News Column

Fitch Affirms Granbury (TX) Utility Revenue Bonds at 'A+'; Outlook Stable

February 3, 2014

Fitch Ratings has affirmed the 'A+' rating for the following bonds issued by Granbury, TX : -- $245,000 senior utility system revenue improvement and refunding bonds, series 2003. The Rating Outlook is Stable. The city has $16.5 million in outstanding debt that is not rated by Fitch. SECURITY The bonds are secured by and payable from a pledge of the net revenues derived from the combined water, sewer, and electric utility system. KEY RATING DRIVERS SMALL COMBINED UTILITY SYSTEM : The Granbury Utility System (the utility) provides electric distribution, water distribution and wastewater collection and treatment services to the city of Granbury, TX and limited surrounding areas. Total utility connections for all three enterprises equaled a relatively small 11,510. RATES RESTRUCTURED IN 2013: The utility restructured its electric, water, and wastewater rates in July 2013 . The changes better align costs and revenues by operation, reducing the utility's reliance on electricity sales to subsidize other business activities. IMPROVED FINANCIAL PROFILE: Financial metrics improved as expected due to the utility's previously implemented rate increases and the recent rate restructuring. Average debt service coverage increased to approximately 2.0 times (x) since fiscal 2011 and days cash on hand rose to 65 days in fiscal 2013 (draft audit) from 37 days in fiscal 2011. POWER SUPPLY UNCERTAINTY: The utility's power supply needs are currently met through an all-requirements contract with Bryan Texas Utilities (BTU) that extends through Dec. 31, 2017 . Management is evaluating options post-expiration of the contract but has not yet secured a subsequent power supply. EXPANDING WATER BUSINESS: The city's ownership rights to 10,800 acre feet in Lake Granbury and access to groundwater wells provide it with an inexpensive water supply for both internal consumption and off system sales. Management plans on building a surface water treatment plant with expected operations beginning in 2017 as part of their strategy to become a regional wholesale water provider in a water scarce area of Texas . SOUND LOCAL ECONOMY: The city of Granbury has a small but quickly growing population and acts as a bedroom community of Fort Worth and as a growing business and retail center for Hood County . Residential and commercial development within the city and nearby areas appears to be picking up, and overall economic indicators for the county are sound. RATING SENSITIVITIES POWER SUPPLY MANAGEMENT: Changes to the system's power supply strategy that materially change its risk profile as a distribution- only electric provider could potentially pressure the rating. POTENTIAL FINANCIAL PRESSURE: The city's planned $15 million investment to develop treated water for sale regionally is expected to be credit neutral or possibly positive. However, if declines in financial margins or rate pressure on existing customers result from the business expansion, it would be viewed negatively. CREDIT PROFILE IMPROVED FINANCIAL PROFILE The utility's financial performance and overall financial position improved markedly over the past three years. Cost recovery was improved following a series of rate increases that were phased in to match the sharp 32 percent increase in power purchase costs following the 2008 renegotiation of the all-requirements power supply contract. More recently, the restructuring of rates for all three of the utilities operations have better aligned costs and revenues among the enterprise operations. Fitch-calculated debt service coverage, which was just over 1.0x in fiscal 2010, has subsequently improved to an average of 2.0x over the past three years, including fiscal 2013 (draft audit). Likewise, the utility's liquidity position was very low at 6 days cash on hand at the end of fiscal 2010, but has incrementally increased to 65 days at the end of fiscal 2013. Management's financial projections through fiscal 2018 show debt service coverage declining modestly but staying at sound levels above 1.5x. However, projections do not include the planned $15 million in additional debt associated with the water treatment plant construction. WATER SUPPLY INVESTMENT PLANNED TO DEVELOP REGIONAL BUSINESS The utility continues to wind down its costly ownership interest in the Brazos River Authority Lake Granbury Surface Water and Treatment System and increase its use of less expensive groundwater to meet its own customer demand. Management plans to build a surface water treatment plant, with the first phase expected to be built operations in 2017, to take advantage of the city's ample water rights in Lake Granbury that currently exceed the city's own demand. The first phase is contemplated as a 2.5 mgd facility with an estimated cost of $15 million . Fitch views this project as credit neutral at this point, given the lack of a firm construction timeline and water sales agreements. However, Fitch expects that financing will not proceed until wholesale customers are identified. It is expected that Granbury's retail customers will not bear the cost of the wholesale project and that overall financial margins will be at or above current levels. Debt levels for the utility are expected to nearly double with the planned issuance of $15 million to finance the construction of the water treatment plant. POWER SUPPLY UNCERTAINTY Power is purchased under an all-requirements contract from BTU (rated 'A+' by Fitch). Power has been purchased by BTU since 1997. The contract is above market prices currently but provides the utility with predictable and stable costs that are reflected in Granbury's retail rates. Management has not made a determination regarding its power supply source after the expiration of the contract in December 2017 . Fitch views the system's decision regarding future power supply as a key credit driver, as a change from a distribution only utility to one with greater power supply responsibilities could result in a shift of the utility's operational profile, adding to credit risk. Additional information is available at ' '. This rating action was informed by information identified in Fitch's U.S. Public Power Rating Criteria and Revenue-Supported Rating Criteria. Applicable Criteria and Related Research : --'U.S. Public Power Rating Criteria' ( Dec. 18 , 2012); --'U.S. Water and Sewer Revenue Bond Rating Criteria' ( Aug. 3 , 2013); --'Revenue-Supported Rating Criteria' ( June 12 , 2012). Applicable Criteria and Related Research : U.S. Public Power Rating Criteria report_frame.cfm?rpt_id=696027 U.S. Water and Sewer Revenue Bond Rating Criteria report_frame.cfm?rpt_id=715275 Revenue-Supported Rating Criteria report_frame.cfm?rpt_id=709499 Additional Disclosure Solicitation Status solicitation?pr_id=818130 ((Comments on this story may be sent to ))

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