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Rating Action:

Moody's affirms the A2 ratings on Lower Colorado River Authority and A1 ratings on LCRA Transmission Services Corp.'s (TX) revenue bonds; outlook stable

12 Mar 2020

New York, March 12, 2020 -- Moody's Investors Service has affirmed the A2 rating on Lower Colorado River Authority's (LCRA) revenue bonds. LCRA has approximately $1.2 billion of revenue bonds outstanding. Concurrently, Moody's has affirmed the A1 rating on the LCRA Transmission Services Corporation's (LCRA TSC) transmission contract revenue bonds. LCRA TSC has approximately $2.3 billion of revenue bonds outstanding. The outlook for both entities remains stable.

RATINGS RATIONALE

The affirmation of the A2 rating on the LCRA revenue bonds incorporates strengthening financial performance, including debt service coverage ratios (DSCRs) that are improving yet continue to provide on average an overall narrow buffer when considering the relatively high customer concentration combined with load release provisions in long-term contracts for wholesale power. The rating is also based on LCRA's lengthy track record of providing wholesale electricity on a contractual basis and water supply to a large and economically healthy service area in Central Texas. Load release provisions in the wholesale power contracts constrain the rating. However, LCRA's recent load growth, which is benefitting LCRA's financial performance, is attributable to customers reversing prior load release elections as well as growth in customer service territories. LCRA's competitive and reliable generation supply portfolio and willingness to implement rate increases when necessary are also reflected in the rating.

The affirmation of the A1 rating on the LCRA TSC transmission contract revenue bonds reflects low business risk as an electric transmission provider operating within the credit supportive regulatory framework of the Public Utility Commission of Texas (PUCT). The rating incorporates the issuer's stable and predictable cash flows and financial performance derived under well-established regulatory rate making processes and its status as a regulated utility service provider. These positive credit attributes are balanced by a sizable capital expenditure program estimated at $1.4 billion over a five year planning period that will be largely debt funded.

RATING OUTLOOK

The stable outlook incorporates our view that LCRA will continue experiencing load growth within its service territory and will maintain satisfactory financial metrics and relatively competitive rates. We do not anticipate customers increasing load release provisions or opening up to retail competition over the 12-18 month outlook period.

We also expect LCRA TSC to continue regularly filing interim capital additions updates, and eventually a transmission cost of service rate filing when needed, as it implements its largely debt-funded capital improvement plan in order to maintain healthy debt service coverage ratios.

FACTORS THAT COULD LEAD TO AN UPGRADE: LCRA

- Improved financial metrics with total DSCRs over 1.8x, days cash on hand over 300 days, and/or a consolidated adjusted debt ratio below 60% to balance the ongoing risk of customer load loss

- Reduced risk of customer load loss

FACTORS THAT COULD LEAD TO A DOWNGRADE: LCRA

- Debt service coverage and adjusted days liquidity fall below 1.1 times and 90 days, respectively.

FACTORS THAT COULD LEAD TO AN UPGRADE: LCRA TSC

- Upgrade of the LCRA revenue bond rating

- Successful implementation of plans to construct and finance capital improvements and achieving favorable outcomes in future rate case proceedings that provide for debt service coverage in excess 2.0 times

FACTORS THAT COULD LEAD TO A DOWNGRADE: LCRA TSC

- A downgrade of LCRA

- Insufficiency of rate filings to sustain close to 1.3 times debt service

LEGAL SECURITY

LCRA revenue bonds are secured by a gross revenue pledge of the LCRA, which includes amounts received under contractual commitments, and all fund balances attributable to such income. LCRA has liens on all revenues of TSC and a first lien security interest on all the assets of TSC, but they do not directly secure LCRA's revenue bonds. The rate covenant and additional bonds test is sum sufficient. The Debt Service Reserve Fund requirement is equal to one half of the average annual debt service requirements. A portion of the DSRF requirement is satisfied by surety policies.

The LCRA TSC transmission contract revenue bonds have a lien and pledge of installment payments to LCRA payable solely from the net revenues of LCRA TSC, to pay the debt service on the transmission contract debt. The pledge is pursuant to the Transmission Contract Debt Installment Payment Agreement between LCRA and LCRA TSC. LCRA TSC is a transmission service provider operating in the state's open access marketplace. LCRA TSC derives its revenues from rates approved by the PUCT sufficient to meet its costs, currently including authorization of a 25 basis points increment of coverage above the covenanted 1.25 times debt service coverage margin. LCRA has not pledged its electric wholesale business revenues to transmission contract revenue bond repayment; however, LCRA does have a lien on and security interest in all LCRA TSC revenues and assets that applies to certain LCRA long-term bonds which are currently obligations of LCRA TSC under terms of an initial contractual commitment entered into between LCRA and LCRA TSC when LCRA TSC was first formed in 2002. Bondholders have no right to foreclose or enforce the Deed of Trust, Mortgage, or Security Agreement to cause LCRA to take such action. The bond resolution requires a 1.25 times rate covenant; an additional bonds test of 1.25 times; and expected compliance with the state regulatory board's certificate of convenience and necessity requirements for any transmission project undertaken. The Debt Service Reserve Fund requirement is equal to one-half maximum annual debt service. There is also a covenant through the installment payment agreement for LCRA TSC to keep a separate operating reserve equal to roughly an additional average six-month debt service.

PROFILE

LCRA is a governmental entity and body politic and corporate of the state of Texas. Legislation governing LCRA allows it to, among other things, sell the waters of the Colorado River for useful purposes; to generate, distribute and sell electric power in all or parts of a 55 county service area of Central Texas; and to develop and manage parks and recreational facilities. LCRA is also authorized through the use of affiliates to provide wholesale electric and transmission services throughout the state.

LCRA is the largest public provider of wholesale electricity in the state. LCRA provides wholesale electricity and related services to 33 wholesale electric customers (four electric cooperatives and 29 cities) that combined serve millions of people in 41 counties. Customers are obligated to receive a portion of their respective electric requirements from LCRA through June 25, 2041. The customers have a right to reduce their respective loads served by LCRA by as much as 35% over the course of several years, a credit negative. Likewise, customers may return such reduced load to be served by LCRA. Approximately 92% of non-fuel revenues in fiscal 2019 were derived from the sale of wholesale electric power. LCRA currently has approximately 3,214 megawatts of net maximum electric generating capacity.

LCRA manages water supplies and flooding along the lower Colorado River in the state, and sells both firm and interruptible water to customers throughout the region. LCRA operates six dams that form the Highland Lakes and which contain LCRA's hydroelectric generating facilities. LCRA's water service are covers approximately 20,000 square miles in all or part of 33 counties in Texas.

LCRA TSC was established after 1999 legislation that restructured the state's utility industry. LCRA transferred its transmission and transformation services to TSC, which now provides transmission services to utilities, including LCRA and its wholesale electric customers, that operate within ERCOT.

METHODOLOGY

The principal methodology used in these ratings was US Public Power Electric Utilities with Generation Ownership Exposure Methodology published in August 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Julie Meyer
Lead Analyst
Project Finance
Moody's Investors Service, Inc.
Plaza Of The Americas
600 North Pearl St. Suite 2165
Dallas 75201
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Kurt Krummenacker
Additional Contact
Project Finance
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
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New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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