City of Austin Performance Report 2014-15
Credit Rating for Separate-Lien Electric Utility System Revenue Bonds
Austin Energy (AE) bonds are rated for credit quality by credit rating agencies for the separate-lien electric utility system revenue bonds. A bond rating is a “grade” assigned by private independent rating services (Moody’s, Standard & Poor’s, and Fitch) that indicates the bonds' credit quality.
The ratings are the result of evaluations done by the rating agencies that measure an entity’s ability to repay principal and interest on debt issued. The performance of the local economy, strength of financial and administrative management, and various debt ratios are all considered when assigning a rating to an entity. The rating indicating the highest credit-quality investment grade bonds is “AAA”, and the lowest grade is “C”, also known as “junk.” Investors utilize these ratings when deciding whether to purchase AE’s bonds issued by the City of Austin. The higher the bond rating, the lower the risk is to the investor, which results in a lower cost of borrowing for AE.
This rating is directly assigned by the bond ratings agencies.
FY 2014-15 Results
Austin Energy met with three private independent rating services, Moody’s, Standard & Poor’s, and Fitch, in the spring of FY 2014-15 to sell bonds in the financial market and received confirmation of their current ratings from all three agencies with a stable outlook from each. The table above is based upon Standard & Poor’s rating.
Assessment of Results
Austin Energy is pleased with the ratings assigned by each of the three rating services. In the analysis for the rating from Standard & Poor’s, they noted positives for the utility as having a diversified generation resource mix of coal, gas, and efficient nuclear. Other positives included:
- Competitive rate and a rate structure that also includes a separate cost-recovery component that allows the system to true-up for fuel costs or purchased-power costs;
- Strong liquidity, including designated cash reserves that the city codified through a comprehensive risk-management plan; and
- Service area that is not concentrated in revenues from its principal customers and continues to exhibit steady customer growth and very solid overall income levels. In addition, the Austin metropolitan statistical area (MSA) continues to exhibit strong growth and stability.
Austin Energy will continue to work on strengthening its financial position. With the ability to adjust rates for pass-through charges such as the Power Supply Adjustment, Regulatory Charges and the Community Benefit Charge, Austin Energy has the mechanisms in place to recover increasing costs.
With Austin Energy’s goal to limit rates to no more than a 2% increase per year, AE will continue to strive for cost effectiveness in order to keep rates within the 2% parameter while continuing to improve the financial position of the utility, increase cash reserve levels, and continue to meet debt to equity ratios that are favorable to the ratings agencies. Austin Energy does not anticipate a bond sale in FY 2015-16, but a cost of service study will be conducted in order to make sure that customer rates are set properly and Austin Energy’s revenue recovery is sufficient to keep the utility’s financial position sound.
For more information, contact Mark Dombroski, Sr. Vice President, Finance and Corporate Services, at (512) 322-6148.