Fitch maintains a rating on Brazos' implied senior secured obligations because the cooperative does not have any publically held debt. The rating takes into account Brazos'
The Rating Outlook is Stable.
Brazos' 2010 mortgage indenture grants senior secured bondholders a first lien on substantially all of its real and tangible personal property, including its member power sales contracts.
KEY RATING DRIVERS
Stabilizing Financial Metrics: The cooperative's cash flow metrics are stabilizing near Fitch's 'A' rating category medians, following construction-related rate increases that drove higher debt service coverage ratios in 2009 and 2010. Improving balance sheet metrics are approaching the medians, and a recently amended and extended
Robust Transmission Operations: Regulated transmission operations constituting the largest proportion of net margins are a valuable, currently stable component of the cooperative's overall financial position.
Competitive Rates: Relatively sizable proportions of natural gas-fired generation (77%) and market exposure (up to 30%, by design) introduce potential wholesale rate volatility that has ultimately benefitted Brazos in recent years. The newly commissioned
Growing, Solid Member Systems: Robust sales growth averaging near 4% annually and a largely residential base contributing well over half of megawatt-hour sales enhance Brazos' overall system operations. Consolidated member equity ratios have grown to more than 50%, and the three largest members representing two-thirds of total sales exhibit healthy financial metrics.
Various Exposures Require Consideration: While currently well managed, various risks of fuel price, energy cost, and interest rate movements requiring the cooperative's active management could add costs in adverse market or economic conditions. Brazos' competitive wholesale rate provides some headroom for these or other unforeseen purposes.
Brazos is a large G&T cooperative with 2,667MW of owned and contracted capacity, providing electric service to 16 Texas distribution cooperative members and one municipality pursuant to long-term, all-requirements contracts through 2045. The members, in turn, serve a rapidly growing retail customer base (555,084) in 68 counties principally to the west of the
STABILIZING FINANCIAL METRICS
Brazos' financial metrics are settling near Fitch's 'A' rating category medians. This follows a period of considerable growth from 2008-2010, during which the cooperative added nearly
Debt service coverage and coverage of full obligations equaled 1.26x and 1.16x, respectively, in 2013, which was in line with the medians. Moreover, the ratios of (i) equity to capitalization and (ii) debt to funds available for debt service improved to 19.5% and 9.8x, respectively, from 13.8% (2009) and 15.1x (2011). The rating category medians are 23.5% and 9.4x.
Fitch noted during its prior review in 2012 that Brazos' more limited capital plans and corresponding deleveraging would be an important indicator of its longer-term financial strength.
Brazos adds substantially to available liquid resources with a recently amended and extended
Brazos continues to collect rate revenues from its members for the approximately 18 months of debt service obligations it deposits in the cushion of credit program. This provides some protection against an unexpected shift in short-term borrowing rates under the syndicated facility.
GOOD MEMBER FINANCIALS
Brazos' three largest members representing two-thirds of total sales likewise demonstrate healthy financial metrics solidly in support of the cooperative's 'A' rating. The three members' debt service coverage registered approximately 2.3x in 2013 (consolidated) and similarly strong equity ratios equaled 50%. Cash on hand was more modest at about 84 days, but largely residential customer bases and limited leverage are offsets. In addition, all member ratios were improved from Fitch's prior review of two years ago.
BROAD POWER SUPPLY STRATEGY
On balance, Brazos' power supply strategy has benefitted its members' retail rates. A preponderance of natural gas-fired generation (77%), coupled with market purchases for up to 30% of power needs, by design, has kept costs low. While the heightened exposure to a single fuel source and market conditions could ultimately introduce volatility, Brazos' active management and competitive wholesale rate provide headroom to negotiate adverse conditions. In addition, the cooperative's monthly PCRF helps ensure the timely recapture of costs.
The cooperative recently diversified fuel sources with 388MW of additional coal-fired capacity through two purchase power agreements, the larger of which (233MW) is with its wholly-owned subsidiary. Moreover, heat rate call options and forward purchases provide a degree of protection against market conditions.
Additional information is available at 'www.fitchratings.com'.
This action was informed by the sources of information identified in Fitch's U.S. Public Power Rating Criteria.
--'U.S. Public Power Rating Criteria' (
--'U.S. Public Power Peer Study Addendum -
--'2014 Outlook: U.S. Public Power and Electric Cooperative Sector' (
U.S. Public Power Rating Criteria
U.S. Public Power Peer Study Addendum --
2014 Outlook: U.S. Public Power and Electric Cooperative Sector (Calm Under Pressure)
Source: Fitch Ratings
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