NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to the city of Garland, TX's electric utility system revenue refunding bonds, series 2013. Proceeds of the bonds, which are scheduled to sell competitively on May 7, 2013, will be used to refund series 2005 bonds for approximately 16.4% savings of the refunded par amount.
In addition, Fitch has affirmed the 'AA-' rating on Garland's $90.8 million of outstanding electric utility system revenue bonds.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a first lien on net revenues of Garland Power & Light (GP&L), the city's electric utility.
KEY RATING DRIVERS
Texas Retail Utility: GP&L serves approximately 68,400 customers in a healthy service territory located just outside the city of Dallas. The utility owns and operates three power stations, but its principal source of power is the Texas Municipal Power Agency (TMPA; revenue bonds rated A+/Stable by Fitch).
Robust Liquidity: Its sizable rate mitigation fund (RMF) enables GP&L to offset increased obligations to TMPA in fiscal years 2013-2018 with minimal rate increases, which preserves the utility's future revenue-raising flexibility. The RMF balance grew ahead of schedule to $194 million in fiscal 2012 versus far more modest expectations from two years ago.
Strong Financial Results: Fiscal 2012 coverage of debt service and cash on hand equaled 4.1x and 647 days, respectively, both of which were consistent with GP&L's strong results in recent years and well above Fitch's 'AA-' rating category medians. Longer-term cash flow and liquidity metrics are expected to be more in line with the category medians, as GP&L begins to draw down RMF balances in fiscal 2013.
Good Power Supply: GP&L's 47% entitlement in TMPA's coal-fired Gibbons Creek Steam Electric Station (GCSES) provides a sound baseload power supply requiring minimal environmental modifications over the next few years. However, GP&L's high proportion of energy from the facility (70%) poses some risk.
RATING SENSITIVITIES
Strong Planning Supports Rating Stability: GP&L's strong planning for increased fixed cost obligations through fiscal 2018 should ultimately provide for financial and rating stability.
CREDIT PROFILE
STRONG FINANCIAL PLANNING
GP&L's history of strong financial planning should contribute to longer term stability. The utility's outsized RMF grew to a peak of $194 million as of Sept. 30, 2012, which is considerably higher than projections of $143 million and $171 million during Fitch's respective May 2011 and October 2011 ratings. The RMF provides GP&L with exceptional liquidity and flexibility to mitigate higher fixed cost obligations over the next several years without need for a material rate increase.
The utility is entering a period of increased demand charges to TMPA. This follows a two-year reprieve in fiscal years 2011-2012 resulting from the refinancing of certain TMPA generation debt. GP&L's projected debt service and purchased power costs rise to an average of approximately $128 million in fiscal years 2013-2018, or by about one-quarter more than the three-year average to fiscal 2010 ($102 million). After TMPA's currently remaining power supply bonds fully mature in fiscal 2018, GP&L's total obligations will return closer to historical norms.
ROBUST FINANCIAL RESULTS
GP&L's proactive strategy of funding a reserve to mitigate future fixed cost obligations has caused its cash flow and liquidity metrics to be well above Fitch's 'AA-' rating category medians. The utility's debt service coverage and coverage of full obligations have averaged 4.3x and 2.1x annually since fiscal 2009. Fitch's 'AA-' rating category medians are 2.5x and 1.4x. Moreover, GP&L's cash on hand totals 647 days, or a still healthy 120 days net of the RMF.
FORECASTS IN LINE WITH MEDIANS
An important rating consideration over the longer term will be GP&L's financial metrics relative to rating category medians, as the utility returns to more normalized financial operations. This will become clearer as GP&L draws down the RMF balance and ultimately begins to meet expenses with current year revenues.
GP&L's current forecasts through fiscal 2022 show healthy debt service coverage averaging 2.1x annually and adjusted coverage of approximately 1.6x annually, both of which remain in line with rating category medians. New wholesale customers in fiscal 2013 boost operating income and associated cash flow metrics for that year.
Retail rates, which are slightly above the state average, do not increase materially in the 10-year forecast, which provides GP&L with flexibility to raise future revenues, as required. Rates include a base rate and revenue adjustment factor that GP&L's management can change without approval of the city council.
LARGE BASELOAD RESOURCE
GP&L's principal source of power is a 220MW (47%) share of GCSES through its membership in TMPA. The facility has been a low cost resource for GP&L. However, a high proportion of energy from one facility (70%) does subject the utility to a degree of risk. GP&L rounds out its power supply largely with purchase power contracts and other owned peaking facilities.
GOOD SERVICE TERRITORY
GP&L provides retail electric service to 68,400 customers in the city of Garland, which benefits from the depth of the Dallas metropolitan area. Wealth indicators are slightly above average, and residential sales compose nearly one-half of the total.
Additional information is available at 'www.fitchratings.com'.
This rating action was informed by information identified in Fitch's U.S. Public Power Rating Criteria and Revenue-Supported Rating Criteria.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria' (Dec. 18, 2012);
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Garland Power & Light' (May 24, 2011).
Applicable Criteria and Related Research
U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696027
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
Garland Power & Light (Garland, Texas)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=632110
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=789598
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