Fitch assigns an 'A' rating to Lower Colorado River
Authority Transmission Services Corporation's (TSCorp) $122 million
transmission contract refunding revenue bonds (LCRA Transmission
Services Corporation Project), series 2005. The Rating Outlook is
Stable. Fitch also affirms the 'A' rating on $559 million of TSCorp's
outstanding contract revenue bonds. Proceeds of the series 2005 bonds
will refinance a portion of TSCorp's outstanding tax-exempt commercial
paper. The bonds are expected to price the week of July 25, 2005 with
Morgan Stanley as senior manager.
The affirmation takes into account the resolution of TSCorp's 2003-2004 transmission service costs rate case with the Texas Public Utility Commission (PUC). The final order authorized TSCorp to receive a $143.7 million TCOS and reaffirmed a debt service coverage (DSC) return methodology utilizing 1.50 times (x) as TSCorp's target debt service coverage (DSC for fiscal year 2004 was 1.48x). Tariffs were implemented on May 15, 2005. While TSCorp received a favorable decision by the Public Utility Commission of Texas (PUCT) for its first transmission rate case in December 2002, TSCorp's 2003-2004 rate filing was challenged by various parties. TSCorp proposed changing its rate methodology from the DSC approach to a cash flow approach, which would have resulted in DSC of about 1.80x, or an 80% increase in revenue requirements. Some additional positives that came out of the PUC order are that TSCorp's project costs are reasonable, that LCRA's utilization and control of TSCorp is in compliance with state law, and LCRA's overhead cost allocations to TSCorp are reasonable. In addition, the PUC final order provides that LCRA have an independent management audit to evaluate how TSCorp and LCRA conduct business. With these current findings and recommendations, Fitch believes that there is clear/proven framework and rate methodology for TSCorp's future rate cases.
Underpinning the 'A' rating is the essentiality of the service it provides and the reduced business risk involved with transmission assets (especially relative to electricity generation). TSCorp's business model focuses on developing transmission projects across Texas currently recommended by the Electric Reliability Council of Texas (ERCOT) that have or will receive a certificate of convenience and necessity (CCN) from the PUCT prior to construction. Additional strengths include TSCorp's experienced management team with a proven history of developing transmission facilities in Texas, the predictability of transmission service operating costs, and good cash reserves. Fiscal 2004 financials show debt service coverage of 1.48x and cash reserves equal to about six months of operating expenses.
Credit risks include TSCorp's large capital improvement plan (nearly $759 million over the next five years), a relatively short operating history as a separate affiliate of LCRA (beginning in 2002), and regulatory risk concerning how the PUCT will respond to TSCorp's ongoing rate case filings given the recently contested rate case. Partially mitigating this concern is TSCorp's liquidity position and its ability to appeal PUCT rate cases. Moreover, in the event a PUCT rate decision were to be well below TSCorp expectations, management has stated that it would consider discontinuing future transmission projects if they could not reasonably expect to recover costs and earn margins sufficient to provide debt service coverage of 1.50x. It is also important to note that, while viewed unlikely, LCRA has the ability to issue debt secured in part by TSCorp's contractual commitment to LCRA, and draw excess revenues back to LCRA. TSCorp's payment obligations to LCRA under the contractual commitment structurally subordinate TSCorp's debt service on contract revenue bonds below that of LCRA.
TSCorp is a Lower Colorado River Authority transmission system affiliate and non-profit corporation. Fitch views TSCorp as being ultimately controlled and operated by LCRA (which is rated 'A+' by Fitch). TSCorp was formed to separate LCRA's transmission business from electric generation, as required under the Texas electricity restructuring legislation (Senate Bill 7), and allow LCRA to provide transmission services throughout Texas. Transmission rates within ERCOT are 100% 'postage stamp,' determined by spreading the total cost of electric transmission service in ERCOT among all distribution service providers (DSP) according to their electric loads. All Transmission Service Providers (TSPs), including TSCorp, receive their compensation from all the DSPs in ERCOT.
Fitch's rating definitions are available on the agency's public web site, 'www.fitchratings.com.' Published ratings, criteria and methodologies and relevant policies and procedures are also available from this site, at all times. This document will remain on the public site for seven days.
The affirmation takes into account the resolution of TSCorp's 2003-2004 transmission service costs rate case with the Texas Public Utility Commission (PUC). The final order authorized TSCorp to receive a $143.7 million TCOS and reaffirmed a debt service coverage (DSC) return methodology utilizing 1.50 times (x) as TSCorp's target debt service coverage (DSC for fiscal year 2004 was 1.48x). Tariffs were implemented on May 15, 2005. While TSCorp received a favorable decision by the Public Utility Commission of Texas (PUCT) for its first transmission rate case in December 2002, TSCorp's 2003-2004 rate filing was challenged by various parties. TSCorp proposed changing its rate methodology from the DSC approach to a cash flow approach, which would have resulted in DSC of about 1.80x, or an 80% increase in revenue requirements. Some additional positives that came out of the PUC order are that TSCorp's project costs are reasonable, that LCRA's utilization and control of TSCorp is in compliance with state law, and LCRA's overhead cost allocations to TSCorp are reasonable. In addition, the PUC final order provides that LCRA have an independent management audit to evaluate how TSCorp and LCRA conduct business. With these current findings and recommendations, Fitch believes that there is clear/proven framework and rate methodology for TSCorp's future rate cases.
Underpinning the 'A' rating is the essentiality of the service it provides and the reduced business risk involved with transmission assets (especially relative to electricity generation). TSCorp's business model focuses on developing transmission projects across Texas currently recommended by the Electric Reliability Council of Texas (ERCOT) that have or will receive a certificate of convenience and necessity (CCN) from the PUCT prior to construction. Additional strengths include TSCorp's experienced management team with a proven history of developing transmission facilities in Texas, the predictability of transmission service operating costs, and good cash reserves. Fiscal 2004 financials show debt service coverage of 1.48x and cash reserves equal to about six months of operating expenses.
Credit risks include TSCorp's large capital improvement plan (nearly $759 million over the next five years), a relatively short operating history as a separate affiliate of LCRA (beginning in 2002), and regulatory risk concerning how the PUCT will respond to TSCorp's ongoing rate case filings given the recently contested rate case. Partially mitigating this concern is TSCorp's liquidity position and its ability to appeal PUCT rate cases. Moreover, in the event a PUCT rate decision were to be well below TSCorp expectations, management has stated that it would consider discontinuing future transmission projects if they could not reasonably expect to recover costs and earn margins sufficient to provide debt service coverage of 1.50x. It is also important to note that, while viewed unlikely, LCRA has the ability to issue debt secured in part by TSCorp's contractual commitment to LCRA, and draw excess revenues back to LCRA. TSCorp's payment obligations to LCRA under the contractual commitment structurally subordinate TSCorp's debt service on contract revenue bonds below that of LCRA.
TSCorp is a Lower Colorado River Authority transmission system affiliate and non-profit corporation. Fitch views TSCorp as being ultimately controlled and operated by LCRA (which is rated 'A+' by Fitch). TSCorp was formed to separate LCRA's transmission business from electric generation, as required under the Texas electricity restructuring legislation (Senate Bill 7), and allow LCRA to provide transmission services throughout Texas. Transmission rates within ERCOT are 100% 'postage stamp,' determined by spreading the total cost of electric transmission service in ERCOT among all distribution service providers (DSP) according to their electric loads. All Transmission Service Providers (TSPs), including TSCorp, receive their compensation from all the DSPs in ERCOT.
Fitch's rating definitions are available on the agency's public web site, 'www.fitchratings.com.' Published ratings, criteria and methodologies and relevant policies and procedures are also available from this site, at all times. This document will remain on the public site for seven days.
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