Major rating agency lowers LCRA bond ratings

A major financial rating agency cut its grade for a series of Lower Colorado River Authority bonds.

 

Fitch Ratings on Tuesday downgraded LCRA’s revenue bonds from an A+ to an A rating and dropped its commercial paper from F1+ to F1. The bonds for LCRA’s Transmission Services business unit were unaffected by the move.

 

According to a report by the Reuters wire service, the downgrade related to the downward pressure on LCRA’s revenues as a result of an ongoing dispute between LCRA and 10 of its former wholesale electric customers that declined to renew power supply contracts with LCRA that were set to expire in 2016. Most of those customers – small Texas municipal utilities and cooperatives – filed suit against the utility for a breach of contract. The utilities subsequently terminated power supply contracts early.

 

While LCRA management plans to make further cuts in its expenses, Fitch noted that the river authority has already slashed costs. “Management expects to preserve financial margins through expenditure reductions and market energy sales,” Fitch said. “However the expenditure reductions needed are meaningful and come on top of cost reductions already implemented.”

 

LCRA spokesperson Clara Tuma told In Fact Daily in an email that the authority “remains a strong, stable public service organization that provides reliable power to a substantial customer base.” The Fitch rating “doesn’t change any of that.”

Tuma acknowledged that a part of the action was the result of “uncertainty caused by recent actions from eight of LCRA’s 43 wholesale electric customers.”

 

“This year, eight of the 10 customers who chose not to extend their contracts with LCRA past 2016 decided to try and exit their contracts early, arguing LCRA had breached the contracts by allowing customers that extended their contracts until 2041 to purchase a portion of their power elsewhere,” she continued.

 

In the email sent by Tuma, LCRA general manager Becky Motal said that the organization is “aggressively working through the issues with some of our customers and expect them to be resolved in our favor.”

 

“As I have said before,” Motal continued, “LCRA believes the contracts are binding and we stand ready to strongly defend them in court. LCRA made business decisions and budget plans relying on those contracts and we expect our customers to honor them.”

 

A drop in bond ratings can make it more expensive for LCRA to borrow money.

 

According to the Fitch website, an A bond rating “denote(s) expectations of low default risk” that may, however, “be more vulnerable to adverse business or economic conditions than is the case for higher ratings.” The F1 commercial paper rating is the highest grade Fitch gives short-term debt, but LCRA’s loss of the “plus” status carries a similar implication as it does with the bonds.

 

Motal stuck by LCRA’s approach. “LCRA is well-positioned to face the significant challenges ahead,” she said. “We have a solid, forward-looking Business Plan that has already cut expenses by more than $40 million. We will continue to reduce expenditures through strategic reductions in costs and we look forward to continuing to provide outstanding service to customers throughout our service territory.’’

 

LCRA layoffs, position eliminations, and the like have extended into the organization’s management structure, its parks division and its operations. (See In Fact Daily, Aug. 8, 2011, Jan. 4, 2012, and May 9, 2012.)

 

The Fitch ratings cut affects $1.6 billion of revenue bonds and $175 million of commercial paper.