Fitch Rates Lower Colorado River Authority's 2004D Bonds 'A+'

Business Wire, Nov 18, 2004

NEW YORK -- Fitch Ratings assigns an 'A ' rating to Lower Colorado River Authority's (LCRA), $58.4 million refunding revenue bonds, series 2004D. The Rating Outlook is Stable. In addition, Fitch affirms LCRA's outstanding $1.5 billion of revenue bonds at 'A ' and the 'F1 ' rating on LCRA's tax-exempt and taxable commercial paper (CP) programs. Proceeds from the 2004D bonds will refund certain outstanding commercial paper. The bonds are expected to price the week of Nov. 22, 2004 with Bear Stearns as senior manager.

The 'A ' rating reflects LCRA's cost competitiveness in the ERCOT wholesale market (derived from well-run and cost-efficient power generating plants), its members' growing power needs, and the belief that the members see value in continuing their long-standing relationship with LCRA beyond the existing contract expiration date (2016).

LCRA's financial profile includes debt service coverage of 1.37 times (x)-(LCRA and TSCorp), equity-to-capitalization of 27% and sufficient cash on hand to fund two months of operating expenses and approximately six months of debt service. Management expects aggregate debt service coverage to range between 1.3x - 1.4x over the next few years.

Credit concerns include the increasing amount of revenue bonds maturing beyond the final expiration date (2016) of the wholesale electric power agreements and the increasing complexity of LCRA's long-term power resource planning. On March 17, 2004, Fitch downgraded LCRA to 'A ' from 'AA-' as a result of these developments. For additional information regarding these issues, see Fitch Research 'LCRA dated April 1, 2004 at 'www.fitchratings.com'.

An additional credit concern includes competitive pressures within Texas coming from the deregulation of the Texas retail electric market. Partially mitigating this concern is that LCRA's wholesale customers (cooperative and municipal utilities) have the ability to opt into retail competition and that Fitch believes they will continue to remain out in the near to medium term. This is a result of uncertainties associated with competition (once you opt in you can't opt-out), added costs of upgrading billing and IT systems to comply with ERCOT systems (a large expense for small to medium sized distribution systems), and the apparent benefits of competition being skewed toward large commercial and industrial customers (LCRA members retail customers are 59% residential and 41% small commercial/industrial).

Fitch's long-term perspective considers the likely probability that LCRA's wholesale electric customers may offer retail choice, which under the current contracts could reduce LCRA's energy sales to these customers. Nevertheless, based on Fitch's analysis of LCRA's competitive and diverse power resources, Fitch believes that members opting into competition should not have a material effect on LCRA's financial performance.

LCRA is the largest public power wholesale provider in Texas serving eight electric cooperatives, 33 cities, and one investor owned utility. The utility also provides regional water and wastewater services in its service area, and manages water supplies and controls flooding along the Colorado River of Texas. Wholesale Power Services accounts for about 91% of operating revenues, followed by Water Services at 7%, and transmission support services at 2%. Revenues originally associated with transmission have been shifted from LCRA to its affiliate TSCorp, a nonprofit corporation. TSCorp was formed to separate LCRA's transmission business from electric generation as required under the Texas electricity restructuring legislation (Senate Bill 7), and to allow LCRA to provide transmission services throughout Texas, for LCRA and other contracted entities.