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Fitch Rates New Braunfels (TX), Utility System Rev Bonds, Series 2012 'AA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'AA' rating to the $26.2 million utility system revenue and refunding bonds, series 2012 to be issued by the City of New Braunfels, TX on behalf of New Braunfels Utilities (NBU). The bonds are expected to price on Oct. 10, 2012.

Bond proceeds will refund a portion of the outstanding series 2002 and 2004 bonds for savings, fund system capital improvements and pay cost of issuance.

In addition, Fitch has affirmed the 'AA' rating on the city's $32.9 million of outstanding utility system revenue bonds.

The Rating Outlook on all bonds is Stable.

SECURITY

The bonds are secured by a first lien on and pledge of the net revenues of the combined utility system.

KEY RATING DRIVERS

STABLE OPERATING PERFORMANCE: NBU continues to exhibit stable operating performance as a combined utility system, which provides electric (80% of revenue), water (11%) and wastewater (9%) services to the City of New Braunfels and the surrounding area.

SOLID FINANCIAL METRICS: Strong operating cash flow, low leverage and good liquidity supports NBU's solid financial position. Debt service coverage (DSC) has consistently been above 3.0x reaching a high of 6.28x in fiscal 2011. Coverage of full obligations has also been strong, averaging 1.5x. Projections forecast DSC lessening in the medium term, due to increased debt service, but staying above 3.0x.

CHANGING POWER SUPPLY: The majority of NBU's power is supplied through an all requirements contract with the Lower Colorado River Authority (LCRA; rated 'A+' with a Stable Outlook by Fitch). The contract provides NBU with competitively priced power and volume protection in the event of significant load loss. However, the contract will terminate on June 25, 2016 and NBU will need to procure its power from alternate suppliers.

THRIVING SERVICE AREA: City population growth of 55% over the past eight years has added to the utility system's customer base, which is growing at an average of 2.4% per year. Economic indicators continue to be solid. Wealth levels are average, but the city outperforms both the state and the nation in regards to employment growth and low unemployment rates.

COMPETITIVE RATES: Electric rates compare favorably with regional electric systems. While NBU does not anticipate increasing rates, flexibility exists to absorb rate increases if needed. A monthly purchased power adjustment provides utility management with the authority to increase rates and recover variable costs in a timely and efficient manner.

LARGE CAPITAL PLAN: NBU's capital plan totals $182.9 million over the next five years, almost half of which will be debt funded. Increased debt service payments will lessen DSC in outer years, but coverage will still remain strong at above 3.0x. Debt to funds available for debt service (FADS) is projected to increase from a very low 1.4x to a still solid 3.0x.

WHAT COULD TRIGGER A RATING ACTION

LONG-TERM POWER SUPPLY MANAGEMENT: Changes in NBU's long-term power supply after termination of the LCRA contract are expected to alter the utility's risk profile and could ultimately pressure the rating. Fitch will continue to monitor the cost and credit impact of NBU's evolving power supply arrangements.

CREDIT PROFILE

The City of New Braunfels (the city) is located in Comal County and is situated between the cities of Austin and San Antonio, approximately 30 miles from each. The local economy is strong and has weathered the economic downturn very well.

GROWING SERVICE TERRITORY

NBU's service territory has seen substantial development over the previous decade, resulting in robust growth in power and water usage, and in NBU customer accounts. The utility's electric service area is 169 square miles and currently serves approximately 31,061 customers. The water service area is 80 square miles and serves approximately 25,588 customers, while the wastewater system serves 21,097 customers.

CHANGING POWER SUPPLY

The majority of NBU's power, approximately 96%, is supplied through an all requirements contract with LCRA that expires on Jun. 25, 2016. The remainder of NBU's supply is purchased from two small renewable generation facilities and third party sources. NBU will not renew its contract with LCRA; instead the utility intends to procure its power from alternate suppliers with a blend of different contract lengths and termination dates. Fitch views NBU's decision regarding future power supply as a key rating driver, in that it may impact resource diversity and related exposure to fuel volatility, collateral risk, cost competitiveness and load loss.

STRONG FINANCIAL POSITION

Financial performance has historically been strong, as illustrated by the combined utility system's Fitch-calculated DSC of 6.28x for fiscal 2011 (yearend July 31), versus 'AA' peer-median DSC of 2.09x. Projections indicate that DSC will decline somewhat in fiscal 2015 - 2017, when additional debt is issued to fund NBU's capital improvement plan, but will remain above 3.0x and in line with historical coverage. Liquidity is sufficient, although it has declined from a recent high of 134 days cash on hand at fiscal yearend 2008 to approximately 91 days cash on hand at fiscal yearend 2011.

MANAGEABLE DEBT PLANS

NBU's five-year capital improvement plan is estimated at $182.9 million, of which approximately half will be funded from debt. Leverage is currently very low as measured by debt/FADS (1.4x), given that the utility purchases its power and does not invest in generation projects. However, the capital plan will increase NBU's debt by almost three times and is projected to increase debt/FADS to 3.0x. Given NBU's strong operating results and growing service area, Fitch believes the utility can handle the increased debt service costs and higher debt levels.

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 and U.S. Public Power Rating Criteria, this action was 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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=665815

U.S. Public Power Peer Study -- June 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681449

U.S. Public Power Distribution Systems

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656525

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Fitch Ratings
Primary Analyst
Stacey Mawson, +1-212-908-0678
Associate Director
Fitch, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Ryan Greene, +1-212-908-0593
Director
or
Committee Chairperson
Dennis Pidherny, +1-212-908-0738
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908 0526 (New York)
elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings