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Amendment - Fitch Affirms Pedernales Electric Cooperative's (TX) First Mtge Bonds 'AA-'.

SAN FRANCISCO -- (This revises the release that went out on Jan. 30th with a new estimated capital needs figure in the sixth paragraph.)

Fitch Ratings affirms the 'AA-' rating of Pedernales Electric Cooperative, Inc.'s (PEC) $587 million in outstanding first mortgage bonds. The Outlook remains Stable.

The rating reflects the strong underlying value of the nation's largest distribution cooperative, which provides predictable cash flow and limited business risk. PEC has a reasonably flexible and low-cost power supply contract with the Lower Colorado River Authority (LCRA; rated 'A+' by Fitch). LCRA's generation assets are substantially coal-fired (60%) and competitively priced in a deregulated ERCOT power market that is increasingly dependent on natural gas-fired generation. Additional credit strengths include an experienced management team, prudent PEC Board action to recover costs when needed, a rapidly growing service territory, and favorable security provisions providing bondholders with a first lien on PEC's assets.

PEC's power supply contract is a take-and-pay, all-requirements contract that results in low risk to PEC from fluctuations in its energy demand or from a deregulated marketplace. Fitch believes that the contract between PEC and LCRA limits PEC's supply, volume, and price risk in the short term, allowing it to operate solely as a distribution system, although the price impact of market influences may ultimately be passed through by LCRA to its customers. However, as PEC enters its third year of negotiations with LCRA regarding extension of its power supply contract beyond the 2016 termination date, the uncertainty surrounding its future power supply begins to become more of a concern. While there appears to be sufficient time to secure another power supply after 2016 if PEC so desires, until a final agreement with LCRA is reached regarding whether or not to extend the contract and under what terms, no decisions can be made regarding future power supply options. Over half of LCRA's 43 wholesale customers have signed contract extensions with LCRA through 2041. PEC (LCRA's largest customer) and several other large customers have not. Ongoing discussions center on the customers' participation in new generation assets. PEC would like to have the flexibility to decide whether or not to participate in new generation projects.

Other potential credit concerns include ongoing growth pressure and rate competitiveness. PEC has experienced 5.1% average growth in energy sales the past four years and continues to add between 800 and 900 new connections per month. The service territory includes rapidly growing suburban areas surrounding Austin and San Antonio. The cooperative averages 13 connections per line mile reflecting the suburban regions of its service territory.

The different demographics of PEC's large service territory have not currently resulted in divisions at the PEC Board level. Retail rates are competitive in the region. Although rates are higher than the municipal power providers within ERCOT, this partially reflects the more sparsely populated service territory and higher distribution costs. PEC's average residential rate of 11.74 cents per kilowatt hour (kWh) in 2006 was slightly below the state average residential rate of 12.76 per kWh.

Debt service coverage has been consistently above 1.4 times (x) over the past five years. Debt service coverage is projected to be above 2.0x in fiscal 2006 due to PEC's conservative approach to its own power cost recovery factor but may be closer to 1.5x in future years. Although the power cost recovery factor is not automatic, the PEC Board adjusted the power cost recovery factor five times the past two years, indicating its willingness to adjust rates and a commitment to timely cost recovery. Liquidity is adequate with approximately $74 million in unrestricted cash at the end of fiscal 2005, or 84 days cash, including PEC designated reserve and contingency funds. PEC also has a $75 million line of credit, which was increased to $100 million in January 2007. Although financial metrics are in the lower range of Fitch's 'AA' category for retail system financial medians, Fitch considers PEC's financial performance as supportive of the 'AA-' rating when combined with its limited risk profile. Capital needs are approximately $426 million over the next five years and much of this will be debt financed. Fitch expects PEC to maintain its historical financial metrics even with the anticipated new debt issuance.

PEC is a cooperative corporation under the Texas Electric Cooperative Corporation Act. PEC began operations in 1938 and provides electric transmission and distribution services to rural and suburban areas comprising, in total, 8,100 square miles in central Texas, including part or all of 44 municipalities and towns. PEC is the largest electric distribution cooperative in the U.S., based on total consumers served, with approximately 206,000 customers.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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Publication:Business Wire
Date:Feb 5, 2007
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