Fitch Rates San Antonio, TX's Elec and Gas Rev Extendible Muni CP 'F1+'; Affirms Ratings at 'AA-'

Published: 2025-04-03 10:32:16 ET TLN

Fitch Ratings has assigned a 'F1+' short-term rating to the following electric and gas system extendible municipal commercial paper (CP) notes that will be issued by the city of San Antonio on behalf of San Antonio City Public Service (CPS Energy).

Up to a maximum of $150 million extendible municipal CP notes (taxable and tax-exempt), series A.

The extendible municipal CP notes will be used to finance capital improvements, provide working capital funds and funds for fuel acquisition, refund outstanding CP notes, and redeem other obligations of CPS Energy's electric and gas systems. The series A extendible municipal CP notes program is expected to become effective April 15, 2025.

Fitch has also affirmed CPS Energy's outstanding rated obligations issued by the city of San Antonio, including $5.7 billion senior lien and $1.9 billion junior lien obligations at 'AA-', multiple existing traditional CP programs permitted to issue notes up to a maximum of $1.0 billion at 'F1+', and the bank bond ratings for certain of the existing CP note programs (series A, series C, and new series A-1) at 'AA-'.

Fitch has assessed CPS Energy's standalone credit profile (SCP) at 'aa-'. The SCP represents the credit profile of the power system on a standalone basis irrespective of its relationship with and the credit quality of the city of San Antonio (the city; Issuer Default Rating [IDR] AA+/Positive Outlook).

The Rating Outlook on all the long-term obligations is Stable.

RATING ACTIONS

Entity / Debt

Rating

Prior

San Antonio City Public Service (TX)

San Antonio City Public Service (TX) /Combined Utility Revenues - Subordinate/2 LT

AA-

Affirmed

AA-

San Antonio City Public Service (TX) /Combined Utility Revenues/1 LT

AA-

Affirmed

AA-

San Antonio City Public Service (TX) /Self-Liquidity/1 ST

F1+

Affirmed

F1+

Page

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VIEW ADDITIONAL RATING DETAILS

The 'AA-' rating and Stable Outlook reflect CPS Energy's very strong financial profile in the context of a large and diversified retail electric and gas customer base, very strong revenue defensibility characteristics, very low operating costs and a neutral operating risk for utilities participating in the Electric Reliability Council of Texas (ERCOT) regional market. ERCOT exhibits improved operations and protocols to mitigate widespread disruptions like those experienced during Winter Storm Uri in February 2021.

CPS increased its plan for debt financing in the past year as it moved into an increased capital cycle over the next five years to finance its generation plan through 2030. CPS Energy acquired 1,710MW of existing natural gas-fired generation assets from Talen Energy Corporation (Talen Energy) for $785 million on May 1, 2024. The purchase accelerated CPS Energy's generation plan and replaced the identified need for approximately 1,550 MW of generation resources over the next 10 years-15 years, eliminated the need for certain bridge market purchases, and provides the opportunity for market sales in the ERCOT market.

In addition to the asset acquisition, substantial increases to planned capex since Fitch's prior rating review reflect heighted spending to meet load growth, transmission investment needs, and overall system reliability and hardening projects. Planned capex increased to $7.4 billion over the next five years (fiscal years 2025-2029) up from $5.7 billion (2024-2028). Capex is expected to be funded approximately 70% from debt. Leverage is expected to range between 8.0x and 10.0x in Fitch's rating case, which should remain supportive of CPS Energy's very strong financial profile.

The 'F1+' rating on CPS Energy's existing and new CP note programs broadly reflects Fitch's 'AA-' rating on its long-term obligations and market access to refund outstanding CP notes used as an interim funding mechanism for capex. The short-term rating also reflects Fitch's expectation that CPS Energy has sufficient liquidity, both through unrestricted cash balances and its available short-term liquidity facilities and programs, to repay near-term financial obligations.

Fitch does not distinguish between the ratings on the senior lien and junior lien bonds, as the current amount of outstanding junior debt together with fluid issuance between the open liens does not provide enough additional protection for senior bondholders to support a higher rating.

SECURITY

The senior lien bonds are secured by net revenues of the combined electric and gas systems, operating as CPS Energy. The junior lien bonds are secured by CPS Energy net revenues after the payment of debt service on the senior lien bonds. CP repayment, including the new EMCP program, is secured by a third lien on net revenues.

The newly established extendible CP program provides for note maturities up to 180 days from the original issue date of each note but allows for the city to issue a note with a maturity date to the date that is 270 days after the original issue date in the event of a disruption in market liquidity for the notes.

KEY RATING DRIVERS

Revenue Defensibility - 'aa'

CPS Energy's revenue defensibility is well supported by revenues from electric and gas sales within and around the city of San Antonio, transmission revenues and, to an increasing degree, by wholesale energy sales. The revenue defensibility assessment of 'aa' reflects very strong customer growth, as evidenced by a five-year CAGR of 2.1%, favorable service area characteristics and no customer concentration.

Due to the purchase of the Talen assets, wholesale revenues increased to a larger share of revenues in fiscal 2025 at an estimated 16% based on unaudited figures. CPS Energy expects to implement longer term sales strategies for the energy and capacity of the newly purchased assets over the interim years until the planned retirement of older coal and steam units in 2029 and 2030. The contracts are designed to reduce potential variability of the revenue stream based on market energy price movement.

Electric and gas rates are established locally by city council and exhibit high affordability. Continued consideration and implementation of periodic rate adjustments will be key to the preservation of the rating given planned spending levels. The last base rate increase of 4.25% was implemented in February 2024. Management anticipates potential modest base rate increases ranging up to 5.5% in fiscal years 2027 and 2029. Additional needed borrowings to fund any remaining realized winter storm costs that result from ongoing litigation will be supported by the utility's rate-supported regulatory asset, which the city council previously approved to recover 2021 winter storm costs and would move automatically into rates without further approval.

Operating Risk - 'aa'

Fitch's assessment of CPS Energy's operating risk profile is assessed at 'aa', which reflects the utility's very low operating cost burden and neutral operating cost flexibility. Electric operating cost burden, as measured by total electric operating costs including transfers divided by total kilowatt hour (kWh) sales, averaged 8.8 cents over the last three years.

Historically, CPS Energy's Fitch-calculated operating cost burden has been very low averaging between 7 cents/kWh and 8 cents/kWh, including the transfer to the city's general fund, during the past five years. Strong headwinds related to general inflationary pressures, higher natural gas prices, and slower economic growth weighed on operating performance in fiscal 2023 as CPS Energy's cost burden rose to 9.8 cents/kWh, but the cost burden declined in fiscal 2024 to 8.6 cents/kWh as natural gas prices returned lower.

CPS Energy's board approved the utility's generation plan on Jan. 23, 2023, which included plans to replace certain aging coal and natural gas-fired power plants with a blend of gas, solar, wind, and energy storage resources. The Vision 2027 Generation Plan is designed to position CPS Energy to meet the goal of carbon neutrality by 2050. CPS Energy accelerated its generation plan with the purchase of the Talen assets ahead of the generation plan was completed due to the attractive market opportunity the asset sale within the southern zone of ERCOT presented. The result was capex spending and debt issuance in fiscal 2025 well above budgeted levels.

Capital reinvestment in the system has been strong. The average age of plant is low at 15 years and annual capex to depreciation has averaged 157% over the last five years. Future capital spending is expected to be higher than historical levels over the medium term. Projects include conversion of an existing coal unit to natural gas, additional energy storage, and incremental generation, and will be funded primarily with debt. Approximately $1.3 billion of the total spending over the next five years will fund transmission investments in new and upgraded lines. Considering the growth across ERCOT, there is a demand for increased transmission investment. Due to CPS Energy's central geography in the state, their transmission investment is important to overall growth in the state.

Financial Profile - 'aa'

CPS Energy's financial profile improved in fiscal 2024 (January 31 YE), with leverage declining to an unusually low 6.0x from between 7.5x and 8.5x in the three years prior. Substantial improvements in the utility's operating cash flows in fiscal 2024 were driven by outperformance of the utility's wholesale sales resulting from elevated temperatures during the 2023 summer, and increased energy demand. Fitch-calculated coverage of full obligation improved to 2.1x at fiscal 2024 YE from 1.4x for fiscal 2023. Liquidity metrics remained very strong with 222 days cash on hand for fiscal 2024 based of $1.18 billion in unrestricted cash. The utility also maintains ample additional liquidity through several short-term borrowing programs.

Preliminary but unaudited financial results for fiscal 2025 indicate continued strong performance, although metrics reflect the additional debt issued to finance the Talen Assets. Leverage increased to an estimated 7.0x in fiscal 2025 with the new debt supported by increased wholesale revenues made from the acquired capacity as opportunities arose within ERCOT. Unrestricted cash balances remained over $1.0 billion and COFO was strong at just under 2.0x.

Fitch expects leverage will remain around 8.0x-10.0x and COFO above 1.4x over the next five years based on our forward-looking rating case. Assumptions are informed by CPS Energy's own financial forecast and include reasonable assumptions regarding load growth, rate increases, large increases in capex, additional debt issuance, and substantial but conservatively estimated wholesale sales. Forward performance will hinge on the utility's ability to ensure adequate operating cash flows over the medium- to long term through retail rates and wholesale performance at or near budgeted levels.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Failure to implement planned rate increases;

A sustained increase in leverage above 10.0x in Fitch's rating case scenario;

A downgrade of the long-term rating coupled with reduced liquidity could result in a corresponding downgrade of the short-term rating.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

A sustained decrease in leverage approximating 7.5x in Fitch's rating case scenario;

Not applicable for the 'F1+' short-term rating.

PROFILE

CPS Energy provides exclusive retail electric service to over 960,000 retail electric customers and approximately 390,000 natural gas customers in San Antonio and portions of seven adjoining counties. Retail competition was introduced in Texas in 2000, giving municipal utilities in the state the option to offer retail competition in their service areas. CPS Energy has not indicated any intent to do so and is the sole supplier of electricity in its service area. The customer base is large and diverse, and the city of San Antonio (general government IDR AA+/Positive) continues to attract new industry to the service area.

Fitch considers the system a related entity to the city of San Antonio for rating purposes given the city's oversight of the system, including the authority to establish rates. The credit quality of the city does not currently constrain the bond rating. However, as a result of being a related entity, the issue ratings could become constrained by a material decline in the general credit quality of the city.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

Additional information is available on www.fitchratings.com