Fitch Affirms Granbury, Texas' Utility System Revs at 'A'; Outlook Negative
Source: Business Wire
The Negative Outlook reflects Granbury's failure to meet required debt service coverage covenants in fiscal year 2008. Coverage of senior debt service coverage is required to be 1.25 times (x) net revenues and coverage of the senior and subordinate debt obligations is required to be 1.0x net revenues. In fiscal year 2008 coverage of the senior debt and combined senior and subordinate debt was 0.97x and 0.78x, respectively.
While the city of Granbury's certificates of obligation (CO) are direct obligations of the city, a portion of the bonds are supported by the utility system revenues. Fitch considers the utility's portion of the debt in its analysis of the utility's debt profile. Based on Fitch's calculations, coverage of the utility's full debt service obligations was 0.54x in 2008. The utility's failure to abide by the debt service covenant resulted in a material notice filing May 5, 2009. The rate increase in September 2008 combined with an expected rate increase this summer should be sufficient to correct the technical default.
The 'A' rating reflects the utility's history of adequate debt service coverage as well as a stable long-term power supply contract with Bryan Texas Utilities (BTU; electric revenue bonds rated 'A+', Stable Outlook by Fitch). In addition, Fitch believes that the utility has sufficient liquidity despite the drawdown in 2008 to make debt service payments. While the utility's cash position declined to 96 days operating expenses from 223 days in 2007, Fitch believes that the utility's unreserved cash and investments are still able to support its 'A' rating. Favorably, management has demonstrated the willingness and ability to raise rates to align revenues with expenditures (including debt service requirements).
Looking forward, Fitch will monitor the following:
--Fiscal year 2009 debt service coverage, which Fitch expects to be sufficient to cover full debt service obligations, otherwise Fitch could take Negative Rating action;
--Expected rate increases this summer, which should restore historically strong financial margins;
--Ability to obtain wholesale supply contracts that match increased treatment capacity at Lake Granbury.
Fitch notes that the water system has a long-term interest in 10,800 acre feet in Lake Granbury and was recently designated a primary water supplier for the region by the Texas Water Development Board (TWDB). While the system currently does not have treatment capacity for all 10,800 acre feet, the utility plans to build reverse osmosis treatment plants sufficient to treat and distribute that water to their customers as well as on a wholesale basis. Although the project will probably be completed in several stages, the ultimate cost is projected to be $12.5 million, of which 100% has been approved for TWDB financing. Should the project materialize, the off-system sales have the potential to generate strong revenues and alter the utility's revenue composition in favor of the water system.
Granbury's combined utility systems provide electric, water, and sewer service to the City of Granbury. Operating revenues for fiscal 2008 totaled $14.5 million, comprising 60% electric, 25% water, and 13% wastewater revenues. The electric system's small customer base is approximately 3,000, which is primarily residential; however, actual energy usage is mostly commercial (65%) due the city's growing commercial and retail base.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.
Contact:
Fitch Ratings
Drake Richey, 212-908-0325
Yvette Dennis, 212-908-0668
Cindy Stoller, 212-908-0526 (Media Relations, New York)
cindy.stoller@fitchratings.com
