Fitch Affirms Boerne, TX's Outstanding Utility Sys Revs at 'A'; Outlook Stable

  Fitch Affirms Boerne, TX's Outstanding Utility Sys Revs at 'A'; Outlook
  Stable

Business Wire

CHICAGO -- November 09, 2012

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.

SECURITY

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.

CREDIT PROFILE

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.

POWER SUPPLY

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.

FINANCIALS

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681449

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=665815

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Contact:

Fitch Ratings
Primary Analyst
Stacey Mawson, +1 312-606-2337
Associate Director
stacey.mawson@fitchratings.com
Fitch, Inc.
33 Whitehall Street
New York, New York
or
Secondary Analyst
Ryan Greene, +1 312-606-2337
Director
Committee Chairperson
Alan Spen, +1 312-606-2337
Senior Director
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com
 
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