DALLAS — Austin risks a downgrade on its electric utility bonds if it fails to raise rates high enough, its financial advisor told the City Council last week.
Bill Newman, managing director of PFM Asset Management in Austin, told the council that the city’s failure to raise rates since 1994 would be a factor if rating agencies downgrade the utility debt.
“I would say we anticipate a change in the 'current status’ of the rating because of the last two years of coverage and fund balance decreases,” Newman told The Bond Buyer via e-mail. “The 'size’ and timing of the rate increase is another matter and it may have been delayed too long.”
The combined electric and water utilities of the city are rated AA by Standard & Poor’s and AA-minus by Fitch Ratings. The agencies maintain stable outlooks on the utility’s senior debt.
In January, Standard & Poor’s rated a separate-lien bond issue A-plus with a positive outlook, based in part on Austin’s proposed rate increase of 12.5% over two years.
“If coverage levels improve while what we view as strong liquidity is maintained and accommodating the system’s capital plan, we could raise the rating to AA-minus,” analysts wrote. “We could revise the outlook to stable if the system does not make progress on increasing financial margins, whether through revenue shortfalls or rising expenditures.”
The separate-lien bonds’ provisions will go into effect after all the combined lien debt has been retired, analysts wrote. The separate lien will not require a debt service reserve fund, as long as Austin Energy maintains at least 1.5 times annual debt service coverage.
The city’s general obligation debt is rated triple-A.
Austin automatically passes through increases in fuel costs to customers but has not increased the basic rate in nearly 18 years. The city has also diverted revenue from the electric utility for other purposes.
Other utilities make small rate increases every few of years to avoid confronting public opposition to a major increase after more than a decade, Newman said.
Newman recommended “an immediate and adequate” rate hike to reduce chances of a downgrade, which he said could cost $27 million for every $100 million of bonds issued over 30 years.
One proposal before the council calls for raising the average home’s rate 13% this year, and 7% in 2014. In February, the utility proposed an 8.7% increase this year and a 3.8% increase in 2015. That would provide an overall 12.5% increase. The two-step approach would be achieved by deferring until 2015 revenues needed to fully rebuild reserves.
The proposal would also cap transfers to the city’s general fund at $105 million.
The council is expected to decide on the size of the rate increase by June 7.
Council member Mike Martinez said the credit rating should be only one of several factors in deciding how much to raise rates. He said a downgrade might be preferable to the shock of a major rate increase.
