Fitch Assigns 'AA+' to San Antonio City Public Service's (TX) Elec & Gas System Bds; Outlook Stable

SAN FRANCISCO--(BUSINESS WIRE)--

Fitch Ratings assigns an 'AA+' bank bond rating to the following San Antonio City Public Service (CPS Energy), Texas' junior lien electric and gas systems revenue bonds:

--$250 million junior lien revenue bonds, series 2003.

The bank bond rating is assigned in connection with the substitution of the standby bond purchase agreement (SBPA). The existing facility expires on Jan. 31, 2012 and is being replaced by a SBPA provided by Royal Bank of Canada to provide liquidity support to the variable rate series 2003 bonds.

In addition, Fitch affirms the following CPS Energy ratings:

--$3.9 billion outstanding senior lien obligations at 'AA+';

--$897.6 million outstanding junior lien obligations at 'AA+';

--$130 million outstanding commercial paper (CP) notes at 'F1+'.

The Rating Outlook is Stable.

KEY RATING DRIVERS

COMBINED SYSTEM: The utility is a combined municipal utility that provides retail electric and natural gas services to the City of San Antonio.

SOLID FINANCIAL PERFORMANCE: Financial margins have been consistently healthy at over 2.2 times (x) debt service coverage or 1.5x, including the large 14% general fund transfer, in recent years.

STRONG POLICIES AND PLANNING: CPS has exhibited consistently strong management practices, including long-range financial and rate forecasting, through recent senior management turn-over and power supply strategic direction change.

COMPETITIVE GENERATION PORTFOLIO: CPS enjoys a competitively priced and sufficient generation portfolio, resulting in competitive rates and rate flexibility.

POWER SUPPLY CHANGES: CPS announced in June 2011 its decision to retire one of its two coal-fired power plants by 2018, the Deely Plant (871 MW). CPS will look to replace the capacity with natural gas-fired generation.

SIZABLE CAPITAL DEMANDS: The utility's debt burden and equity position are average. Additional capital needs in the range of $3 billion over the next five years will require additional debt funding, but debt levels and rate increases should remain manageable.

STABLE SERVICE AREA: The San Antonio service area continues to enjoy growth, albeit at a lower level, resulting from ongoing military spending in the area.

SHORT-TERM RATING: The 'F1+' ratings on CPS's tax-exempt CP programs are based on the internal liquidity support of CPS and dedicated revolving credit agreement.

SECURITY:

The senior lien bonds are secured by net revenues of the combined electric and gas system. The junior lien bonds are secured by net revenues after the payment of debt service on the senior lien bonds.

CREDIT PROFILE:

Stable Service Area

CPS Energy provides exclusive electric service to 713,390 primarily residential electric customers and to 324,702 primarily residential gas customers. The customer base is large and diverse and the City of San Antonio continues to attract new industry to the CPS Energy service area. While electric usage declined from 2009 through 2010, it recovered in fiscal 2011.

Vertically Integrated Utility

CPS Energy owns and operates 5,907.6 mega-watts (MW) of generating capacity. In addition, CPS Energy continues to acquire a significant amount of renewable energy through various long-term purchase power agreements. Of the 883 MW of purchased power renewable resources, approximately 97% is wind resources from West Texas. The J.K. Spruce II unit, a 775 MW coal-fired unit, was brought on line in May 2010 and 190 MW of natural-gas peaking units came on line in December 2010. The new resources are replacing older, less efficient units, which are being retired.

New Energy Economy

CPS announced it would retire the Deely plant by 2018, 15 years ahead of schedule, in lieu of spending money to install scrubbers to bring it into compliance with potential new emissions standards. The plant closure and strategic decision to invest in alternative renewable energy and efficiency savings are components of San Antonio's 'New Energy Economy Initiative'. CPS is positioned to play a cornerstone role in the city's desire to embrace cleaner energy technologies and attract business and jobs to the community.

Nuclear Developments

From 2007 through 2009, CPS worked with NRG to develop plans to expand the South Texas Project (STP) with two additional Units #3 and #4. Near the end of 2009, CPS determined that it would no longer participate in the development of additional nuclear capacity. In 2010, CPS and NRG came to an agreement that, in exchange for the $370 million in development costs CPS had invested to date, CPS would receive 7.6% of Units #3 and #4 when completed. However, in April 2011, NRG announced it would not invest additional capital in STP #3 and #4 and wrote off its investment to date in the project. At year end fiscal 2011, CPS still had $370 million included in its construction-in-progress related to cash reserves spent on development costs at STP #3 and #4. It is not known when or if the additional units will be built.

Stable Financial Performance

CPS Energy's financial performance has hovered in a consistent range for the past five years. Fiscal year end Jan. 31, 2011 generated a Fitch calculated 2.33x annual debt service coverage on the senior and junior bonds, and an all-in 1.59x coverage when general fund transfers are included. Management's financial projections indicate continued financial margins in this range. With unrestricted cash of $814 million, including its repair and replacement fund, or 243 days cash on hand, CPS Energy's liquidity levels are strong. While debt levels are moderately high and continue to increase, CPS Energy continues to exhibit its ability to service this level of debt.

Rates are competitive and regular rate increases occur approximately every two years. Both electric and gas rates have automatic fuel adjustment factors that help recovery variable fuel costs in a timely manner.

Sizable Capital Needs

CPS Energy has identified approximately $3 billion of capital improvement projects that it will undertake over the next five years. A significant amount of the capital program will be to make improvements to the electric distribution system. CPS Energy is pursuing an ambitious energy conservation program called Save for Tomorrow Energy Plan (STEP) which is expected to reduce load growth through energy efficiency projects. Even with its STEP program, CPS Energy still anticipates electric load growth to continue at a 1.25% annual rate. The capital improvement program identifies various transmission and generation projects. The capital improvement program is expected to be funded by a combination of 70% debt financings and 30% internally generated funds.

Commercial Paper Program

The 'F1+' rating on CPS's tax-exempt commercial paper program is supported by CPS's liquidity position and a $450 million revolving credit facility provided by State Street Bank and Trust Company and Bank of America, N.A. The revolving credit agreement is a dedicated facility that will cover the payments on the notes if the notes are unable to be remarketed. The revolving credit agreement expires on Nov. 1, 2012. In addition to its revolving credit facility, CPS had available cash and investments of approximately $814 million that could be used to support the CP program, if needed.

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:

--'Revenue-Supported Rating Criteria', June 20, 2011;

--'U.S. Public Power Rating Criteria', March 28, 2011;

--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity', dated June 20, 2011.

--'U.S. Public Power Peer Study', June 20, 2011.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=613065

Criteria for Assigning Short-Term Ratings Based on Internal Liquidity

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637129

U.S. Public Power Peer Study, June 2011

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=636311

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