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Fitch Rates Boerne, TX's 2010 Utility Sys Revs 'A'; Downgrades Outstanding

NEW YORK, Nov 12, 2010 (BUSINESS WIRE) -- Fitch Ratings assigns an 'A' rating to the following City of Boerne, Texas combined utility system (the system) bonds: --$30 million utility system revenue bonds, series 2010.

The series 2010 bonds are expected to price via negotiation on Nov. 15, 2010.

Proceeds of the bonds will be used primarily to fund the construction of a new wastewater treatment facility, among other additions, renovations, and improvements to the existing utility system. The bonds are scheduled to mature serially from March 1, 2011 to March 1, 2040.

In addition, Fitch downgrades the system's outstanding ratings as follows: --$17.9 million utility system revenue bonds to 'A' from 'A+'.

The Rating Outlook is Stable.

RATING RATIONALE: --The rating downgrade to 'A' from 'A+' reflects a deterioration of the system's financial metrics following a significant increase in leverage with the issuance of the series 2010 bonds.

--Fiscal 2009 debt service coverage of 2.85 times (x) exceeded the 'A+' rating category median of 2.52x; however, financial projections suggest coverage of nearer 1.5x annually after a more than doubling of debt with the current issuance.

--Liquidity levels are adequate, registering 143 days cash on hand versus the 'A' rating category median of 102 days, but the increase in leverage will push debt to funds available for debt service to 12.6x. The 'A' rating category median is 7.9x.

--Area economic indicators are strong, helping to mitigate the currently above-average water and wastewater rates that will be increased further to support debt service on the new bonds.

--The system's small but growing electric distribution system benefits from a competitively priced, long-term take-and-pay contract with the Lower Colorado River Authority (LCRA, rated 'A+' by Fitch) that terminates in 2016; the relatively low-risk system provides two-thirds of operating revenues and half of funds available for debt service.

KEY RATING DRIVERS: --The timely implementation of rate increases to maintain financial metrics in line with the 'A' rating category medians.

--The successful management of future growth-related needs while preserving the system's financial stability.

--The timely implementation of a new power supply contract to replace the expiring contract with LCRA.

SECURITY: The series 2010 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 systems.

Revenues from the utility's modest gas distribution system are not pledged to bondholders. However, the revenues are part of the city's enterprise fund and, in practice, support approximately $2.4 million of the series 2006 utility bonds.

CREDIT SUMMARY: The utility's financial metrics have been strong. However, growth-related capital needs primarily for the water and wastewater systems require additional debt financing that will increase system leverage and weaken debt service coverage to levels more consistent with 'A' rated systems. The maintenance of sound financial metrics, despite an increased leverage position, and the timely implementation of planned rate increases will be important measures of the system's credit strength over the next several years. Officials have been increasing the system's rates in anticipation of the current offering; water and wastewater rates are currently above average at about $108 per month.

Coverage of debt service and cash on hand averaged 2.89x and 135 days, respectively, over the past five years. Fiscal 2009 results were similarly strong, registering 2.85x and 143 days, or comfortably above the 'A+' rating category medians of 2.52x and 103 days. Fiscal 2010 unaudited results suggest similarly strong figures. However, five-year financial projections show coverage of nearer 1.5x annually after a more than doubling of debt with the current issuance. The fiscal 2009 'A' rating category median for debt service coverage was 1.21x.

Boerne (general obligation bonds rated 'AA-' with a Positive 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 systems secure the city's utility bonds.

However, these three systems represent about 90% of the combined enterprise fund. The electric distribution system, the largest of the combined utility, serves 4,727 customers, while supplying two-thirds of operating revenues and about half of funds available for debt service. The system's long-term, take-and-pay contract with LCRA expires in June 2016, and officials must notify LCRA of their plans for renewing or replacing the contract by June 2011.

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 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.

PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

SOURCE: Fitch Ratings CONTACT: Fitch, Inc. Primary Analyst Ryan A. Greene, Director +1-212-908-0593 One State Street Plaza New York, NY 10004 or Secondary Analyst Eric Espino, Director +1-212-908-0574 or Committee Chairperson Jeff Schaub, Managing Director +1-212-908-0680 or Media Relations Cindy Stoller +1 212 908 0526 cindy.stoller@fitchratings.com Copyright Business Wire 2010 -0- KEYWORD: United States

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New York

Texas INDUSTRY KEYWORD: Professional Services

Finance SUBJECT CODE: Bond/Stock Rating