CoServ Electric rating affirmed at AA- with stable outlook

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CoServ Electric rating affirmed

Highlights

Fitch affirmed CoServ Electric's AA- rating with a stable outlook, citing very strong revenue defensibility, low operating risk, and an 'aa' financial profile.
Fitch projects CoServ's leverage to remain between 7.0x and 8.0x over five years, with securitized Winter Storm Uri debt excluded, reducing 2025 leverage to 7.4x.
CoServ's service area customer base grew over 5.0% per year, bolstered by high incomes, low unemployment, and nearly $1 billion in planned capital spending over five years.

Rating rationale and financial metrics

As reported by Fitch Ratings, the affirmed ratings reflect CoServ's very strong credit profile as an electric distribution cooperative with monopolistic service characteristics across a high-growth part of the Dallas-Fort Worth metroplex. Fitch says the utility benefits from very strong revenue defensibility, low operating risk and a financial profile assessed at 'aa'.

Fitch-calculated coverage and liquidity are expected to remain broadly in line with historical levels, while leverage is projected to stay between 7.0x and 8.0x over the next five years. Under changes to Fitch's U.S. public power rating criteria, debt tied to the securitization of CoServ Electric's share of Winter Storm Uri costs is no longer included in the utility's debt and financial metrics, leaving Fitch-calculated leverage at 7.4x in 2025, compared with 8.0x if that debt were included.

The first mortgage notes remain secured by a first lien on all of CoServ's electric assets. Fitch also points to generally consistent coverage and leverage, supported by healthy operating margins, while a recently approved rate increase is expected to help cover rising fixed costs and debt service tied to capital spending.

Growth outlook in North Texas

Customer growth in CoServ's service area averages more than 5.0% a year over the past five years, supported by expansion in Denton and Collin counties, where household incomes are high and unemployment is low. Fitch says that although a sizable part of the territory is multi-certified, it sees limited risk of customer loss once electric service has started.

Rate-setting authority remains with CoServ's board, and affordability is still very strong, with an average retail power bill equal to 1.8% of average annual income in Denton County, the agency says. Operating risk is also supported by a low average operating cost burden of just over 11 cents per kwh, including charges linked to the securitization of 2021 winter storm costs.

CoServ has managed its own power supply since March 2023, after shifting away from Brazos Electric Power Cooperative and contracting with multiple suppliers for fixed-price energy blocks, shaped products and call options. Fitch views cost flexibility as neutral given the diversity of suppliers, contract terms and fuel sources, while projected capital spending of just under $1 billion over five years is aimed at supporting service area growth and new distribution substations.

In our earlier coverage of Fitch’s downgrade of Hyde Housing Association, we explained that the agency cut the issuer ratings as leverage weakened amid an extensive development pipeline and ongoing reinvestment. The article also noted that Hyde’s rating still benefits from assumptions of UK government support and continued access to grant funding, helping underpin the stable outlook despite elevated debt metrics.

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