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Moody’s lowers outlook on LCRA bonds to negative

Wednesday, November 28, 2012 by Michael Kanin

The Lower Colorado River Authority took another hit from Wall Street as Moody’s Investors Service last week downgraded its debt outlook from stable to negative, a move that contributes to an increasingly troubled borrowing picture for the organization.

 

Moody’s pinned the downgrade of the river authority’s bond debt on a fomenting series of legal issues that have complicated LCRA’s wholesale electric business. Moody’s said in a news release that LCRA faces increased financial pressures and may need to raise its rates to offset losses in wholesale electric customers.

 

The negative rating outlook for LCRA reflects the increase in its credit risk profile resulting from the evolving nature of its relationships with its wholesale electric customers,” Moody’s said. “These circumstances create a need to accelerate mitigating strategies, including possible non-fuel rate increases, to cope with anticipated significant load loss and financial pressures if the courts do not rule in a timely way in LCRA’s favor on the contract disputes.”

 

Moody’s action comes after Fitch Ratings early last month downgraded LCRA’s revenue bonds and commercial paper, citing many of the same reasons that Moody’s did.

 

Sherri Greenberg, director of the University of Texas’ Center for Politics and Governance at the LBJ School, told In Fact Daily that the Moody’s action is a continuation of Wall Street concern over LCRA’s lingering disputes with wholesale electric customers. Greenberg noted that the Moody’s outlook drop might only slightly affect LCRA’s borrowing costs.

 

“Moody’s is … looking to see what happens next,” said Greenberg, who previously rated Austin Energy and LCRA for the credit-rating agency Standard & Poor’s and also served as a state representative.

 

LCRA spokesperson Clara Tuma said in an email to In Fact Daily that “the rating agencies reacted to the uncertainty of the contract status with some of our wholesale electric customers that has unfolded over the last few months. Seven customers improperly terminated their contracts and have not been paying amounts due under the contracts. Another customer provided notice of termination effective in January 2013,” Tuma wrote.

 

Tuma and Moody’s referred to an exchange of lawsuits between LCRA and a handful of former wholesale electric customers. The electric utilities informed LCRA in late 2010 that they would not extend their respective wholesale power supply contracts with the agency, which were set to expire in 2016. LCRA General Manager Becky Motal said that the loss of those customers would represent a dramatic loss of revenue for her organization (see In Fact Daily, August 30, 2011).

 

Eight of the 10 utilities have accused LCRA of unfairly overcharging them in the wake of their decisions to not renew their power contracts. Earlier this month, LCRA filed suit against Gonzales-based Guadalupe Valley Electric Cooperative to stop the customer from violating its power contract (see In Fact Daily, Nov. 16, 2012).

 

“LCRA has taken aggressive action, including litigation, to enforce the contracts,” Tuma said. “We have a high degree of confidence we will prevail and recover our costs under those contracts.” She added this assurance: “LCRA continues to prudently manage its costs to ensure we maintain our financial stability during this period of uncertainty.”

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