Fitch Ratings assigns a 'BBB+' rating to the $115 million Power Supply
System Revenue Refunding Bonds series 2012 to be issued by Sam Rayburn
Municipal Power Agency (SRMPA or agency), TX. The bonds are expected to
price in the week of Aug 20. Proceeds from the series 2012 bonds will be
used to refund all outstanding bonds.
In addition, Fitch affirms the rating at 'BBB+' and removes from 'Rating
Watch Evolving' SRMPA's outstanding power supply system revenue bonds,
all of which are expected to be refunded.
The Rating Outlook is Stable.
Bonds are secured by net revenues of the agency, which are derived from
payments received under take-or-pay power supply contracts with the
three member cities.
KEY RATING DRIVERS
SEPARATELY SECURED LEGACY OPERATIONS: The resolution of the Rating Watch
reflects Fitch's understanding of the separation of SRMPA's power supply
obligation to its member cities and its obligation under the recently
executed Project Cambridge (Cambridge) that is under review as part of
Entergy Texas Inc's (ETI) rate case.
STABLE MEMBERS: The 'BBB+' rating reflects the stable credit quality of
the underlying members. SRMPA's members are characterized by a small but
primarily residential customer base and slow growth. Debt at each of the
distribution systems is negligible, but higher than average at SRMPA
($13,500 per customer).
TAKE-OR-PAY CONTRACTS: SRMPA's members have unconditional take-or-pay
power supply contracts with an unlimited step-up provision. Fitch notes
that given the size of each member it is unclear if the performing
members would be able to absorb a default by any other member.
LONG TERM FIXED PRICE SUPPLY: SRMPA's electricity requirements net of
its share of federal hydro purchases are met under a fixed price
requirements power supply agreement (RPSA) with Entergy Wholesale
Operations Marketing, LP (EWOM or Entergy) (not rated by Fitch). The
RPSA extends through the life of the debt.
RATE COMPETITIVENESS: Wholesale rates to members have remained steady
despite some increases associated with below average hydro generation.
The rates of SRMPA participants are now competitively priced given rate
increases at neighboring systems.
COUNTERPARTY RISK: While the RPSA between SRMPA and Entergy is backed up
by a purchase money security interest in Entergy Power Inc, and
guaranteed by Entergy Corp, SRMPA remains exposed to Entergy's
WHAT COULD TRIGGER A RATING ACTION
MEMBER CREDIT QUALITY: The rating on the bonds is based on the credit
quality of the members together with the step-up provisions that
mitigate against a payment default. A change in the credit quality of
the members could affect the rating. The rating also assumes the
continuation of Entergy's RPSA through the end of the contract period in
Full Requirements Joint Action Agency
SRMPA is a municipal corporation organized to provide full requirements
electric supply to its three members located in eastern Texas. The
agency's members (cities of Jasper, Liberty and Livingston) are all
located in the SERC Reliability Corporation (SERC) region of Texas and
are therefore outside the nodal market recently implemented in the
Electric Reliability Council of Texas (ERCOT).
Take-or-Pay Contracts with Members
Member's power supply needs are met pursuant to unconditional
take-or-pay contracts that run through 2021, thereby matching up with
the maturity of the outstanding bonds. The take-or-pay contracts have an
unlimited step-up provision. SRMPA does not own any generation; but
receives its power from Entergy under the RPSA. The RPSA was entered
into in exchange for SRMPA's ownership interest in a coal plant. SRMPA
is also entitled to the output of two federal hydro projects and
Entergy's contract obligations are net of the hydro output.
Project Cambridge Significantly Expands Agency Operations
SRMPA executed contracts under Cambridge in the fall of 2011, whereby
the agency amended its wholesale power supply contract with EWOM. The
effective date for Cambridge was Dec 1, 2011. Cambridge resulted in
SRMPA serving an additional 545MW of load through ETI and Vinton Public
Power Authority. Although there is overlap of power supply between
legacy load obligations and obligations under Cambridge, the creation of
a separately-secured project account for Cambridge with cascading unwind
provisions, results in fiscal separation. The agency's Net Revenues and
other funds established under the Indenture are not commingled with
Cambridge. Cambridge is independent from the agency's existing
operations that secure the agency's payment on the series 2012 Bonds.
Fitch notes the agency's strategy, as part of Cambridge, to secure long
term power supply for its members after the expiration of RPSA in 2021.
Although the agency's bonds are not secured by Cambridge revenues, the
extent and scope of Cambridge will demand additional oversight from the
existing management team which Fitch views as being small. Fitch
believes that the extensive use of outside consultants will continue in
the near future.
The agency has exhibited stable financial performance in the past. Debt
service coverage has ranged between 1.15x and 1.3x, which is adequate
for a joint action agency. SRMPA's financial forecast indicates a 1.1x
debt service coverage through 2021. Any excess coverage is rebated back
to customers in the following year. All outstanding bonds are fixed rate
and currently there are no plans to issue additional debt. The planned
refunding should result in an annual reduction of $2.9 million in future
debt service which equates to a reduction of about 11% in wholesale
Additional information is available at www.fitchratings.com.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's
Revenue-Supported Rating Criteria, this action was additionally informed
by information from Creditscope.
Applicable Criteria and Related Research:
Rating Criteria' (June 12, 2012);
--'U.S. Public Power Rating
Criteria' (Jan. 11, 2012);
--'Fitch Places Sam Rayburn Municipal
Power Agency's Pwr Supply Sys Revs on Rating Watch Evolving' (June 27,
Applicable Criteria and Related Research:
Public Power Rating Criteria
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