October 21, 2008

Fitch Affirms Kerrville Public Utility Board, Texas’ Electric Revs at ‘A+’

Fitch Ratings has affirmed the 'A+' rating for the Kerrville Utility Board, TX's (KPUB) $13 million in outstanding electric revenue bonds. The Rating Outlook is Stable.

The 'A+' rating reflects KPUB's stable and competitively priced wholesale power supply provided by the regional supplier - the Lower Colorado River Authority (LCRA; rated 'A+' with a Stable Outlook by Fitch), a retail electric rate structure that includes a cost recovery mechanism adjusted monthly to recover variable natural gas prices, customer diversity and moderate load growth, strong debt service coverage and manageable capital needs with no additional debt anticipated.

The key credit driver in the next few years will be KPUB's decision regarding its long-term power supply. The majority of KPUB's power supply is provided by a partial requirements LCRA contract (around 67%) that expires in 2016. The LCRA contract requires KPUB to notify LCRA of its intent to continue with the contract by 2011. LCRA has been in negotiations regarding contract extensions since 2004 with its customers, including KPUB. KPUB has not notified LCRA of its intent and is exploring other options for long-term power supply. The decision regarding future power supply may impact resource diversity, exposure to fuel volatility, cost competitiveness, and could create contract renewal risk depending on the length of any contracts. While KPUB has experience buying a portion of its energy from counterparties other than LCRA, the decision not to extend its LCRA contract would be a significant shift in its operations to move the majority of its supply elsewhere after 2016.

KPUB's financial position is strong with 2.5 times (x) debt service coverage in fiscal 2007 (year end Sept. 30), or 2.0x after the transfer to the general fund. Based on unaudited numbers, performance in fiscal 2008 was similar to fiscal 2007. KPUB typically spends around $2 million annually on capital projects from funds generated from ongoing revenues. The overall debt levels of KPUB are low, as is typical for a distribution utility. No additional debt is anticipated at this time, although that could change depending on decisions made regarding future power supply.

KPUB's rate structure provides balance between revenues and expenditures with the use of a monthly power cost adjustment mechanism. This allows for the timely recovery of real-time natural gas costs or the cost of purchased power contracts. Natural gas price volatility has been significant in the past few years, which has impacted KPUB's ratepayers but not had a meaningful impact to the utility's financial position.

Kerrivlle is located in central Texas, west of San Antonio near Interstate-10. KPUB serves 21,162 customers in the city of Kerrville and the surrounding area. Load growth has averaged a moderate 2% over the past five years and the customer base is well diversified among residential and small commercial users. There is no concentration in the customer base. The largest ten customers account for only 7.4% of revenues in fiscal 2008.

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.