DALLAS -- Fitch Investors Service yesterday downgraded $230 million in revenue bonds for the Sam Rayburn Municipal Power Agency in Texas to BB, or junk status, from BBB-minus.
The move comes nine months after a similar action by Standard & Poor's Corp., which lowered the bond rating to BB from BBB, and reflects growing concern over the power agency's failure to sell surplus electricity.
"We are not certain they will be able to sell the excess power because pricing is coming down and the industry is becoming more competitive," said Alan Spen, a managing director at Fitch. "They are not a low-cost provider."
Spen and Fitch analyst David Silverstein said Fitch is concerned that the four cities in Texas and Louisiana that are served by Sam Rayburn will have to withstand high rate increases for debt service on the bonds to be paid.
"It's an uncertain situation, but they will have to unload the excess power or their ratepayers will have to absorb the cost," Spen said.
Fitch analysts said the East Texas power agency has up to 40% excess capacity and they don't expect buyers for the surplus in the next few years because of increased competition and a regional power glut.
That's combined with predictions for slow growth in energy demand in the four cities -- Jasper, Liberty, and Livingston, Tex., and Vinton, La. q and the likelihood of additional rate increases in the future.
The electricity rates already are among the highest in the nation and are expected to increase an average of 5% in the next five years. Wholesale rates to the four city members, which have a combined population of 23,000, now stand at 7 cents per kilowatt hour and residential rates range up to 11 cents per kilowatt hour.
Unless Sam Rayburn can sell surplus capacity, wholesale rates could reach 10 cents per kilowatt hour by 2000.
"In terms of default, we don't expect that," Silverstein said, but pressure will continue to increase in coming years.
For example, in 1996, a power sell-back agreement between Sam Rayburn and a majority owner, Gulf States Utilities, expires, and tinless renegotiated would leave the East Texas power agency with more surplus electricity.
Although the cities are obligated to pay rates that would service debt through the life of the bonds maturing in 2023, Fitch analysts questioned the political tenability of raising rates.
Those and other factors have prompted the rating agency to revise the credit trend on the $230 million in revenue bonds to declining from stable.
But Ralph Gillis, a Boston attorney who is general counsel for Sam Rayburn, said that the cities are obligated by contract to purchase the electricity and absorb rate increases and will be able to withstand the pressure if no excess power is sold.
"We can hold out, period," Gillis said. "These cities can, will, and are quite able to" pay.
Sam Rayburn had several active prospects to buy the surplus power, Gillis said, including municipalities and cooperatives, and he predicts the surplus in the region will begin to disappear between 1998 and 2000.
"Sam Rayburn continues its strong efforts to sell its excess power," Gillis said.
Gillis said Sam Rayburn took the worst-case scenario into account -- no short-term sales -- when it restrnctured its debt in 1992.
"There is no reason to question Sam Rayburn's credit or financial integrity," Gillis said. "It meets its obligations."
Other rating agencies have also demonstrated their concerns. In February, Standard & Poor's downgraded Sam Rayburn's revenue bonds primarily because it was concerned about the organization's high rates and failure to sell surplus electricity.
Moody's Investors Service has assigned the Sam Rayburn debt its lowest investment-grade rating, Baa, after downgrading the bonds in 1992 when the agency restructured its debt.
Problems at Sam Rayburn have been emerging for years. In 1982, the power agency agreed to purchase electricity from a new Gulf States Utilities plant. The agency based its electricity needs on strong economic and population growth during the oil boom.
When the oil bust occurred in 1986, growth flattened and Sam Rayburn was stuck with excess power and a regional glut of electricity.
In addition, competition for electricity sales have increased as utilities, spot gas marketers, energy companies, and others plunge into a more deregulated environment.
