NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'AA-' rating on the following Floresville (TX) outstanding improvement revenue bonds:
--$360,000 Improvement Revenue Bonds Series 1999;
--$2,230,000 Improvement Revenue Bonds Series 2002;
--$8,235,000 Improvement Revenue and Refunding Bonds Series 2005;
--$3,750,000 Improvement Revenue and Refunding Bonds Series 2009;
--$9,805,000 Improvement Revenue and Refunding Bonds Series 2011.
The Rating Outlook is Stable.
SECURITY
The outstanding bonds are special obligations of the city of Floresville, secured by a first lien on the net revenues of the electric light and power system.
KEY RATING DRIVERS
SMALL JOINTLY OWNED DISTRIBUTION SYSTEM: Floresville Electric and Light Power System (FELPS) is a small distribution system owned by three cities. The city of Floresville is the largest owner with undivided 64% interest in the system. FELPS meets customer load demand with an all-requirements contract with San Antonio's City Public Service (CPS; rated 'AA+' with a Stable Outlook by Fitch).
COMPETITIVE POWER SUPPLY: FELPS maintains a limited risk profile, as the all-requirements contract provides it with a stable source of power. Residential customer rates for fiscal 2012 were 9.9 cents/kWh (kilowatt hour), slightly higher than peer utilities.
STABLE FINANCIAL POSITION: FELPS' financial position continues to be stable and sound. Debt service coverage and cash on hand have averaged 2.65x and 79 days, respectively, over the past three years and remain in line with 'AA-' rating category medians.
TIMELY RECOVERY OF COSTS: FELPS' monthly pass-through mechanism of fuel costs helps ensure the stability of its financial margins. However, board recommendations on electric rate adjustments are subject to Floresville city council approval, which could ultimately limit the board's ability to make necessary adjustments in a timely manner.
PREDOMINANTLY RURAL SERVICE AREA: Below-average income levels in FELPS' rural service territory are mitigated by relatively low unemployment rates in the broader San Antonio area. Population growth over the last several years is a good indicator of commercial growth, partly driven by the Eagle Ford Shale exploration and production in east and south Texas.
RATING SENSITIVITIES
FUTHER DETERIORATION IN METRICS: The maintenance of sound financial metrics, consistent with rating category medians, is predicated on management's willingness and ability to make timely rate adjustments when necessary. Further deterioration in metrics will likely result in rating pressure.
CREDIT PROFILE
POWER PURCHASES FROM ONE SUPPLIER
Fitch views the contract with CPS as a credit positive because of the stable and low-cost power supply CPS provides. The current contract expires on Dec. 31, 2015, while a new agreement reached in 2012 extends the contract to Dec. 31, 2020. Contract provisions are essentially unchanged, including the limitation of pricing adjustments to three times over the duration of the contract, capped price adjustments to reflect consumer price index, and the inclusion of a fuel cost factor which allows CPS to adjust rates monthly to recover fuel costs and changes to transmission costs.
ELECTRIC RATES SUBJECT TO CITY COUNCIL APPROVAL
Fitch views this approval structure as a somewhat weaker attribute of the utility's rate setting authority, although the relationship between the city and the board is reportedly constructive.
Historically, board recommended rate adjustments have been fully supported by city council with the exception of an initial 2010 rate increase request that was originally denied but eventually approved and implemented.
STABLE FINANCIAL PROFILE
Debt service coverage has remained at a sound level, averaging 2.80x annually for the past 6 years, with very little deviation. Cash on hand is thin for the rating category, but has likewise remained very stable, averaging 75 days over the same period, including 95 days cash on hand at the close of fiscal 2012. Fitch's 2012 rating category medians for both measures are 2.54x and 138 days, respectively. FELPS management targets a 25% to 35% debt-to-capitalization ratio, which it has been able to meet and exceed, averaging 63.7% over the last 6 years.
Management expects to come to market in 2014, 2017, 2020 and 2023, each time with an issuance of approximately $10 million to fund its capital program. Corresponding rate increases are planned in each of those years, and are expected to help buffer a rise in leverage. Timely and sufficient rate increases will be key to maintaining the system's sound capitalization and operating margins in light of FELPS's planned debt offerings.
GROWING SERVICE TERRITOTY
FELPS serves 14,321 electric retail customers in a 600-square-mile, fast-growing region of Texas that includes the cities of Floresville, Poth, Stockdale, Falls City, and La Vernia, as well as unincorporated portions of Wilson County.
Customer growth has been stable with expectations of more robust growth as shale exploration and production continues in south and east Texas. Shale activity is expected to translate into a rise in commercial activity. FELPS benefits from this activity by adding to its customer base and building and upgrading electric lines and meters.
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.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria', dated Dec. 18, 2012;
--'Revenue-Supported Rating Criteria', dated June 12, 2012.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research
U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696027
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