Fitch Rates San Antonio, Texas' $380MM Elec & Gas Jr Lien Revs 'AA+'; Outlook Stable
October 22, 2009
SAN FRANCISCO -- Fitch Ratings assigns an 'AA+' rating to San Antonio, Texas' (the city) electric and gas systems junior lien revenue bonds, series 2009A and 2009B (taxable), issued on behalf of CPS Energy. Fitch also affirms the 'AA+' long-term rating on CPS Energy's outstanding senior ($3.9 billion) and subordinate ($402 million) bonds and the 'F1+' rating on $260 million in outstanding commercial paper. The Rating Outlook on the long-term bonds is Stable.
The junior lien revenue bonds, series 2009A and 2009B, will be structured with a 10-year maturity, with principal amortization occurring in the final five years. However, the bonds will have a mandatory tender after three years to provide some flexibility to CPS to execute a long-term take-out financing of the debt. There is no external liquidity support for the bonds. The mandatory tender on Dec. 3, 2012 is expected to be funded with long-term bonds. Alternatively, the bonds can be reissued in a similar term mode or in a different mode under the authorizing documents. Proceeds of the bonds will provide preliminary funding of CPS Energy's investment in a nuclear project - an expansion of the existing South Texas Project (STP). The potential scale of CPS Energy's investment in the project is still relatively preliminary in that it is early in the design and permitting process. Bonds are expected to price on Nov. 10, 2009.
The 'AA+' rating reflects strong management practices, a diverse and competitively priced power supply portfolio, ongoing investment in generation needed to meet load growth, stable financial performance, a significant capital plan and sizable debt needs, and a large and diverse customer base. Bonds are secured by pledged net revenues of the electric and gas system that provide retail service in and around the city of San Antonio. The electric system accounts for the majority of CPS Energy's combined revenues at 88% on Jan. 31, 2009, the end of the fiscal year.
CPS Energy's rate advantage compared to other utilities in Texas has historically been viewed by Fitch as providing the utility with comfortable rate flexibility and liquidity that could be tapped if needed. However, rate tolerance can be affected by many factors and the scope and frequency of the upcoming rate increases to support CPS Energy's share of the STP Units #3 and #4 expansion will likely reduce this rate flexibility. The result could be a credit profile that is more in line with other highly rated 'AA' utilities, depending on movement that may occur in other components of rating criteria, such as financial strength and debt burden.
CPS Energy maintains a robust generation portfolio that includes a significant portion of coal-fired and nuclear generation. The utility's net generation capacity of 5,198 megawatts (MW) was sufficient to meet the native load requirements (the record peak of 4,649 MW was reached in July 2009) and CPS Energy maintains a 10%-15% reserve margin. Deregulation of the ERCOT market in Texas has not had a credit impact on CPS Energy, which has not opted into the competitive market. It is yet to be seen how and to what extent federal carbon legislation may impact CPS Energy but, with a sizable coal-fired generation fleet, Fitch expects it will have a financial impact that will ultimately be passed on to ratepayers.
CPS Energy is expecting to participate in an expansion of the existing South Texas Project. The total expansion, in which CPS energy would be a 20%-25% participant, envisions two new units (STP Units #3 and #4) that would add 2,700 MW of new capacity. CPS Energy and NRG (operating through a subsidiary known as the Nuclear Innovation North America; NINA), two of the three co-owners of the existing units #1 and #2, filed a combined construction and operating license application (COLA) with the Nuclear Regulatory Commission (NRC) on Sept. 24, 2007. The application was the first one filed with the NRC in 30 years. The NRC has indicated that its timing to evaluate the application would result in a COLA being issued in calendar 2012. There are interveners to the application. The additional units would use advanced boiling water reactor (ABWR) technology, which is a proven technology at four nuclear plants in Japan.
Following a process over the summer of 2009 that included community discussion regarding the benefits and costs of this potential new generation resource compared to other options, the CPS Energy Board of Trustees approved the selection of STP #3 and #4 as CPS Energy's next baseload resource. CPS Energy currently has the option to purchase 50% of the project expansion. However, CPS Energy has an agreement with NINA to sell down its share to 40%. Furthermore, CPS Energy has received direction from its Board of Trustees and City Council to sell down an additional amount to result in a 20%-25% ownership share of units #3 and #4, or 540-675 MW new nuclear capacity. City Council has not yet approved the series of rate increases that are expected to be needed to finance the project. Initial estimates are for a 9.5% base rate increase to occur in fiscal 2011, followed by increases in a similar range every other year for the next 10 years. While these appear to be reasonable increases for an investment the size of STP #3 and #4, these will occur in a service territory that has become accustomed to very modest rate increases and exceptionally competitive rates.
CPS Energy provides exclusive electric service to 693,815 customers in all of Bexar County and portions of seven adjacent counties. Additionally, the utility provides retail gas service to 320,407 customers within the city of San Antonio and surrounding areas. The customer base is large and diverse, with a 2008 peak load of 4,367 (occurring on June 19, 2008). CPS Energy owns three coal plants (1,431 MW) and 40% of the STP Nuclear Plant (1,080 MW) that combined, provide 73% of its kilowatt hour (KWh) sales.
Additional information is available at 'www.fitchratings.com'.
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