AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating on the city of Boerne, TX's outstanding $40.6 million utility system revenue bonds, series 2009 and 2010.
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 (collectively, the system). Net revenues include substantially all revenues and income of the system.
KEY RATING DRIVERS
SMALL, COMBINED UTILITY SYSTEM: The city's combined utility system provides electric distribution, water, wastewater, gas and garbage removal services to the city and surrounding areas. Pledged revenue includes those from the electric, water and wastewater systems, which account for 90% of the system's combined revenues.
STRONG GROWING SERVICE AREA: Economic indicators for the region are strong, with per capita personal income and unemployment outperforming state and national levels. The recent construction of new developments on the east side of the city, which will add more than 4,500 homes, will continue to fuel growth at the utility.
LIMITED RISK POWER SUPPLY: The system entered into an all-requirements wholesale power supply contracts with San Antonio's City Public Service (CPS; rated 'AA+', Outlook Stable) on June 25, 2016, securing its power supply through Dec. 31, 2026.
ELEVATED TRANSFER PAYMENTS: The electric utility transferred $1.9 million to the general fund in fiscal 2015 for quality of life and development projects, increasing the total transfer to 21.8% of utility system revenues. The quality of life reserve is funded by two thirds of the purchased power savings following the city's contract termination with the Lower Colorado River Authority (LCRA; rated 'A+', Outlook Stable) in 2013, helping to mitigate the elevated transfer payments.
REDUCED LEVERAGE METRICS: The system has continued to amortize its debt following the city's 2010 bond issuance to fund a new wastewater treatment plant. Debt to funds available for debt service (FADS) reduced to 6.0x from a high of 10.0x in fiscal 2011 and leverage is expected to decline further with no new debt issuances planned at least through the next five years.
AMPLE 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 2015 was a healthy 315 days. The city's financial policies require a minimum of 90 DCOH and the utility targets 90-180 DCOH.
RATING SENSITIVITIES
STABILITY IN FINANCIAL PERFORMANCE: Sustained financial performance in line with 2015 financial metrics and greater clarity on long-term power supply at the city of Boerne, TX's combined utility, could lead to a rating upgrade.
CREDIT PROFILE
The city of Boerne's combined utility is a municipally owned, city council-governed system that provides retail electric, water, wastewater, gas and garbage services to the city and portions of Kendall County (city is rated 'AA', Outlook Stable). The system's gas and garbage services account for only a small portion of the combined utility system's revenues, while the pledged revenues account for 90%. The electric distribution system, the largest of the combined utilities by revenue, serves more than 5,000 customers and contributes 60% of operating revenues.
OUTSIZED TRANSFER PAYMENTS
The electric utility established a quality of life reserve in 2013 to fund economic development and general government projects. The reserve is funded with savings resulting from lower purchased power costs with CPS. Two thirds of the savings, or approximately $1 million annually, are transferred to the reserve and the remaining savings are passed through to customers in the form of a rate adjustment.
The electric utility transferred $1.9 million from the quality of life reserve to the general fund in fiscal year (FY) 2015, primarily to fund road improvement projects. As a result, transfer payments in FY 2015 increased to 21.8% of utility system revenues, up from 11.1% in FY 2014. Positively, the quality of life reserve is funded through purchased power savings and should not have a negative effect on the utility's financial profile.
FINANCIALS
The utility's financial position has strengthened, primarily driven by the growth in electric utility sales which increased by approximately 13% annually during FYs 2014-2015. The water and wastewater revenues also grew at strong levels of approximately 4% annually. The rapid population growth and a 1.8% rate increase in FY 2015 across the electric, water and wastewater utilities also drove the combined utility revenue growth.
Liquidity has been and continues to be strong for the system, as shown by an ample DCOH of 315 days at FYE2015. DCOH has historically averaged around 160 days, but liquidity increased substantially in 2013 following the termination of the LCRA power supply contract. The city's financial and budget policy requires a minimum of 90 DCOH and management targets 90-180 DCOH.
Fiscal 2016 is primarily on target to meet budget, as of June 30, 2016. Estimated debt service coverage (DSC) for the year is 1.45x, below FY 2015 DSC of 2.26x, but still in line with rating category medians. The city projects DSC to remain relatively stable through 2021 ranging from 1.33x to 1.54x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/site/re/864007
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013188
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https://www.fitchratings.com/regulatory
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