NEW YORK--(BUSINESS WIRE)--Fitch Ratings takes the following rating action on the city of Georgetown, Texas' utility system revenue bonds:
--$485,000 utility system revenue refunding bonds, taxable series 1998B, affirmed at 'AA-'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The financial performance of Georgetown's combined electric, waterworks, and sewer funds has been consistently strong; debt service coverage and days cash on hand (DCOH) have averaged 3.6 times (x) and 123 days, respectively, over the past three fiscal years versus Fitch's 'AA-' rating category medians of 2.9x and 113 days.
--Low debt levels reflect the use of cash flow to pay for the utilities' ongoing capital needs; debt to funds available for debt service equaled 2.7x in fiscal 2009 versus the rating category median of 4.8x.
--The city does not intend to renew its full requirements power supply contract with the Lower Colorado River Authority (LCRA, revenue bonds rated 'A+' by Fitch); however, in the first quarter of 2011 management intends to bring clarity to the city's post-June 2016 power supply by finalizing contracts with multiple suppliers.
--A newly established $5 million rate stabilization fund will help smooth any increases in electric rates for the duration of the LCRA contract.
--Revenue concentration in the largest customers is partially mitigated by the stability of industries represented and the breadth of the net revenue pledge, which includes the three utility funds.
--Existing capacity at the water and wastewater treatment plants appears adequate for at least the duration of the city's five-year capital plan, despite the rapid growth of the service area.
--Service area economic indicators are strong, with income levels and unemployment rates better than state and national averages.
--The city is somewhat unusual in having a dual-certified portion of its electric service territory; however, most new electric customers in the territory become customers of the city due, in part, to the city's competitive rates.
KEY RATING DRIVER:
--Agreeing to contract terms with the city's new power suppliers and planning for the risks associated with the new supply terms while maintaining strong financial metrics.
SECURITY:
The bonds are secured by a first lien on net revenues of the combined funds, after payment of operations and maintenance costs.
CREDIT SUMMARY:
The city is a full requirements customer of LCRA, but the city does not intend to renew its power supply contract past the December 2016 expiration. Instead, the city will pursue a strategy of procuring take-and-pay contracts from several suppliers for terms that range from 5-12 years with multi-year renewal options. The city is not planning to own generation resources. As such, Fitch does expect a material change in the utility's operating profile. However, a key credit consideration over the longer term will be how the city transitions from using a single supplier to managing multiple suppliers and fuels sources, while maintaining an affordable cost of power and currently strong financial metrics.
The combined funds' financial performance has been stable and strong. Fiscal 2010 coverage of debt service equaled 3.6x (unaudited), which equals the funds' three-year average and comfortably exceeded Fitch's 'AA-' rating category median of 2.9x (fiscal 2009). Liquidity levels of 138 DCOH and equity to capitalization of 75% evidence similarly strong metrics. Debt levels are low, as the city has pursued a strategy of funding numerous capital needs from pay-go capital, and officials have limited plans for issuing additional debt. The city's distribution electric system provides approximately 70% of the combined funds' total operating revenues.
The city credits, in part, its competitive rates for attracting 98% of new electric customers in a dual-certified area of its electric service territory. Residential rates include a $6 monthly fee and an energy charge equal to $0.1046 per kilowatt hour. In fiscal 2011, low fuel costs enabled the city to suspend its power cost adjustment for the year. In addition, the city established a $5 million rate stabilization fund to smooth any rate increases during the remaining period of the LCRA contract.
Georgetown is located in central Texas approximately 30 miles north of Austin along Interstate 35. The city provides electric, waterworks, and sewer services in an area exhibiting strong per capita income levels equal to 123% of the state level and a relatively low unemployment rate of 7.1% in November 2010. Despite a near doubling of the population since 2000 to 50,891, remaining capacity at the city's three water treatment plants (58%) and five wastewater treatment plants (49%) is reportedly adequate through at least the city's five-year capital planning period; the city has two surface water supply agreements through 2040 and 2050 and 12 subsurface wells. Above-average concentration among the city's largest customers is a credit concern, but the stable presence of governments, the local school district, a healthcare system, and a university among them partially mitigate this risk.
Additional information is available at www.fitchratings.com.
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:
--'Revenue-Supported Rating Criteria', Oct. 8, 2010;
--'Public Power Rating Guidelines', June 11, 2009.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
Public Power Rating Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=447150
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