Greenville Electric Utility System, Texas Greenville; Retail Electric

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1 Summary: Greenville Electric Utility System, Texas Greenville; Retail Electric Primary Credit Analyst: Jeffrey M Panger, New York (1) ; jeff.panger@standardandpoors.com Secondary Contact: Russell J Bryce, Dallas (1) ; russell.bryce@standardandpoors.com Table Of Contents Rationale Outlook Related Criteria And Research SEPTEMBER 13,

2 Summary: Greenville Electric Utility System, Texas Greenville; Retail Electric Credit Profile Greenville Elec Util Sys retail elec Long Term Rating A+/Stable Affirmed Greenville retail elec Long Term Rating A+/Stable Affirmed Greenville retail elec (AGM) (SEC MKT) Unenhanced Rating A+(SPUR)/Stable Affirmed Many issues are enhanced by bond insurance. Rationale Standard & Poor's Ratings Services has affirmed its 'A+' rating on Greenville Electric Utility System (GEUS), Texas' electric system revenue bonds. At the same time, Standard & Poor's affirmed its 'A+' rating on Greenville, Texas' electric system revenue bonds issued for the utility. The outlook is stable. GEUS is a component unit of the city. The 'A+' rating reflects what we view as: The city's increasing economy, with a diverse employment base of its own as well as peripheral access to some of Dallas' northern suburbs; Solid coverage of fixed costs, bolstered by the 2010 debt issuance that enabled GEUS to prepay fixed costs to its wholesale energy provider, Texas Municipal Power Agency (TMPA), which TMPA then used to restructure its debt; The establishment of a cash funded escrow that management will use to further reduce fixed demand charges due to TMPA in fiscal years We further believe that this will enable the utility to maintain solid coverage of fixed costs that would otherwise have been elevated. We also note that demand charges are scheduled to decline significantly thereafter; Competitive rates; and Limited additional capital needs, which we expect management will fund internally. Mitigating against further credit improvement: A historically concentrated customer base, which despite the 2012 closure of a plant operated by second-biggest customer Newell Rubbermaid Inc. (13% of sales and 11% of revenue), remains concentrated; Reliance on coal-fired generation in an era of increasing environmental regulation; Liquidity that we expect to decline only adequate levels while the utility addresses the elevated demand charges during the timeframe; and High debt levels, including GEUS' share of TMPA debt; SEPTEMBER 13,

3 Summary: Greenville Electric Utility System, Texas Greenville; Retail Electric A first-lien pledge of net revenues of the utility's electric and telecommunications system secures the bonds. GEUS is one of four members of TMPA, and has an approximately 47 megawatts (10% share) of TMPA's Gibbons Creek coal-fired plant. The Gibbons Creek plant supplies roughly 60% of the utility's energy needs to serve retail demand. TMPA believes that the plant will comply with the Environmental Protection Agency's (EPA) Cross State Air Pollution Rule, which the courts stayed pending judicial review; and the Clean Air Interstate Rule, which is in effect in the interim. TMPA is assessing remedial actions to comply with the EPA's recently announced Mercury Air Toxics Standard, but expects that remediation costs will be modest. Management expects these and other measures the EPA has proposed to generally increase operating and capital costs for coal-fired generation. GEUS' customer base is concentrated, with the top 10 customers accounting for 33% of retail revenue (down from 37% following Rubbermaid's closure). The top customer is L3 Communications Holdings Inc. (formerly Raytheon), which accounts for 17% of revenue. Rubbermaid closed its Greenville plant in We understand that the site is now being occupied by Fritz Industries Inc., which moved from another Greenville location, and that the site Fritz vacated is being occupied by a company new to the service area. This has helped cushion the impact of Rubbermaid's departure, which management now expects will result in a 6% net load reduction. GEUS's below-average rates affords it financial flexibility. According to the Department of Energy's Energy Information Administration, the utility's rates were about 5% below the state average in 2011, the most recent year of available comparative data. Management implemented its first base-rate increase (4.1%) in nearly 20 years in fiscal Management expects that the pending cost-of-service study might identify the need to impose a moderate rate increase in October In 2010, and with its members facing sharply higher fixed demand charges, TMPA restructured about $300 million of debt, extending maturities to give fixed cost relief while more closely matching amortization with the remaining useful life of the Gibbons Creek asset. To further reduce its near-term fixed obligations, GEUS issued $54 million of debt (40% of which was to prepay prospective demand charges) and set up a cash-funded escrow to further reduce such costs. As a result of these measures, coverage of fixed costs (which includes the utility's share of TMPA debt service requirements) improved to 1.4x in 2010 from the 1.1x-1.2x range in fiscal years Further improvement came in 2011, with fixed cost coverage at 2.4x, largely the product of sharply higher surplus energy sales revenue in ERCOT's nodal market. Although lower, fixed cost coverage was what we view as a still strong 1.59x in GEUS updates financial projections in conjunction with cost-of-service studies. Its previous projections expected coverage in the 1.3x-1.4x range through 2016, levels that we believe are solid and support the 'A+' rating. We note that these previous projections incorporated the expected loss of Rubbermaid, offset by a 2.1% increase in sales, and announced expansions at other leading members. We believe liquidity is strong but expect it to be drawn on to cash fund the demand-charge reduction escrow. Unrestricted cash and board-restricted (but lawfully available) money provide about $24 million in total liquidity, measuring a robust 128 days cash. As the demand charge escrow is funded, we expect liquidity to decline to about $6.5 million, or 36 days of projected fiscal 2016's cash on hand. SEPTEMBER 13,

4 Summary: Greenville Electric Utility System, Texas Greenville; Retail Electric We believe that debt levels (including GEUS' 10% share of TMPA's $1 billion of debt) are high, at about $13,000 per customer. However, we note that a portion of this is related to transmission, the cost of which is socialized within ERCOT. Capital needs are less than $2 million per year, we expect the utility to fund it internally. Greenville is 45 miles northeast of Dallas, where it benefits from its access to the Dallas Metroplex. The local employment base, centered on the city's municipal airport, has been increasing. The leading employer is L3 Communications. The economy continues to increase, with mainly commercial and industrial development. City household effective buying income levels are a low 85% of the national average. Outlook The stable outlook reflects our view of management's projections of coverage levels that supportof the rating. Given high debt levels, reliance on coal-fired generation, and customer concentration, we do not believe that there is further upward rating potential in the next two years. A downward rating action would likely occur if projected coverage levels do not materialize. Related Criteria And Research USPF Criteria Electric Utility Ratings, June 15, 2007 Complete ratings information is available to subscribers of RatingsDirect at All ratings affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. SEPTEMBER 13,

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