TEXT-Fitch affirms Kerrville Public Utility Board, Texas revs

Fri Dec 7, 2012 3:32pm EST

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Dec 7 - Fitch Ratings has affirmed the 'AA-' rating on the Kerrville Public
Utility Board, TX's outstanding $4.46 million electric system revenue refunding
bonds, series 2001.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by the net revenues of the city's electric utility system.

KEY RATING DRIVERS

Stable Distribution System: Kerrville Public Utility Board (KPUB) is a retail
distribution system that serves 21,612 customers in central Texas.

Open Power Supply Position: Following the early termination of its partial
requirements contract with KPUB's wholesale provider, the Lower Colorado River
Authority (LCRA), KPUB does not have power supply in place between June 2013 and
2016, which Fitch views as a potential credit risk. However, power supply
options are being reviewed and KPUB appears to be considering an
all-requirements style contract.

Litigation Risk: The utility is currently in litigation with LCRA regarding the
decision to terminate its contract prior to the 2016 expiration. While the
outcome remains uncertain, KPUB has created a reserve account to mitigate the
risk of an unfavorable court outcome, which Fitch views positively.

Strengthening Financial Metrics: KPUB's unaudited fiscal 2012 financial results
show a strengthening of Fitch-calculated debt service coverage (DSC) and
operating margin compared to fiscal 2010 and 2011 results. Fiscal 2012 DSC is a
robust 2.73x, which compares favorably to the 'AA-' rating category median of
2.54x.

Minimal Debt Levels: Outstanding long-term debt is very low and matures in
fiscal 2014. The system anticipates modest additional debt issuance to fund
capital needs.

Favorable Customer Base: KPUB's customer composition provides stability and
limited risk. Residential customers represent the majority of KPUB's customer
base and energy sales, and there is no concentration among top customers.

What Could Trigger a Rating Action

Power Supply Management: A change to KPUB's power supply strategy that
materially alters its risk profile could potentially pressure the rating. Fitch
will be monitoring KPUB's development of its longer-term power supply plan,
given the termination of the LCRA contract.

CREDIT PROFILE

KPUB provides retail electric to a service area comprising approximately 130
square miles. The system serves the City of Kerrville (the city), along with the
city of Ingram, the communities of Center Point and Hunt, and other outlying
regions in Kerr County. The customer base of 21,696 is relatively stable,
showing steady, modest growth averaging 1% per year.

The majority of KPUB's customer base is residential, at 83% of customers and 53%
of energy sales. There is no customer concentration. The largest commercial
customers are in a range of industries, from medical and health centers, to
higher education and retail stores. Energy sales have been fairly consistent,
except for a slight decline in 2011 and 2012 of 0.9% and 2.7%, respectively. A
continued downward trend in energy sales would be a concern to Fitch.

POWER SUPPLY

Since KPUB's inception in 1987, LCRA has been the system's majority power
supplier. KPUB had a partial requirements contract with LCRA for a contract load
of 80 MW. However, KPUB terminated the contract four years early on Sept. 13,
2012 due to an ongoing contract dispute over pricing and accelerated debt
amortization.

The system currently has an interim power supply contract in place with San
Antonio City Public Service (CPS), which will expire on May 30, 2013, capped at
80 MW. The remainder of its power is supplied by Luminant, with a contract
through April 30, 2013. KPUB is currently reviewing bids for a power supplier
after the expiration of the CPS interim contract. KPUB's decision regarding
power supply management is viewed as a key credit driver. A change from one
long-term power supplier to managing multiple suppliers under varying contract
lengths is inherently more risky and could put downward pressure on the rating.

FINANCIALS

Fitch-calculated DSC was 2.73x in fiscal 2012 (unaudited), which compares
favorably with the 'AA-' rating category median of 2.54x. DSC rebounded in 2012,
after somewhat weakened coverage in fiscal years 2010 and 2011, falling to 1.52x
and 1.69x, respectively. Forecasted financial results show continued strong
operating performance. DSC is projected to stay above 2.0x and increase
significantly in fiscal years 2015 through 2017.

Liquidity for the system is sufficient, although it has declined somewhat in
recent years. Management is working towards increasing liquidity over the next
two to three years, targeting days cash on hand of 120 days.

KPUB's leverage ratio, as measured by debt to FADS, is very low at 0.6x at
fiscal year-end 2012 (unaudited). The system has one bond issue outstanding,
which will fully amortize on Nov. 1, 2013 (fiscal year 2014). KPUB anticipates
modest additional bond issuances to fund a portion of its capital plan.

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 Criteria' (Jan. 11, 2012);
--'U.S. Public Power Peer Study - June 2012' (Jun. 15, 2012);
--'U.S. Public Power Distribution Systems' (Nov. 17, 2011).

Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
U.S. Public Power Peer Study -- June 2012
U.S. Public Power Distribution Systems
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