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 September 10, 2015 - 1:56 PM EDT
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Fitch Upgrades Texas Muni Power Agency's Senior Revs to 'AA-'; Outlook Stable

Fitch Ratings has taken the following rating actions on Texas Municipal Power Agency's (TMPA) revenue bonds:

--$57.6 million refunding revenue bonds, series 1993 (prior lien) upgraded to 'AA-' from 'A+';

--$37.3 million subordinate lien revenue refunding bonds, series 2008 affirmed at 'A+';

--$116.5 million subordinate lien revenue/transmission revenue converting security refunding bonds, series 2010 affirmed at 'A+'.

Fitch does not rate TMPA's junior subordinate lien revenue refunding bonds, series 2013 (a private placement).

The Rating Outlook on all bonds is Stable.

SECURITY

All outstanding bonds are secured by net revenues of the agency. The lien securing series 2008 and 2010 bonds is subordinate to TMPA's series 1993 bonds and series 2005 commercial paper (CP) notes. The series 1993 bonds also include a debt service guarantee that requires members to scale up their respective proportions of debt service payments to cover any defaulting member's share. The guarantee does not extend to the other bond series.

Pursuant to springing covenants in the resolution, the series 2010 bonds will be secured solely by a first lien on TMPA's net transmission revenues beginning Sept. 1, 2018, after the final payment of the agency's remaining generation-related debt and CP notes.

KEY RATING DRIVERS

TEXAS JOINT ACTION AGENCY: TMPA is a joint-action agency that provides unit-based power to four member cities pursuant to court-validated, take-or-pay power sales contracts (PSCs) that expire Sept. 1, 2018. The agency's sole generating asset is the 470MW, coal-fired Gibbons Creek Steam Electric Station (GCSES). The agency also has approximately 300 miles of transmission lines.

HIGHER RATING ON SENIOR LIEN: The upgrade of the series 1993 senior bonds reflects the joint-and-several nature of the security pledge, its effectively closed lien, and diminishing proportion of senior lien debt to debt, which meaningfully reduces the probability of default relative to the other outstanding bonds.

SUPPORTIVE MEMBERS: Supportive member credit quality is a fundamental consideration of TMPA's ratings. Fitch maintains public ratings on two members that together represent 68.7% of the agency: the city of Garland (electric revenue bonds rated 'AA-'/Stable Outlook) and the city of Bryan (electric revenue bonds rated 'A+'/Stable Outlook). In addition, Fitch believes the other members' financial metrics and service territory characteristics adequately support the ratings on TMPA debt.

LOW-COST RESOURCE: The unit is well positioned to be a stable, low-cost resource through its 2035 estimated useful life. The final maturity of TMPA's generation debt in 2018 is forecast to cause a considerable decline in wholesale rates, and management has modest expectations for additional environmental retrofits. Replacement operating agreements are under development for the period after the members' existing PSCs expire.

INCREASED GENERATION IN 2014: GCSES' operating metrics were generally in line with historical levels in 2014 after low natural gas prices reduced the plant's dispatch in 2012 and, to a lesser degree, in 2013. GCSES' availability has consistently been above the industry average since at least 2005.

LONGER-TERM TRANSMISSION ASSETS: TMPA has been active in developing transmission resources. A December 2009 member settlement agreement enabled TMPA to finance longer-term transmission assets that are expected to produce stable, regulated returns in support of the agency's series 2010 bonds that mature in 2040.

SPRINGING COVENANT: The rating reflects Fitch's expectation that series 2010 springing covenant that will convert the security of the bonds will take effect upon the final maturity of TMPA's existing generation debt.

RATING SENSITIVITIES

MEMBERS DRIVE CREDIT QUALITY: The Texas Municipal Power Agency's ratings are fundamentally driven by the credit quality of the participating members. A decline in member credit quality would likely lead to negative rating action.

CREDIT PROFILE

TMPA provides unit-based power to its four member cities. Pursuant to court-validated, take-or-pay PSCs through Sept. 1, 2018, each member city is financially obligated to TMPA in proportion to its participatory share: Bryan (21.7%), Denton (21.3%), Garland (47%), and Greenville (10%). Fitch maintains public ratings on Bryan and Garland (noted above) and believes the credit quality of the other two members adequately supports TMPA's 'A+' ratings.

TMPA members are expected to make preliminary decision by September 2016 regarding the replacement operating agreements for the post Sept. 1, 2018 period. Options to the members include winding down the organization, splitting the transmission and generation systems, or some combination of the two.

SATISFACTORY FINANCIAL PERFORMANCE

Similar to other project-based joint action agencies, TMPA targets modest debt service coverage of 1.25x, choosing instead to leave equity at the member level. Fitch-calculated debt service coverage was 1.19x and 1.39x in fiscals 2014 and 2013, respectively. Liquidity levels at the end of fiscal 2014 were sound for the rating with 127 days cash on hand.

DEBT STRUCTURE

The higher rating on the senior series 1993 bonds reflects the joint-and-several nature of the security pledge, its effectively closed lien, and diminishing proportion of senior lien debt (approximately 32% of total expected debt service costs). A debt service guarantee for TMPA's senior, prior lien bonds, contained in the PSCs since 1976, requires members to scale up their respective proportions of debt service payments to cover any defaulting member's share. There is no such guarantee for the subordinate lien bonds, which causes greater sensitivity to the credit quality of the individual members.

The series 2010 subordinate lien revenue/transmission revenue converting security refunding bonds are currently on parity with TMPA's outstanding subordinate lien bonds and are also rated 'A+'. The bonds are expected to continue benefitting from the stability of transmission cost of service revenues from all distribution service providers (DSPs) in ERCOT after Sept. 1, 2018. On this date, TMPA's generation-related debt and CP will fully mature and springing covenants in the series 2010 bond resolution will convert the security. The change will ultimately cause Fitch to consider solely the underlying credit quality of the DSPs, but it may not necessarily cause a rating change.

RELIABLE, LONG-TERM ASSET

GCSES, a 470MW coal-fired power plant located in Grimes County, TX, will become a more competitive resource beginning in fiscal 2019 when TMPA's generation-related debt fully matures. The agency forecasts modest rate escalations through fiscal 2017, before declining somewhat in fiscal 2018 and dropping significantly in fiscal 2019.

The plant saw 31.7% increase in net generation in fiscal 2014 due to higher natural gas prices. Fiscal 2014 production was at 99% of the plant's net generation average from 2000-2014, which is viewed positively following the sharp decrease in production recorded in fiscal 2012. Fitch expects that volatility in annual production levels will continue due to the current and projected cost of natural gas. The volatility in production is not expected to drive the rating as members remain financially obligated to TMPA pursuant to the take-or-pay PSCs, irrespective of actual plant operations.

LONGER-TERM TRANSMISSION ASSETS

TMPA's transmission assets provide a regulated rate of return that is expected to support the agency's 2010 refunding bonds through the 2040 estimated useful life of the assets and the final maturity of the bonds. TMPA is a registered transmission owner and provider, with approximately 300 miles of lines and 14 substations in ERCOT.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Public Power Rating Criteria (pub. 18 May 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990630

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990630

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings, Inc.
Primary Analyst
Matthew Reilly, CFA
Director
+1-415-732-7572
Fitch Ratings, Inc.
650 California St, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Kathryn Masterson
Senior Director
+1-512-215-3730
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com


Source: Business Wire (September 10, 2015 - 1:56 PM EDT)

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