Fitch Rates San Antonio, TX's Electric & Gas System Revenue Bonds 'AA+'; Outlook Stable
Fitch Ratings has assigned an 'AA+' rating to the following revenue
bonds issued by the city of San Antonio, TX:
--Approximately $235 million electric and gas systems revenue bonds, new
--Approximately $100 million electric and gas systems variable rate
junior lien revenue bonds, series 2015C;
--Approximately $100 million electric and gas systems variable rate
junior lien revenue bonds, series 2015D.
Bond proceeds will be used to fund a portion of San Antonio City Public
Service Energy's (CPS Energy) capital plan and pay costs of issuance.
Bonds are expected to price the week of Nov. 2, 2015 via negotiated sale.
In addition, Fitch affirms the following outstanding San Antonio
electric and gas system revenue bond ratings:
--$3.39 billion senior lien obligations at 'AA+';
--$1.73 billion outstanding junior lien obligations at 'AA+';
--$47.8 million in outstanding junior lien 2012B term bonds at 'AA+/F1+';
--$360 million outstanding commercial paper (CP) notes at 'F1+' and a
corresponding bank note rating of 'AA+' on each series of CP.
Fitch has withdrawn the 'AA+' rating on San Antonio's new series 2010
electric and gas system revenue bonds as the bonds were not sold.
The Rating Outlook is Stable.
Senior lien bonds are secured by net revenues of the combined electric
and gas system, operating as CPS Energy. The junior lien bonds are
secured by CPS Energy net revenues after the payment of debt service on
the senior lien bonds. CP repayment is secured by a third lien on net
KEY RATING DRIVERS
COMBINED ELECTRIC AND GAS SYSTEM: CPS Energy provides retail electric
and natural gas services to the city of San Antonio. The service area
continues to enjoy modest but consistent growth.
STRONG FINANCIAL METRICS: Financial margins for bondholders were strong
in fiscal 2015 with 2.47x Fitch-calculated debt service coverage of
revenue bonds and 1.71x all-in coverage after the large transfer made
annually to the city's general fund. Liquidity remained healthy with 206
days of operating cash.
COMPETITIVE RATES: Electric rates are low for the region. Both electric
and gas rates have automatic adjustment mechanisms that management
employs routinely to recover fuel costs.
DIVERSE, LONG GENERATION PORTFOLIO: CPS Energy enjoys a competitively
priced generation portfolio and is in a long resource position,
resulting in the need for some amount of wholesale activity to balance
assets with demand. CPS Energy continues to add renewable purchase power
agreements to achieve its self-elected renewable portfolio standard.
MODERATE CAPITAL DEMANDS: The utility's debt burden and equity position
are average for the rating. Additional capital projects estimated at
approximately $2.75 billion over the next five years are expected,
although debt levels and rate increases should remain manageable.
WEAKER FINANCIAL MARGINS: The Stable Outlook reflects San Antonio City
Public Service's (CPS Energy's) consistently strong financial metrics.
However, a sustained decline in financial margins as a result of
increased operating costs and/or a reluctance to increase rates could
result in rating pressure.
CPS Energy provides exclusive electric service to over 760,000 primarily
residential electric customers and to around 335,000 primarily
residential gas customers. CPS Energy is the sole supplier of
electricity in its service area and is not subject to retail competition
introduced in Texas in 2000. Municipal utilities in the state have the
option to offer retail competition in their services areas and CPS
Energy has given no indication of its intent to do so.
The customer base is large and diverse, and San Antonio continues to
attract new industry to the service area. CPS Energy owns sufficient
generation totaling 6,355 MW to serve its own native load with a system
all-time peak of 4,911 MW. Coal is still the predominant fuel type (42%
of energy in 2015) but this is expected to decline in 2018 with the
deactivation of its oldest coal plant in favor of greater natural
gas-fired and renewable resources. Remaining coal-fired resources are
compliant with existing environmental regulations. The planned closure
of the older Deely coal plant should reduce CPS Energy's exposure to
potentially stricter future regulations.
The 2015C, 2015D junior lien variable rate bonds are being issued in the
term mode. Repayment of purchase price on the mandatory tender date at
the end of the interest period is payable solely from remarketing
proceeds. CPS Energy is not required and has no intent to purchase the
bonds on the mandatory tender date. To the extent there is a failed
remarketing on an mandatory tender date, the bonds are retained by the
holders and CPS Energy pays a penalty rate to be determined at pricing.
Bondholders are required to hold the bonds until maturity, although the
penalty rate provides an incentive for CPS to refund the debt, as soon
STABLE RETAIL SERVICE AREA; INCREASING WHOLESALE ACTIVITY
Retail sales growth has averaged 1.8% over the past decade. CPS Energy
management projects annual retail energy and gas sales growth to average
around 1.5% and 0.9%, respectively as a result of extensive investments
in energy efficiency programs and industry-wide technology changes that
offset customer and load growth in the service area.
In addition to its retail customer base, CPS Energy sells energy under
firm contracts to a number of regional cities and cooperatives under
fixed-price contracts with termination dates ranging from 2016-2023.
Short-term economic energy sales within the Electric Reliability Council
of Texas (ERCOT) are also utilized.
Wholesale sales, including the firm contracts, increased to 33% of total
sales in fiscal 2015, up from 13% in 2010, reflecting the long
generation position of the utility. Fitch views the potential revenue
fluctuation that may result from the short-term energy sales as a risk
that CPS Energy should continue to adequately manage even though spot
market prices in ERCOT have been soft in the past couple of years.
COMPETITIVE RATES; SOME RATE PRESSURE
Rates are competitive, and regular rate increases have occurred
historically approximately every two years. CPS Energy rates must be
approved by the San Antonio City Council. The last base rate increase
occurred in February 2014 at 4.25% for both the electric and gas system,
which was slightly below the amount requested by CPS Energy of 4.75%.
Prior to 2014, the last rate increase had not occurred since 2010.
CPS Energy does not expect to need an additional base rate increase for
either system in the next few years. While overall financial performance
has been healthy, management's decision to forgo rate action may also
reflect some rate sensitivity in the service area, despite the utility's
comparatively low rates. Both electric and gas rates have automatic fuel
adjustment factors that help recover variable fuel costs in a timely
CONSISTENTLY STRONG FINANCIAL PERFORMANCE
CPS Energy's financial performance has remained strong for a number of
years. With the rate increase implemented in fiscal 2015,
Fitch-calculated annual debt service coverage improved to 2.47x on the
senior and junior lien revenue bonds and to 1.71x with general fund
transfers factored in. CPS Energy's consistent financial performance is
supported by sound financial policies and rate setting that target
minimum all-in debt service coverage of 1.5x. Although CPS Energy makes
a large annual transfer to the city's general fund equal up to 14% of
gross revenues, consistent financial margins for bondholders and
competitive rates mitigate concerns about this practice.
Management's financial and rate model indicates continued strong
financial margins without electric or gas system base rate increases
over the next few years. Fuel adjustment rate clauses in the retail
rates for both systems will continue to be adjusted to recover
fluctuations in commodity prices.
Unrestricted cash of $895 million at the end of fiscal 2015 includes the
general operating fund and the repair and replacement fund. CPS Energy
deposits 6% of gross revenues annually into the repair and replacement
fund. Liquidity is healthy at 206 days cash on hand.
Debt levels are above average at $7,550 debt per electric customer. Free
cash flow is typically only around 50% of annual depreciation although
improved to 79% in fiscal 2015. Reinvestment in the system, as well as
new asset investment, has been funded primarily via debt, although CPS
Energy forecasts a decreasing reliance on debt funding as a percentage
of overall capital spending over the next decade. CPS Energy targets
maintaining an acceptable debt to equity ratio below 65%.
Additional information is available at 'www.fitchratings.com'.
Rating U.S. Public Finance Short-Term Debt (pub. 07 Jan 2015)
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Public Power Rating Criteria (pub. 18 May 2015)
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