DALLAS — Litigation and a turbulent Texas electricity market sparked a Moody's Investors Service downgrade of the Lower Colorado River Authority as it prepares to refund $123 million of revenue bonds.
Moody's downgraded the LCRA one notch to A2, affecting $1.7 billion of outstanding debt.
"The rating actions reflect the significantly changed relationships with LCRA's wholesale electric customers, the related operational and financial challenges created by reduced electric load, and the increased risk to LCRA of operating its wholesale generation business in the competitive unregulated ERCOT [Electric Reliability Council of Texas] market," analyst Kevin Rose wrote in a March 13 report. ERCOT is the electric grid serving most of Texas.
Standard & Poor's, in contrast, raised its outlook to stable from negative on its A rating.
"The outlook revision is based on greater certainty about the alignment between LCRA's load and its revenue requirements," S&P analyst Theodore Chapman wrote March 11.
The bonds are expected to go to market March 19 with Bank of America Merrill Lynch as book runner and Barclays as co-senior manager.
OBP Muni and Specialized Public Finance are co-financial advisors on the deal. McCall Parkhurst & Horton is bond counsel.
LCRA is the largest public power wholesale provider in Texas and also manages and distributes water supply and controls flooding along the lower Colorado River. Wholesale electric sales provided 63% of the LCRA's total combined revenues in fiscal 2014.
The wholesaler has reached settlements with seven of eight customers that alleged breach of power agreements and stopped buying power in fiscal year 2013. The eight customers accounted for 24% of LCRA's electric load.
"The settlements of litigation have resulted in considerable load loss much sooner than originally expected, necessitating cost reductions and other initiatives to compensate for the pressures that the load loss placed on the Authority's financial performance," Rose wrote.
After the loss of customers, LCRA's decision not to raise rates on remaining customers resulted in cash flow pressure, according to analysts.
"LCRA has managed lower revenues through expenditure reductions, realignments, the spend-down of reserves and the increased use of debt-funding of capital," according to Fitch Ratings analyst Kathy Masterson, which affirmed its A rating ahead of the bond deal. It assigns a stable outlook to the LCRA.
Fitch downgraded LCRA in October 2012 in anticipation of declining revenues when the eight customers ended the power purchases.
As litigation proceeded with the non-paying customers, LCRA stopped purchasing energy in the ERCOT market on behalf of the eight customers but continued to bill customers for remaining fixed costs due under their wholesale power agreements.
To compensate for the lost revenue, LCRA reduced spending, tapped cash reserves, and increased use of debt.
LCRA took a $59.5 million write-off in fiscal 2014 for its uncollected electric revenues to date. As a result, Fitch-calculated consolidated debt service coverage declined to a ratio of 1.19 times, although LCRA's calculation remained above the board-policy target of 1.25 times.
Consolidated coverage includes the affiliate LCRA Transmission Services Corp., whose revenues are not pledged to LCRA bondholders.
Debt service coverage without the revenues of LCRA TSC was below a ratio of one, according to Fitch.
Through use of reserves, LCRA expects consolidated debt service coverage to remain at or near the 1.25x policy level in fiscals 2015 and 2016 with results similar to fiscal 2014, according to Fitch. Debt service coverage is expected to improve in fiscal 2017 when a decline in debt service costs is expected.
Thirty-four of LCRA's wholesale customers have signed amended and restated wholesale power agreements through June 2041.
"Fitch expects that LCRA will continue to manage cash flow pressures effectively through fiscal 2016, when debt service payments decrease," Masterson wrote.
Rating analysts made favorable comments about LCRA's new management.
Phil Wilson took over as general manager in February 2014 after a stint as executive director at the Texas Department of Public Transportation. Wilson was previously Texas secretary of state and chief of staff for former Gov. Rick Perry. He had also worked as a lobbyist for Luminant Energy.
Additional senior management changes brought in managers with backgrounds in the competitive electric industry, business strategy and development, legal and regulatory expertise and finance, analysts said.
"The new leadership team at LCRA appears promising in that it includes individuals with expertise in the power business line, and specifically in energy trading, which has become more important given LCRA's long position in the market," Masterson said. "Despite management turnover, Fitch expects LCRA's overall risk profile to remain consistent with its core businesses, with energy hedging activities serving to confine potential cost exposures to the wholesale customers."
LCRA dedicated its natural-gas-powered Thomas C. Ferguson Power Plant in Horseshoe Bay in October. The 540-megawatt combined-cycle power plant is considered one of the most efficient in the state.
"The new Ferguson plant's state-of-the-art technology and design allow us to respond quickly to demands for power while reducing transmission congestion costs for LCRA's wholesale electric customers," LCRA board chair Timothy Timmerman said at the dedication.
The $500 million natural gas plant replaces the original Thomas C. Ferguson plant on Lake LBJ. Fluor Corporation, which built the new plant next to the original Ferguson plant, broke ground on the project in April 2012.
The new plant produces 30% to 40% fewer emissions per megawatt-hour than the old plant and requires only a third of the water of a comparably sized steam plant. It also uses about 35% less fuel per megawatt-hour than the original Ferguson plant and uses advanced technology that makes it capable of starting and ramping up quickly while providing for quiet plant operation and low greenhouse gas emissions.
The original 420-megawatt Ferguson power plant, built in 1974, was taken off line in 2013, and is being dismantled. Decommissioning should be complete this year, LCRA said.
The City of San Marcos owns a small portion of the new plant under a provision of LCRA's wholesale power agreement that allows customers to participate in LCRA's power generation projects.
"This plant will serve Texans for many years with cost-effective, reliable power," Wilson said.
