NEW YORK--()--Fitch Ratings affirms the 'AA-' rating on the following Georgetown, Texas bonds:
--$250,000 utility system revenue refunding bonds, taxable series 1998B.
The Rating Outlook is revised to Negative from Stable.
The bonds are secured by a first lien on net revenues of the combined funds, after payment of operations and maintenance costs.
INCREASED SUPPLY RISK: The Negative Outlook reflects the increased risk associated with the city's decision to begin actively managing its own power supply via short-term contracts with several different providers. This follows the termination of its long-term wholesale power supply contract with the Lower Colorado River Authority (LCRA; revenue bonds rated 'A' with a Stable Outlook by Fitch) nearly four years ahead of the stated expiration date.
SMALL COMBINED UTILITY SYSTEM: The city of Georgetown, TX owns and operates a combined electric distribution, water, and wastewater system serving approximately 21,000 customers in the growing Austin region. Electric revenues compose slightly more than two-thirds of total operating revenues.
SOUND FINANCIAL METRICS: Financial metrics are largely consistent if not slightly better in comparison to Fitch's 'AA-' rating category medians. Debt service coverage (DSC) has remained securely above 3.0x over the prior five years, and coverage of full obligations has averaged 1.4x over that span despite sizeable transfers to the city's general fund. Cash on hand declined somewhat in fiscal 2011 but remains at a satisfactory level (93 days).
PASS-THROUGH RATES: The utility's ability to automatically adjust rates on a monthly basis ensures the timely recovery of variable purchased power costs. The adjustment does not require city council approval.
LIMITED CAPITAL NEEDS: Future capital needs appear manageable with spending through fiscal 2017 forecast at close to $70 million and funding derived mostly from debt issuance. Future borrowings are not expected to result in a material increase in the utility's already favorable balance sheet ratios, which include debt to funds available for debt service (FADS) and equity to capitalization of 3.1x and 77%, respectively.
GROWING SERVICE TERRITORY: The city's inclusion in the steadily growing Austin region has resulted in consistently low unemployment, above-average wealth levels and solid average annual growth in utility sales. The 10 largest users, all of whom are electric customers, account for a moderate 17% of total combined revenues.
WHAT COULD TRIGGER A RATING ACTION
POWER SUPPLY MANAGEMENT: Unanticipated pressure on Georgetown's financial position arising from the utility's management of its own power supply would likely lead to a rating downgrade.
LONG-TERM SUPPLY IN QUESTION
The city historically had been a full requirements customer of LCRA pursuant to a contract slated for expiration in December 2016. Despite its long-standing plan to remain a customer through the 2016 deadline, the city elected instead to recently terminate its contract with LCRA early, in September 2012, following allegations that LCRA breached the contract.
Going forward the city will pursue a strategy of procuring power via take-and-pay contracts from several suppliers for relatively shorter terms. The strategy represents a material change in the utility's operating profile which could ultimately impact the utility's cost of power and financial metrics. Fitch will continue to monitor the city's ability to effectively manage its power supply while also maintaining a strong financial profile and competitive rates.
STABLE FINANCIAL OPERATIONS
The combined funds' financial performance has remained stable and strong. Sizeable growth in fiscal 2011 in both electric and water sales positively offset management's decision to forego passing through higher purchased power costs, resulting in reduced but still strong DSC of 3.2x. Liquidity also declined in fiscal 2011 but is satisfactory for the rating category at nearly 100 days cash. Management expects DSC in fiscal 2012 to be at or close to 3.5x.
LOW LEVERAGE WITH MODEST CAPITAL NEEDS
Debt levels have remained low as the city has pursued a strategy of funding a high percentage of capital needs from excess cash flow. Future capital needs appear manageable and additional borrowings planned through 2017 are not expected to result in higher leverage ratios.
Future capital needs will mostly focus on maintenance and improvements to existing infrastructure. Despite a near doubling of the population over the prior decade, remaining capacity at the city's three water treatment plants and five wastewater treatment plants is reportedly adequate through at least the city's five-year capital planning period.
The city credits, in part, its competitive rates for attracting 98% of new electric customers in a dual-certified area of its electric service territory. Residential rates include a $6 monthly fee and an energy charge equal to $0.1046 per kilowatt hour. In fiscal 2011, low fuel costs enabled the city to suspend its power cost adjustment for the year.
GROWING SERVICE TERRITORY
Georgetown is located in central Texas approximately 30 miles north of Austin along Interstate 35. The city provides electric, waterworks, and sewer services in an area exhibiting above-average per capita income levels and a low unemployment rate of 4.9% in November 2012. Above-average concentration among the city's largest customers is not a material concern given expectations for future growth and the relative stability of the largest users.
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.
This action was informed by information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria', December 2012;
--'Revenue-Supported Rating Criteria', June 20, 2011.
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
Revenue-Supported Rating Criteria