRA's revenue refunding bonds and short-term notes, issued pursuant to a master resolution, are secured by all lawfully available funds of LCRA, including but not limited to funds received from LCRA Transmission Services Corporation (LCRA TSC) for its contractual commitment. Wholesale generation-related debt matures in 2040, although there is a small amount of parity debt related to the water business line maturing in 2045.
Approximately $96.5 million outstanding debt at the end of fiscal 2019 remains as part of the initial contractual commitment obligation paid by LCRA TSC with a final maturity in 2032. LCRA TSC is a non-profit corporation and instrumentality of LCRA and issues separately secured debt.
KEY RATING DRIVERS
Revenue Defensibility: 'aa' - Wholesale Power Contracts with Load Release Provisions; Strong Purchaser Credit Quality
Revenue defensibility is very strong, as revenues are predominantly provided by wholesale power sales to 33 retail utilities that have not provided retail customers the option for retail choice. Wholesale power contracts allow LCRA to recover all power supply costs and extend through 2041, although customers can reduce their purchases over time from LCRA by up to 35% under certain conditions. The purchaser credit quality of LCRA's wholesale customers is very strong, with financial profiles supportive of the 'AA-' rating.
Operating Risk: 'a' - Low Operating Costs; Weakened Operating Cost Flexibility
Fitch's assessment of LCRA's operating risk is unchanged, but operating cost flexibility has been revised to 'weaker' from 'neutral', given the recent market weaknesses exposed in the recent Texas weather event. LCRA has generally maintained low operating costs over the past five years, including transmission costs, as calculated by Fitch.
Financial Profile: 'aa' - Very Strong Financial Profile; Leverage to Increase with Storm Costs
Fitch expects LCRA's financial profile to weaken over the short term as storm related costs are financed through interim liquidity sources and recovered over a multi-year period. While a firm recovery plan and timeline has not yet been approved, the estimated storm costs of $370 million are potentially manageable at the 'aa' financial profile and current rating, assuming LCRA exercises its cost recovery authority through its wholesale power contracts and the relatively short timeline scenarios considered in Fitch's analysis.
Based on this early storm cost estimate and a short recovery scenario, leverage, measured as net adjusted debt to adjusted funds available for debt service, could increase above 8x over the next two years before stabilizing at or below 8x. While leverage of 8x is at the upper limit for the rating, LCRA's consolidated financial profile relies heavily on regulated transmission revenues, a highly stable revenue structure that can accommodate slightly higher leverage.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
--Removal of the RWN will depend on LCRA's demonstrated ability to finance and repay near-term storm related costs and to identify a cost recovery plan and timeline supportive of the 'aa' financial profile and existing rating.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
--Weaker liquidity profile or consolidated net leverage above 8.5x;
--Diminished regulatory support for transmission cost recovery or a decline in the approved transmission rate;
--Statewide or board-imposed measures that constrain timely storm cost recovery;
--Legislative or regulatory changes that impose material new operating on capital costs for utilities.
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579].
LCRA is the largest public power wholesale provider in Texas and provides energy services in a 44-county service area. LCRA provides wholesale power to 33 municipal electric utilities and electric distribution cooperatives in central and west Texas. The authority also manages and distributes water supply and controls flooding along the lower Colorado River in Texas.
LCRA's consolidated revenues consist primarily of wholesale electric revenue - the sale of energy from LCRA's generation assets to 33 long-term purchasers - which provided approximately 50% of total combined revenue in fiscal 2020. Transmission revenue provided 43% of consolidated revenue, but is separately pledged to transmission revenue bondholders. Water and irrigation services provided the remaining revenue. Transmission is a growing percentage of the overall consolidated business and accounts for 68% of total outstanding debt. Transmission revenues and costs have remained largely unchanged during the aftermath of the Texas storm event, given the absence of commodity price risk in this business line.
LCRA maintains a public service fund fulfilling the authority's statutory obligations, such as parks and natural resource protection. The public service fund is supported by the three business lines of wholesale power, transmission and water. While Fitch's analysis and assessment of LCRA's financial profile is based on consolidated financial performance, bondholders are secured by revenues primarily from the wholesale generation business, given the provision for the transmission revenue bonds secured by LCRA's transmission revenues.
For additional information on LCRA, please see Fitch's New Issue Report, 'Lower Colorado River Authority, Texas' published on Nov. 7, 2019.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations Lower Colorado River Authority has an ESG Relevance Score of '4' for Exposure to Environmental Impacts due to the effects of recent severe winter weather, which has a negative impact on the credit profile and is relevant to the ratings in conjunction with other factors. Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
Lower Colorado River Authority (TX); Long Term Issuer Default Rating; Rating Watch Maintained; AA-; Rating Watch Negative
----Lower Colorado River Authority (TX) /Electric System Revenues/1 LT; Long Term Rating; Rating Watch Maintained; AA-; Rating Watch Negative
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