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Announcement:

Moody's maintains Aa2 on San Antonio (CPS Energy) TX Combined Utility Enterprise's remarketed Series 2015A and 2015C Variable Rate Junior Lien Revenue Refunding Bonds; outlook is stable

29 Oct 2019

Approximately $225 million of debt affected

New York, October 29, 2019 -- Moody's Investors Service has maintained Aa2 ratings on the City of San Antonio (TX) Combined Utility Enterprise's (CPS Energy) $124,555,000 Variable Rate Junior Lien Revenue Refunding Bonds, Series 2015A and its $100,000,000 Variable Rate Junior Lien Revenue Bonds, Series 2015C. Moody's maintains a Aa2 rating on CPS Energy's outstanding Junior Lien Revenue Bonds totaling approximately $1.7 billion and a Aa1 rating on the utility's Senior Lien Revenue Bonds totaling about $3.7 billion. The outlook is stable.

RATINGS RATIONALE

The Aa2 junior lien rating reflects the subordinate pledge relative to the security pledge on the Aa1 rated senior lien obligations. CPS Energy's ratings 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 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, a fresh strategic approach to enable CPS Energy plan for, develop and / or install new energy sources to serve its community. CPS Energy continues to evaluate its generation portfolio, and leverages its existing community-owned generation assets to bridge to a future with more non-emitting resources such as wind, solar, energy storage and other new technologies. In this regard, CPS Energy has conducted three public input sessions with the Board as well as over 50 partner meetings to educate local stakeholders on the future of its generation mix.

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 remain in the 18% range through 2030. The coal units are in compliance with existing federal and state environmental regulations. Moreover, the diverse CPS Energy's 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, the amortizing debt structure of the debt portfolio, the plan to fund its capital spending with 50% debt and 50% internal sources, and the expectation for maintaining a strong liquidity profile.

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 for 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

CPS is remarketing approximately $124,555,000 of outstanding Series 2015A Variable Rate Junior Lien Revenue Refunding Bonds and $100 million of outstanding Series 2015C Variable Rate Junior Lien Revenue Bonds. The bonds will remain on the junior lien tranche and will beremarked as mandatory soft put bonds with four- to five-year terms.

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.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Jennifer Chang
Lead Analyst
Project Finance
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
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.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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