Approximately $266.4 million of debt affected
New York, December 18, 2019 -- Moody's Investors Service has assigned a Aa1 rating to the City of San Antonio (TX) Combined Utility Enterprise's (CPS Energy) $136.5 million senior lien Revenue Refunding Bonds, Series 2020, and a Aa2 rating to $129.9 million Variable Rate Junior Lien Revenue Refunding Bonds, Series 2020. The rating outlook is stable.
RATINGS RATIONALE
The Aa1 senior lien rating considers various strengths including: the utility's broad and growing service area economy; supportive self-regulation on electric and gas rates and sound environmental policies; competitive retail rates despite a high General Fund transfer requirement; a competitive, reliable and diverse power supply; conservative financial record including strong liquidity; and the sound debt structure and risk management program. The Aa2 junior lien rating considers the subordinate pledge relative to the security on the senior lien obligations.
The City of San Antonio, the nation's 7th largest city, carries a Aaa rating on its general obligation bonds. CPS Energy's power supply is well balanced with both conventional and renewable energy that continues to evolve towards lower carbon emissions, a key policy initiative. In March 2018, CPS Energy announced its Flexible Path. The Flexible Path is a fresh strategic approach on of how CPS Energy will prudently plan for, develop and / or install new energy sources to serve its community. CPS Energy continually evaluates its generation portfolio, and will leverage its existing community-owned generation assets to bridge to a future that enables more non-emitting resources such as wind, solar, energy storage and new technology. Currently, the utility is prioritizing the replacement of capacity from older units, as almost one-third of capacity comes from assets of forty years or older.
While this objective represents a challenge, it appears to be a measured plan to balance clean energy and system reliability and customer growth. Coal-fired generation capacity is expected to decline to around 7% by 2040 under a possible Flexible Path scenario. Moreover, the diverse fuel mix that includes nuclear, coal, natural gas and renewable resources remains well managed and provides the utility with ample flexibility to remain cost competitive as it focuses on sustainability objectives. That said, CPS Energy faces a continuing challenge managing market and commodity risks given its participation in the ERCOT day ahead market as lower energy prices caused by low natural gas prices and abundant wind energy has made its coal fleet less competitive.
CPS Energy's liquidity remains quite strong as adjusted days liquidity (including undrawn lines of credit) has exceeded 400 days over the past three years, and was at 442 days in FY 2019. CPS Energy continues to demonstrate a sustained sound financial record with adjusted debt service coverage in the fiscal year that ended January 31, 2019, (including general fund transfers as an operating expense) at 2.0x, a moderate improvement over the past several years. Retail rates continue to remain competitive across all customer classes.
CPS Energy has a $3.3 billion capital program over the 2019-2024 period, expected to be 50/50 funded by internally generated cash and new debt issuances. Construction funding from debt proceeds is forecasted to average approximately $309.6 million per year.
The capital program primarily focuses on expanding the electric system to accommodate the forecasted annual electric sales increases between 1-2% and gas sales increases between 0.5-1.5% over the next 25 years. Construction projects include electric transmission, electric generation, electric distribution, general properties, and gas facilities. Additionally, the remainder of the capital budget will be used for power generation, gas distribution, and shared services that include a grid optimization program.
CPS Energy's debt ratio as of FY 2019 was 58.1%, while the adjusted debt ratio which includes Moody's adjustment for net pension liabilities was 70.7%. The adjusted debt ratio is on the higher end relative to similarly rated peers, and may modestly increase somewhat over the next few years with additional debt issuance for the implementation of the capital program. That said, we view the leverage levels as being manageable over the long-run given management's prudent capital spending programs and expectation for the maintenance of strong liquidity.
RATING OUTLOOK
The stable outlook reflects the strong competitive position and consistently sound financial position. The outlook additionally incorporates our view that financial results will continue to reflect the utility's sound management, and that capital expenditures will continue to be financed through a fairly conservative approach.
FACTORS THAT COULD LEAD TO AN UPGRADE
- CPS Energy's long-term rating is in the highest rating category of any combined electric and gas utility in the US, so upward rating prospects are limited
FACTORS THAT COULD LEAD TO A DOWNGRADE
- Customer intolerance for any rate increase that would adversely impact financial metrics
- Extended forced outage at its nuclear facility
- Weakening in competitive position or change in business model that impacts fixed cost recovery
- Adjusted debt service coverage that falls below 1.50 times over a three-year period
LEGAL SECURITY
The senior lien bonds are secured by the net revenue pledge of CPS Energy's electric and natural gas systems; there is a sum-sufficient rate covenant required which includes a deposit of 6% of gross revenues into the repair and replacement account, that effectively provides greater than the stated sum-sufficient debt service coverage. There is an additional bonds test of 1.50 times maximum annual debt service on senior lien bonds and 1.00 times on all senior and junior-lien debt obligations and a debt service reserve on senior lien bonds funded at average annual debt service and funded by a surety policy from Assured Guaranty Municipal Corp. (A2 stable). There is no debt service reserve for junior lien bonds. The junior lien pledge is subordinate and inferior to the pledge of net revenues securing the senior lien bonds, but prior and superior to the lien on, and pledge of, the net revenues securing the payment of the commercial paper notes.
USE OF PROCEEDS
Proceeds from both the senior and junior lien bonds, in addition to the bond premiums, will be used to refund approximately $300 million of CPS's outstanding commercial paper program, as well as pay issuance fees. As of December 2019, CPS has approximately $453.5 million of commercial paper outstanding and plans to draw an additional $50 million in January 2020 prior to the refunding. In addition to the $300 million being repaid in January, CPS will repay $130 million of Series B commercial paper with cash on hand. CPS expects to have a balance of $95 million in outstanding commercial paper at the end of fiscal 2020 (January 31, 2020).
In June 2019, CPS Energy increased its commercial paper program to $700 million from $600 million with liquidity support for the additional series provided by Wells Fargo Bank, N.A. (Aa2 stable).
PROFILE
CPS Energy is a combined utility owned by the City of San Antonio. CPS Energy provides near monopoly locally-owned electric service to a strong economic area that includes all of Bexar County (Aaa stable) and part of seven adjacent counties. There is no service area boundary for the CPS Energy gas system.
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.
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Jennifer Chang
Lead Analyst
Project Finance
Moody's Investors Service, Inc.
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Kurt Krummenacker
Additional Contact
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Client Service: 1 212 553 1653
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