San Marcos, TX Electric System Revenue Bonds Series 2013 Rated 'BBB+'

Stocks and Financial Services Press Releases Thursday June 27, 2013 08:55
NEW YORK--27 Jun--Standard & Poor's
NEW YORK (Standard & Poor's) June 26, 2013--Standard & Poor's Ratings Services has assigned its 'BBB+' rating with a stable outlook to San Marcos, Texas' electric system revenue bonds, series 2013.

"Although the utility's coverage of debt service requirements has historically been solid, coverage of debt service after transfers has been very uneven, at or below 1.0x in five of the past 10 years, and we view this is a credit weakness," said Standard & Poor's credit analyst Jeffrey Panger.

The rating reflects our assessment of the following credit factors:
  • Although financial projections suggest solid coverage of debt service after transfers over fiscal years 2014-2017, achieving this will depend on substantial net revenue from San Marcos' share of Lower Colorado River Authority's (LCRA) Ferguson plant, a generation project that is under construction. We believe that the ability to generate such revenue is uncertain, and could challenge San Marcos' ability to meet its projections;
  • Liquidity is adequate to meet San Marcos' current operating profile as a distribution utility, but only marginal to meet future needs as the utility takes on an ownership stake in Ferguson;
  • Competitive positioning is adequate, with rates that are approximately on a par with the state average. However, San Marcos has only sporadically raised base rates, and the rate increases have been insufficient to support stable financial metrics. With the city's income levels at 60% of the nation's, rate flexibility is constrained;
  • Debt levels and capital needs are manageable, with the latter at a total of $11 million over 2014-2017 and expected to be debt financed;
  • The local economy serves as a retail and distribution center within central Texas, with good access to both Austin and San Antonio;
  • Although the customer base is moderately concentrated, we view the leading customer, Texas State University, as a stabilizing presence, and we note that there is no significant industrial presence;
  • Bond provisions are weak, with a rate covenant of 1x annual debt service requirement.
A first-lien net revenue pledge on the city's electric utility system secures the bonds. The bonds are being issued to finance a 3.522% (19.02 megawatt; MW) ownership share of LCRA's 540-MW Ferguson Plant.

The stable outlook is based on our expectation that the system's financial performance will be maintained in line with forecast levels. There is upward potential for the rating should San Marcos' financial metrics improve and stabilize. The likelihood of this will be greatly influenced by the profitability of the new Ferguson plant, but can also be addressed through rate adjustments or lower transfers.

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