OREANDA-NEWS. Fitch Ratings has affirmed the following ratings on Guadalupe Valley Electric Cooperative, TX (GVEC):

--\$33 million electric system bonds at 'AA-', series 2007;
--\$75 million commercial paper note program at 'F1+'.

The Rating Outlook is Stable.

SECURITY

Bonds are payable from a first lien on gross revenues and all property of GVEC. However, GVEC has the option of removing the bondholder lien on property in the future, once all obligations to the National Rural Utilities Cooperative Finance Corporation (NRUCFC; rated 'A/F1' by Fitch) are no longer outstanding. The rating reflects the pledge of GVEC's gross revenues.

KEY RATING DRIVERS

GROWING DISTRIBUTION SYSTEM: GVEC is a transmission and distribution cooperative located in central Texas with a service area experiencing very strong growth in energy sales given the recent development of the Eagle Ford shale.

CONTRACTED POWER SUPPLY: GVEC has replaced its all-requirements power supply contract with the Lower Colorado River Authority (LCRA) with a mixed portfolio of medium-term contracts. When the LCRA contract expires in June 2016, contracts are in place with multiple counterparties to provide baseload and load following capacity. GVEC also recently entered a contract for the construction of peaking capacity to be completed between 2017 and 2019.

LOAD GROWTH RISK: GVEC experienced 7-8% growth in energy sales in fiscals 2013 and 2014. While residential growth is healthy, much of the growth has occurred in larger industrial and commercial load related to the development of the Eagle Ford oil and gas formation, which is located in the GVEC service area.

CONSISTENTLY STRONG FINANCIAL MARGINS: Financial margins and liquidity levels are strong with debt service coverage of over 2.8x for the past five years and liquidity levels over 240 days of operations. Management's financial forecast indicates margins should remain strong.

MODERATE DEBT BURDEN: Debt levels are moderate and leverage metrics are below Fitch's rating category medians. Debt capacity exists to absorb the new debt expected to fund the peaking plant, while other system investment is expected to be funded through rates. GVEC's free cash flow exceeds annual depreciation levels, providing strong ongoing margins for reinvestment.

SUBSTANTIAL SHORT-TERM LIQUIDITY: The 'F1+' rating on GVEC's \$75 million commercial paper note program reflects GVEC's strong credit quality and market access implied by the long-term rating, as well as substantial liquidity sources, including a \$75 million dedicated credit facility provided by CoBank (rated 'AA-/F1+' by Fitch).

RATING SENSITIVITIES

GROWTH PRESSURE: Rapid growth is placing capital demands on the Guadalupe Valley electric system, which the cooperative has absorbed to date without compromising its financial margins. However, if growth begins to outpace rate recovery and results in lower financial margins, downward rating action could occur.

CREDIT PROFILE

GVEC is a retail transmission and distribution cooperative that provides electric service to 75,000 customers across 13 counties in Central Texas. GVECs service territory is located directly east of San Antonio. GVEC's service area encompasses the heart of the Eagle Ford shale geological formation that has experienced intense oil and gas exploration and development in the past five years.

Load growth has been substantial at 8% and 7% per year in fiscals 2014 and 2013, respectively. Growth is occurring in all customer classes but was exceptionally high in large commercial and industrial demand in fiscal 2014. GVEC anticipates that growth in the next few years will continue to be strong, despite some slow-down in new drilling.

EVOLVING POWER SUPPLY

The evolving power supply represents some shift in risk to GVEC, but the current rating and outlook reflect Fitch's view that structural elements of the utility, such as the pass-through of generation costs on a monthly basis to commercial and industrial customers and strong financial margins, mitigate this risk. The strategy of medium-term staggered power supply contracts will introduce counterparty risk and renewal risk but also reduces concerns related to long-term generation ownership in a rapidly changing industry and ERCOT market.

GVEC has historically purchased the majority of its power requirements in accordance with an all-requirements wholesale power agreement with LCRA. A few years ago, GVEC decided not to renew its wholesale power agreement with LCRA, when it ends June 2016. In addition to its 26 MW share of Gentex, GVEC has signed four other contracts for approximately 400 megawatts (MW) of base load and load following requirements (versus peak demand of 489 MW). The contracts are between two and 10 years in length and address new operational and administrative issues that GVEC will have to manage post-2016.

In the interim, negotiations with LCRA have also allowed GVEC to purchase increasing amounts of power from the open market through the remaining life of the LCRA contract. GVEC currently purchases 25% from EDF Trading North America, which will increase to 30% in December 2015.

PEAKING GENERATION TO BE BUILT

In addition to base-load and load following contracts, GVEC will invest in natural gas-fired peaking capacity generation. The owned peaking capacity is expected to provide a price hedge during extreme price events in ERCOT. In May 2015, GFS Electric (a wholly owned subsidiary of GVEC) announced it had reached an agreement to purchase a 50% ownership share in the Guadalupe Peaking Energy Center (GPEC), which will construct a 418 MW natural gas-fired peaking plant to be built in Marion, Texas. Costs will be recovered through GVEC's wholesale power rate to its customers.

An affiliate of Calpine will build GPEC and will own the other 50%. Construction will be completed between June 2017 and June 2019. The two year flexibility is at Calpine's discretion. Once the plant reaches commercial operation, GFS Electric will purchase its share of GPEC, likely through debt issued by GVEC and prepaid to GFS Electric for the facility output.

MODERATE DEBT POSITION SHOULD CONTINUE

GVEC's capital improvement plan (CIP) totals \$300 million, including expected investment in GPEC. GVEC expects to fund approximately half of its CIP with debt. However, with the amortization of existing debt, GVEC's debt burden is expected to rise only moderately. Equity to capitalization is projected to remain around 50%, while debt to funds available for debt service (FADS) is expected to increase from 4.7x to around 5.7x. GVEC's outstanding debt has risen steadily since 2010 as a result of increasing capital investment, and totaled \$207 million at year end 2014, up from \$138 million in 2010. Variable rate debt is limited to GVEC's commercial paper program that is periodically refinanced into long-term fixed rate revenue bonds.

STRONG FINANCIAL MARGINS AND LIQUIDITY

Debt service coverage was very strong at 2.86x in fiscal 2014, which is above Fitch's median for the 'AA' category of 2.4x. In 2014, electric rates were increased twice, in August and November, by a total of 11 mills per kilowatt-hour to cover higher wholesale power market costs. Coverage has been consistently strong at similar levels over the past five years.

Management's financial forecast projects coverage levels remaining over 2.0x. Cash on hand remains relatively weak for the rating (36 days), however available borrowing capacity under three credit agreements with CoBank and NRUCFC improves overall liquidity to 246 days. Available liquid resources, including the CoBank credit facility as well as cash and investments, provided 1.21x coverage of GVEC's maximum commercial paper obligations at Dec. 31, 2014.