November 9, 2012 / 10:46 PM / 5 years ago

TEXT-Fitch affirms Boerne, Texas outstanding utility revs at 'A'

Nov 9 () - Fitch Ratings has affirmed the 'A' rating on the city of Boerne,
Texas's outstanding $46.3 million utility system revenue bonds.

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.  Net revenues 
include substantially all revenues and income of the system.

KEY RATING DRIVERS

Small Utility System: The city's combined utility system (the system) provides 
electric distribution (58% of revenue), water (18%), wastewater (15%), gas and 
garbage removal services to the city and surrounding areas.  Pledged revenue 
includes the electric, water and wastewater system, which account for 90% of the
system's combined revenues. 

Stable Service Area: Economic indicators for the region are strong, helping to 
mitigate the currently above-average water and wastewater rates that are 
expected to increase going forward to support increased debt service. 

Power Supply Needs Clarity: The system terminated its wholesale power contract 
with Lower Colorado River Authority (LCRA) in September 2012, four years ahead 
of schedule.  American Electric Power Company (AEP) has replaced LCRA as the 
system's wholesale provider for a nine-month interim period.  However, the 
system still needs to firm up a long-term power supply arrangement.

Increased Debt Levels: The system issued debt in fiscal 2010 to fund a new 
wastewater treatment plant, which more than doubled its outstanding debt amount 
and increased leverage as measured by debt to funds available for debt service 
(FADS) from 3.9x to 9.9x. Increased debt service has caused Fitch-calculated 
debt service coverage (DSC) to weaken from historical levels. However, fiscal 
2011 DSC of 2.04x compares favorably to the 'A' rating category median of 1.57x.

Sufficient 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 2011 was 161 days, as compared to 
the median 84 days. 

What Could Trigger a Rating Action

Long-term Power Supply Management: Changes in the system's long-term power 
supply that materially change its risk profile as a distribution-only electric 
provider or reduces financial results could potentially pressure the rating.  
However, the system's strong liquidity position provides a cushion for increased
costs. 

CREDIT PROFILE

The city of Boerne (general obligation bonds rated 'AA-' with a Stable Outlook 
by Fitch) owns and operates a small electric, water, wastewater, gas and garbage
utility providing services to the city and portions of Kendall County.  Revenues
of just the electric, water and wastewater system secure the city's utility 
bonds.  The system's gas and garbage services account for only a small portion 
of the combined utility system's revenues, and the pledged revenues account for 
90% of total revenues.  

The electric distribution system, the largest of the combined utility, serves 
4,807 customers and contributes approximately 60% of operating revenues.  The 
system also serves 4,612 water customers and 4,403 wastewater customers.

POWER SUPPLY

The system's power was previously supplied through an all-requirements contract 
with LCRA that was scheduled to expire in June 2016.  However, Boerne terminated
the contract earlier than expiration on Sept. 13, 2012 due to an ongoing 
contract dispute over pricing and accelerated debt amortization.  

The system currently has a nine-month interim contract in place with AEP and is 
taking RFPs for longer-term providers after its expiration.  Management expects 
that the city will continue to purchase power through long-term contracts as 
opposed to owning generation.  Strategies include using a single supplier or 
diversifying with a combination of suppliers for different contract terms.  
Fitch views the system's decision regarding future power supply as a key credit 
driver, as a change from one power supplier to managing multiple power suppliers
with varying contract lengths could result in a shift of the utility's 
operational profile, adding to credit risk.  

FINANCIALS

The system's financial metrics were historically stable but weakened in fiscal 
2011, as anticipated, due to an increase in wastewater debt outstanding.  
Fitch-calculated DSC decreased to 2.04x which, while low for the system, 
compared favorably to the rating category median of 1.57x.  The 2010 bond 
issuance more than doubled the system's debt, increasing debt to FADS to 9.9x at
fiscal year end 2011.

Unaudited fiscal 2012 operating results outperformed budget, due primarily to 
the electric fund exceeding revenue projections after a hot, dry summer.  
However, even with strong operating performance, DSC is expected to decrease to 
approximately 1.35x.  The increased debt levels continue to have a measurable 
impact on coverage and leverage ratios, while requiring continued increases to 
already above-average water and wastewater user rates.  The maintenance of sound
financial metrics, despite the increased leverage position, supported by timely 
implementation of rate increases, will be important measures of the system's 
credit strength over the next several years.


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

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