CHICAGO--()--Fitch Ratings has affirmed the 'A' rating on the city of Boerne, Texas's outstanding $46.3 million utility system revenue bonds.
The Rating Outlook is stable.
The bonds are secured by a first lien on the net revenues derived by the city from the operation of its electric, water and wastewater systems. Net revenues include substantially all revenues and income of the system.
KEY RATING DRIVERS
Small Utility System: The city's combined utility system (the system) provides electric distribution (58% of revenue), water (18%), wastewater (15%), gas and garbage removal services to the city and surrounding areas. Pledged revenue includes the electric, water and wastewater system, which account for 90% of the system's combined revenues.
Stable Service Area: Economic indicators for the region are strong, helping to mitigate the currently above-average water and wastewater rates that are expected to increase going forward to support increased debt service.
Power Supply Needs Clarity: The system terminated its wholesale power contract with Lower Colorado River Authority (LCRA) in September 2012, four years ahead of schedule. American Electric Power Company (AEP) has replaced LCRA as the system's wholesale provider for a nine-month interim period. However, the system still needs to firm up a long-term power supply arrangement.
Increased Debt Levels: The system issued debt in fiscal 2010 to fund a new wastewater treatment plant, which more than doubled its outstanding debt amount and increased leverage as measured by debt to funds available for debt service (FADS) from 3.9x to 9.9x. Increased debt service has caused Fitch-calculated debt service coverage (DSC) to weaken from historical levels. However, fiscal 2011 DSC of 2.04x compares favorably to the 'A' rating category median of 1.57x.
Sufficient Liquidity: On a combined basis, the electric, water and wastewater funds maintain strong cash reserves that have been growing in recent years. Days cash on hand (DCOH) at fiscal year-end 2011 was 161 days, as compared to the median 84 days.
What Could Trigger a Rating Action
Long-term Power Supply Management: Changes in the system's long-term power supply that materially change its risk profile as a distribution-only electric provider or reduces financial results could potentially pressure the rating. However, the system's strong liquidity position provides a cushion for increased costs.
The city of Boerne (general obligation bonds rated 'AA-' with a Stable Outlook by Fitch) owns and operates a small electric, water, wastewater, gas and garbage utility providing services to the city and portions of Kendall County. Revenues of just the electric, water and wastewater system secure the city's utility bonds. The system's gas and garbage services account for only a small portion of the combined utility system's revenues, and the pledged revenues account for 90% of total revenues.
The electric distribution system, the largest of the combined utility, serves 4,807 customers and contributes approximately 60% of operating revenues. The system also serves 4,612 water customers and 4,403 wastewater customers.
The system's power was previously supplied through an all-requirements contract with LCRA that was scheduled to expire in June 2016. However, Boerne terminated the contract earlier than expiration on Sept. 13, 2012 due to an ongoing contract dispute over pricing and accelerated debt amortization.
The system currently has a nine-month interim contract in place with AEP and is taking RFPs for longer-term providers after its expiration. Management expects that the city will continue to purchase power through long-term contracts as opposed to owning generation. Strategies include using a single supplier or diversifying with a combination of suppliers for different contract terms. Fitch views the system's decision regarding future power supply as a key credit driver, as a change from one power supplier to managing multiple power suppliers with varying contract lengths could result in a shift of the utility's operational profile, adding to credit risk.
The system's financial metrics were historically stable but weakened in fiscal 2011, as anticipated, due to an increase in wastewater debt outstanding. Fitch-calculated DSC decreased to 2.04x which, while low for the system, compared favorably to the rating category median of 1.57x. The 2010 bond issuance more than doubled the system's debt, increasing debt to FADS to 9.9x at fiscal year end 2011.
Unaudited fiscal 2012 operating results outperformed budget, due primarily to the electric fund exceeding revenue projections after a hot, dry summer. However, even with strong operating performance, DSC is expected to decrease to approximately 1.35x. The increased debt levels continue to have a measurable impact on coverage and leverage ratios, while requiring continued increases to already above-average water and wastewater user rates. The maintenance of sound financial metrics, despite the increased leverage position, supported by timely implementation of rate increases, will be important measures of the system's credit strength over the next several years.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Guidelines', Jan. 11, 2012;
--'Revenue-Supported Rating Criteria', June 12, 2012;
--'U.S. Public Power Peer Study', June 18, 2012.
Applicable Criteria and Related Research:
U.S. Public Power Peer Study -- June 2012
Revenue-Supported Rating Criteria
U.S. Public Power Rating Criteria