OREANDA-NEWS. Fitch Ratings has affirmed its 'BBB+' rating assigned to the $100 million power supply system revenue refunding bonds series 2012 issued by Sam Rayburn Municipal Power Agency (SRMPA), TX.

The Rating Outlook is Stable.

SECURITY

Bonds are secured by net revenues of the agency, which are primarily derived from payments received under take-or-pay power supply contracts with the three member cities, as well as other funds and accounts pledged under the indenture.

KEY RATING DRIVERS

STABLE MEMBERS: The 'BBB+' rating reflects the stable credit quality of the underlying members. SRMPA's members are characterized by a small but primarily residential customer base and slow growth, and negligible distribution system debt but above-average SRMPA debt (approximately $8,700 per customer).

TAKE-OR-PAY AGREEMENT: SRMPA's members have unconditional take-or-pay power purchase agreements with a 100% step-up provision. Fitch notes, however, that given the size of each member a default by any individual member may be difficult to absorb by any other member.

LONG-TERM FIXED-PRICE SUPPLY: SRMPA's electricity requirements net of its share of federal hydro purchases are met under a fixed-price requirements power supply agreement (RPSA) with Entergy Wholesale Operations Marketing, LP (EWOM or Entergy; not rated by Fitch). The RPSA extends through the life of the debt (Sept. 30, 2021).

SEPARATELY SECURED OPERATIONS: Fitch's rating on the SRMPA bonds reflects the separation of the agency's power supply obligation to its member cities from its obligation under a separate power supply arrangement, Project Cambridge (Cambridge).

COUNTERPARTY RISK: While the RPSA between SRMPA and Entergy is backed up by a purchase money security interest in Entergy Power Inc., and guaranteed by Entergy Corp, SRMPA remains exposed to Entergy's counterparty risk.

RATING SENSITIVITIES

MEMBER CREDIT QUALITY: The rating on the Sam Rayburn Municipal Power Agency bonds is driven largely by the credit quality of the members, together with the step-up provisions that mitigate the risk of a payment default, given the limited operating risk of the agency and its contracted energy supply. Changes in the economic vibrancy and credit quality of the members could therefore affect the rating.

CREDIT PROFILE

FULL-REQUIREMENTS JOINT ACTION AGENCY

SRMPA is a municipal corporation organized to provide full requirements electric supply to its three members located in eastern Texas. The agency's members (cities of Jasper, Liberty and Livingston) are all located in the SERC Reliability Corporation (SERC) region of Texas and are therefore outside the nodal market recently implemented in the Electric Reliability Council of Texas (ERCOT).

TAKE-OR-PAY CONTRACTS WITH MEMBERS

Member's power supply needs are met pursuant to unconditional take-or-pay contracts that run through 2021, thereby matching up with the maturity of the outstanding bonds. The take-or-pay contracts have an unlimited step-up provision. SRMPA does not own any generation, but receives its power from Entergy under the RPSA. The RPSA was entered into in exchange for SRMPA's ownership interest in the Nelson coal-fired unit No. 6. SRMPA is also entitled to a portion of the output of two federal hydro projects and Entergy's contract obligations are net of the hydro output.

SUPPORT FROM PROJECT CAMBRIDGE

Since December 2011, SRMPA has been serving an additional 545 MW of load through ETI and Vinton Public Power Authority under a separate project, Cambridge. Although there is overlap of power supply between Cambridge and SRMPA's legacy load obligations, Cambridge is a separately-secured project account with cascading unwind provisions. The agency's net revenues and other funds established under the Indenture are not commingled with Cambridge and the project is independent from the legacy agency operations that secure SRMPA's payment on the series 2012 bonds.

Fitch notes the agency's strategy, as part of Cambridge, to secure long-term power supply for its members after the expiration of RPSA in 2021. Although the agency's bonds are not secured by Cambridge revenues, the extent and scope of Cambridge demands additional oversight from management. Importantly, the financial effect of Cambridge has been positive for the agencies members, as margins earned from the power supply contracts have funded approximately $17.4 million in distributions to the member cities in fiscal 2014 and 2015.

STABLE FINANCIAL PERFORMANCE

The agency has generally exhibited stable financial performance with debt service coverage (DSC) historically ranging between 1.2x and 1.3x times. Although Fitch-calculated DSC for fiscal 2013 slipped to 1.08x, due to cooler than normal summer weather and higher operating costs related to unanticipated substation and infrastructure work, coverage improved to 1.24x in fiscal 2014.

Offsetting the improved DSC, relative leverage remains high at 100% of capitalization and 634% of net capital assets, but more reasonable when measured against funds available for debt service (6.3x). Liquidity at 13 days cash on hand also remains weak, but acceptable given the absence of asset operating risk and negligible exposure to fuel prices borne by the agency.