Nov 8 - Fitch Ratings has assigned an 'AA-' rating to the following Austin,
TX (the city) revenue bonds:
--Approximately $290 million electric utility system revenue refunding bonds,
--Approximately $114 million electric utility system revenue refunding bonds,
taxable series 2012B.
The bonds are expected to be sold via negotiation the week of Dec. 3. Proceeds
from the sale will be used to retire outstanding commercial paper and refund
outstanding electric utility system revenue bonds for cost savings.
In addition, Fitch affirms the following ratings on outstanding debt of the
--$70.7 million combined utility systems (prior first lien) revenue bonds;
--$168.3 million combined utility systems (prior subordinate lien) revenue
--$1.3 billion electric utility system revenue bonds.
The Rating Outlook is Stable.
The series 2012A and 2012B bonds are secured by net revenues of the Austin
Electric (AE), after provision for the prior first lien obligations. The series
2012A and 2012B bonds are issued on a parity basis with the prior subordinate
lien obligations and outstanding AE revenue bonds.
The prior first- and subordinate-lien obligations are secured by a joint and
several pledge of the Austin water utility (AWU) and AE net revenues. Provision
for the subordinate-lien obligations is made after the prior first-lien
obligations. The master ordinance adopted in 2000 prohibits the issuance of
additional bonds secured by a joint and several pledge of net revenues from both
systems, which effectively closes the prior lien.
KEY RATING DRIVERS
LARGE REGIONAL UTILITY SERVICE PROVIDER: The rating on the city's electric
utility system reflects its role as a retail electric service provider to a
large and important service area that includes the state capital as well as
portions of Travis and Williamson Counties.
STRONG SERVICE TERRITORY: AE's growing service area includes a deep and diverse
economy, exceptionally low unemployment, above average wealth levels and a
diversified customer base.
WEAKENED FINANCIALS EXPECTED TO IMPROVE: Operating margins weakened in recent
years resulting in financial metrics below Fitch's 'AA-' rating category
medians. However, solid growth in sales increased debt service coverage to a
more acceptable 1.9x in fiscal 2011 and the recent implementation of a 7% base
rate increase is expected to return AE's financial position to a level more in
line with rating category medians.
AFFORDABLE BUT RESTRICTIVE RATES: AE's autonomous rate setting authority and
competitive rates provide flexibility to raise additional revenues if needed.
However, city council's prolonged trend of holding rates steady demonstrates a
reluctance to increase rates and offsets somewhat the benefits typically
associated with low rates.
DIVERSE POWER SUPPLY: AE maintains a diverse power supply portfolio with a
strategy to continue increasing renewable energy sources. Owned and purchased
power resources provide the city with a reliable power supply sufficient to meet
MODERATE DEBT PROFILE: Leverage ratios, including debt to funds available for
debt service (FADS) of 4.3x and equity to capitalization at nearly 55% in fiscal
2011, are in line with rating category medians. However, additional debt plans
needed to support AE's sizeable capital program will increase system leverage
WHAT COULD TRIGGER A RATING ACTION
INSUFFICIENT RATE SUPPORT: Any meaningful reluctance on the part of AE and its
governing bodies to promote and approve rate increases necessary to achieve the
utility's financial plan would result in downward pressure on the rating or
WEAKENED METRICS EXPECTED TO REBOUND
AE's financial position weakened in fiscal years 2009 and 2010 before returning
to a more acceptable level in fiscal 2011. Declines in both energy sales and
interest income prompted coverage of all AE obligations, including debt service
on prior first and subordinate lien obligations, to fall from over 2.0x
historically to a subpar 1.8x and 1.6x in fiscal years 2009 and 2010 (AE targets
a 2.0x debt service coverage ratio for electric utility bonds).
Financial metrics stabilized somewhat in fiscal 2011 as energy sales grew by a
favorable 6% over the prior year. DSC improved to 1.9x as a result, although
liquidity remained low with just 83 days cash on hand (DCOH). General fund
transfers have averaged 8.4% of total operating revenues over the prior three
years with little deviation. The transfers are limited to 12% of AE's non-fuel
revenue with a $105 million minimum transfer amount required each year.
Financial performance for fiscal 2012 is expected to remain relatively unchanged
according to financial projections through the first nine months of the fiscal
year. Fitch expects further improvement in AE's financial position based on its
financial forecast through fiscal 2017. Projections show DSC ramping back up to
at least 2.0x by fiscal 2015 and DCOH growing to nearly 200 days by fiscal 2017.
The forecast reflects the 7% rate increase adopted in fiscal 2013 and includes
what Fitch believes are reasonable assumptions.
STRONG SERVICE TERRITORY
AE serves a diverse customer base of approximately 424,300 customers in a
service territory that includes the entire city as well as portions of
surrounding Travis and Williamson Counties. Residential users compose nearly 90%
of AE's customer base but account for just 40% and 36% of total revenue and
sales, respectively. Commercial and industrial customers together account for
slightly more than half of total revenue and sales. No meaningful concentration
exists among users as the top 15 customers accounted for a modest 19% of total
system revenue in fiscal 2011.
The Austin economy continues to outperform that of many other large metro areas
in the U.S. (Fitch rates the city's general obligation bonds 'AAA' with a Stable
Outlook). The city's economy historically has been buffered by the large and
stabilizing presence of state government as well as seven colleges and
universities, including the University of Texas (the University of Texas System
is rated 'AAA' by Fitch with a Stable Outlook), one of the largest public
universities in the country.
The city's population, estimated at roughly 811,000 for 2012, has increased more
than 20% since 2000. Wealth indicators for the area are above average and the
city's September 2012 unemployment rate of 5% is exceptionally low relative to
the state and national averages.
DIVERSE POWER SUPPLY
AE's power supply is well diversified, consisting primarily of two jointly owned
coal units, a jointly owned nuclear facility, owned natural gas/oil units, and
renewable projects (primarily wind) derived from purchased power contracts.
Total resources are 3,148 megawatts (MW) versus fiscal 2011 peak demand of 2,710
MW. Owned generation provides the majority (78%) of AE's total capacity.
Renewable purchased power contracts have increasingly been supplanting AE's
other sources of generation. The biggest contracts were signed in 2011 when the
system entered into wind contracts for a combined 487 MW. Management expects the
contracts to increase customer energy supply from renewable sources to 27% in
fiscal 2013 from 10% in fiscal 2011. Longer term, Austin anticipates growing its
renewable portfolio to ultimately achieve the utility's goal of 35% of its total
energy generation by 2020.
COMPETITIVE RATES TEMPERED BY POLITICAL RATE SETTING ENVIRONMENT
In June 2012, city council approved a system average 7% rate increase effective
Oct. 1, 2012 needed to address weakened operating margins. Fitch notes that
while the rate hike will lead to a positive increase in annual revenue estimated
at $71 million, the size of the rate increase was substantially scaled back
compared to a previously anticipated 13%, or $126 million in additional revenue,
considered by management over much of the prior year. Further, the increase in
the base rates marked the first increase approved by city council since 1994.
Current rates, including an annual fuel adjustment, compare well to other large
Texas cities and remain almost even with the statewide average. The average
revenue/kWh was 9.70 cents in fiscal 2011, compared to the current statewide and
national averages of 9.34 cents and 9.83 cents, respectively. Fitch believes the
city council's demonstrated reluctance to raise rates somewhat offsets the
affordability of the system's cost structure.
MANAGEABLE DEBT PROFILE
AE's debt levels are in line with rating category medians. Debt to FADS improved
somewhat in fiscal 2011 to 4.3x and equity to capitalization has remained at
nearly 55% over the last several years. AE's capital program through fiscal 2017
totals $1.1 billion primarily for routine upgrades and general maintenance.
Approximately 70% of the capital plan will be debt funded, which Fitch expects
will lead to a sizeable but manageable increase in leverage. The current
offering will restructure certain bond maturities coming due over the next
several years in an effort to reduce debt service costs over the short term.
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', Jan. 11, 2012;
--'Revenue-Supported Rating Criteria', June 20, 2011.
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
Revenue-Supported Rating Criteria