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
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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.
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