Fitch Rates Austin's (TX) Electric Utility System Rev Refunding Bonds 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AA-' rating to the following Austin, TX (the city) revenue bonds:

--Approximately $92,700,000 electric utility system revenue refunding bonds, series 2016.

The bonds are scheduled to price via negotiation on Nov. 29. The series 2016 bonds will be used to refund portions of outstanding electric revenue bonds (series 2008A) for interest cost savings and pay issuance costs.

In addition, Fitch affirms the following ratings:

--$1.1 billion million electric utility system revenue bonds at 'AA-';

--$27 million combined utility systems (prior first lien) revenue bonds at 'AA';

--$119 million combined utility systems (prior subordinate lien) revenue bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY

Outstanding electric system revenue bonds are secured by net revenues of Austin Energy (AE), after provision for the prior first lien obligations of the combined utility systems. The electric revenue bonds are on parity with the prior subordinate lien obligations of the combined utility systems.

The prior first- and prior subordinate-lien obligations are secured by a joint and several pledge of net revenues of the combined utility systems, consisting of AE and Austin Water Utility. The issuance of additional bonds secured by a joint and several pledge of net revenues of AE and AWU is no longer permitted by the master bond ordinance, making both liens effectively closed. A default on the prior subordinate lien obligations and water and wastewater bonds would not trigger a default on the prior first lien bonds.

KEY RATING DRIVERS

LARGE REGIONAL UTILITY: AE operates as a large vertically integrated utility system providing retail electric service to a rapidly growing service area that includes the state capital and portions of Travis and Williamson Counties.

STRONG SERVICE TERRITORY: AE benefits from a deep and diverse economy, exceptionally low unemployment, above average wealth levels and a well-diversified customer base.

SOUND FINANCIAL PERFORMANCE: Operating margins have continued to improve over the prior three fiscal years, prompting cash flow metrics well in excess of rating category medians and a much improved liquidity position. Fitch expects coverage ratios will continue above 2.0x while cash reserves steadily increase to a more robust level based on AE's multiyear financial forecast ending in fiscal 2021.

AFFORDABLE RATES: AE's competitive electric rates provide flexibility to raise additional revenues if needed. However, the utility's rates, including its power supply adjustment charge, are subject to a city council-imposed affordability threshold that limits rate adjustments to no more than 2% per annum, which could ultimately impede financial performance.

DIVERSE RESOURCE PORTFOLIO: AE maintains a competitively priced and diverse generation and resource portfolio sufficient to meet the needs of its growing service area. The recent adoption of an updated resource and generation plan further accelerates AE's already aggressive strategy of reducing carbon emissions, although implementation of the plan will be subject to the city's ability to keep rate increases below its 2% threshold.

MANAGEABLE DEBT PROFILE: The utility's debt burden and equity position compare well to median ratios for the rating category and current capital needs appear manageable. Fitch believes leverage ratios will remain fairly consistent with the current rating through the current forecast period, despite plans for additional borrowings.

HIGHER RATING ON PRIOR LIEN DEBT: The 'AA' rating on the prior first lien bonds reflects the closed nature of the lien, the very modest portion of the bonds that make up AE's and Austin Water Utility's (AWU; water and wastewater revenue bonds rated 'AA-'/Outlook Stable) overall debt profile, and the strong DSC provided by the pledge of the combined utilities. Coverage of prior first lien obligations should continue to strengthen given the decreasing annual debt service requirements.

RATING SENSITIVITIES

IMPLEMENTATION OF RESOURCE PLAN: Execution of Austin Energy's resource and generation plan absent rate increases needed to generate financial metrics consistent with the current rating would exert downward pressure on the rating and/or Outlook.

CREDIT PROFILE

AE ranks among the 10 largest municipally owned electric utilities in the U.S., providing retail electric service to an already large service territory that continues to grow at a rapid pace. The city of Austin makes up roughly half of the utility's defined geographical service territory, while sizeable portions of Travis and Williamson Counties make up the balance. Approximately 14% of the nearly 450,500 customers served by AE are located beyond the city's borders, composed almost entirely of residential customers. Approximately 14% of AE's total revenue is attributable to these customers.

The strength and diversity in both AE's customer base and the city's economy continue to underpin the utility's sound, overall credit profile. Electric sales and revenues attributable to residential customers are sufficiently diverse, accounting for about 34% and 39%, respectively, of AE's total sales and gross income in fiscal 2015. Moreover, approximately 90% of customer accounts are residential and just 19% of total revenue is attributable to the 15 largest customers.

DIVERSE POWER SUPPLY

AE's power supply portfolio is well diversified, consisting primarily of two jointly owned coal-fired units, an ownership interest in nuclear capacity, owned natural gas/oil units, and renewable projects derived from long-term purchased power contracts. Available resources currently total 3,954 MW, well in excess of the fiscal 2016 peak demand of 2,755 MW (44% reserve margin). Renewable resources, composed mostly of wind and to a lesser extent solar and bio-mass, now account for the majority of total capacity and energy at 38% and 33%, respectively, in fiscal 2016.

FINANCIAL METRICS CONTINUE TO IMPROVE

Fitch calculated debt service coverage easily exceeded the rating category median in fiscal 2015 as a result, 3.41x compared to 2.31x. Coverage of full obligations, which incorporates annual transfers made to the city's general fund and purchased power costs, was 2.35x, also higher than the rating category median for similarly rated retail utilities.

Liquidity remains relatively low but generally satisfactory, despite unrestricted cash and investments more than doubling since fiscal 2012. AE ended fiscal 2015 with nearly 150 days of cash on hand. Access to a robust commercial paper (CP) program provides additional cushion, equal to a more sizeable 221 days of liquidity on hand.

COMPETITIVE RATES

AE's residential electric rate (10.7 cents/kWh) for fiscal year 2016 compared fairly well to other large Texas utilities and remained modestly lower than the July 2014 statewide average of 11.9 cents/kWh. While the utility's competitive rates provide some flexibility, Fitch believes the city's general reluctance to raise rates historically poses some concern, particularly as the city considers adding additional generation. Rates are approved by the city council and are not subject to any additional oversight.

STRONG SERVICE TERRITORY

Austin's economy continues to outperform that of many other large metro areas in the U.S. The city serves as the state capital and is home to seven colleges and universities, including the University of Texas (revenue bonds rated 'AAA'/Outlook Stable), one of the largest public universities in the country. The city's 2015 population, estimated at roughly 899,000, has grown more than 25% since 2000. Wealth indicators for the area are comparatively high and the city's February 2015 unemployment rate of 3.0% is exceptionally low relative to state and national averages. Accordingly, customer delinquencies are minimal and revenue collection is typically near the industry average.

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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Fitch Ratings
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Christopher Hessenthaler, +1-212-908-0773
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Kathryn Masterson, +1-512-215-3730
Senior Director
or
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Managing Director
or
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elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Christopher Hessenthaler, +1-212-908-0773
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Kathryn Masterson, +1-512-215-3730
Senior Director
or
Committee Chairperson:
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com