Fitch Assigns A- Rating to Bonds issued by the Lower Colorado River Authority on behalf of Transmission Entity

by Paul Ciampoli
APPA News Director
May 8, 2023

Fitch Ratings has assigned an ‘A+’ rating to bonds issued by Texas-based Lower Colorado River Authority on behalf of the Lower Colorado River Authority Transmission Services Corp.

Specifically, Fitch assigned the A- rating to approximately $481.5 million transmission contract refunding revenue bonds, series 2023A.

Proceeds will be used to refinance approximately $62 million in outstanding series 2013A bonds, refinance approximately $420 million in commercial paper into long-term debt, fund a debt service reserve fund and pay costs of issuance.

In addition, Fitch affirmed the ‘A+’ rating on approximately $3.2 billion in outstanding transmission contract refunding revenue bonds.

The rating outlook is Stable.

LCRA is the largest public power wholesale provider in Texas and provides energy services in a 55-county service area. LCRA provides wholesale power to municipal electric utilities and electric distribution cooperatives in Texas. It also manages and distributes water supply and provides flood control along the lower Colorado River in Texas.

Fitch said that the ‘A+’ rating reflects the strong financial profile of the Lower Colorado River Authority Transmission Services Corp. in the context of its very low operating risk profile and the strength of its regulated revenue framework in the Electric Reliability Council of Texas market, in which it operates.

Transmission revenues are regulated by the Public Utility Commission of Texas and collected from all retail customers within ERCOT, Fitch noted. The rating agency said that the largest utilities contributing to the Lower Colorado River Authority Transmission Services Corp.’s transmission revenues have a collective midrange purchaser credit quality and primarily consist of the largest electric utilities operating within the state.

Leverage (measured by net adjusted debt to adjusted funds available for debt service) was below 9.0x over the last decade, despite large additional capex investments in new and existing transmission assets, primarily funded from new debt. The regulatory process in ERCOT allows capex additions to be included in the transmission tariff in a timely manner, allowing revenues to keep pace with the increased debt costs. The planned increase in capital spending at TSC over the next five years should be accompanied by supporting revenues and not result in a material dilution of the utility’s key financial ratios.

In addition, Fitch views the revenue consistency and low operating risk of transmission-only utilities as enabling these utilities to accommodate slightly higher leverage levels than utility peers with generation and retail electric business lines.

LCRA created the Lower Colorado River Authority Transmission Services Corp. as a nonprofit corporation for transmission operations after a 1999 state law changed how electric utilities manage and operate electric transmission facilities.

The law required utilities to separate electric generation and transmission operations as part of preparations for a deregulated retail electric market. The law also allowed LCRA to expand its transmission facilities and operations beyond its traditional Central Texas service area.

On Jan. 1, 2002, LCRA transferred ownership of its transmission facilities to the Lower Colorado River Authority Transmission Services Corp. to satisfy the state’s requirements.

Since its creation, the Lower Colorado River Authority Transmission Services Corp.  has invested more than $3.9 billion in transmission projects to meet the growing demand for electricity, improve reliability, connect new generating capacity, address congestion problems that affect the competitive market and help move renewable energy to the market.