OREANDA-NEWS. Fitch Ratings assigns an 'AA-' rating to the following Austin, TX (the city) revenue bonds:

--Approximately \$355 million electric utility system revenue refunding bonds, series 2015A;
--Approximately \$77.4 million electric utility system revenue refunding bonds, taxable series 2015B.

The bonds are scheduled to price via negotiation on April 28. The series 2015A bonds will be used to retire outstanding tax-exempt commercial paper (CP) notes and refund portions of outstanding parity bonds (series 2006, 2008A, 2010A and 2012A) for interest savings and pay the costs of issuance. The taxable series 2015B bonds will be used to retire outstanding taxable CP notes, refund outstanding parity bonds (series 2006A) for interest savings and pay issuance costs.

In addition, Fitch affirms the following ratings:

--\$1.1 billion million electric utility system revenue bonds at 'AA-';
--\$30.5 million combined utility systems (prior first lien) revenue bonds at 'AA';
--\$148.1 million combined utility systems (prior subordinate lien) revenue bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY

Outstanding electric system revenue bonds are secured by net revenues of Austin Energy (AE), after provision for the prior first lien obligations of the combined utility systems. The electric revenue bonds are on parity with the prior subordinate lien obligations of the combined utility systems.

The prior first- and prior subordinate-lien obligations are secured by a joint and several pledge of net revenues of the combined utility systems, consisting of AE and Austin Water Utility (AWU, water and wastewater revenue bonds rated 'AA-'/Outlook Negative). The issuance of additional bonds secured by a joint and several pledge of net revenues of AE and AWU is no longer permitted by the master bond ordinance, making both liens effectively closed. A default on the prior subordinate lien obligations and water and wastewater bonds would not trigger a default on the prior first lien bonds.

KEY RATING DRIVERS

LARGE REGIONAL UTILITY: AE operates as a large vertically integrated utility system providing retail electric service to a rapidly growing service area that includes the state capital and portions of Travis and Williamson Counties.

STRONG SERVICE TERRITORY: AE benefits from a deep and diverse economy, exceptionally low unemployment, above-average wealth levels and a diversified customer base.

SOUND FINANCIAL PERFORMANCE: As expected, operating margins rebounded to a more solid level in fiscals 2013 and 2014 following the implementation of a base rate increase. Fitch-calculated debt service coverage (DSC) improved to about 2.3x, while liquidity increased to 90 days cash on hand. Liquidity and cash flow metrics remain somewhat low relative to rating category medians, but additional improvement is expected based on AE's multiyear financial forecast.

LIMITED RATE FLEXIBILITY: AE's competitive electric rates provide flexibility to raise additional revenues if needed. However, the utility's rates, including its power supply adjustment charge, are subject to a city council-imposed affordability threshold that limits rate adjustments to no more than 2% per annum, which could ultimately impede financial performance.

AGGRESSIVE CARBON REDUCTION STRATEGY: AE maintains a competitively priced and diverse generation and resource portfolio sufficient to meet the needs of its growing service area. The recent adoption of an updated resource and generation plan (the plan) further accelerates AE's already aggressive strategy of reducing carbon emissions, although implementation of the plan will be subject to the city's ability to keep rate increases below its 2% threshold.

MANAGEABLE DEBT PROFILE: The utility's debt burden and equity position compare well to median ratios for the rating category and current capital needs appear manageable. Fitch believes leverage ratios would weaken but remain fairly consistent with the current rating should tentative plans to finance and construct a 500 MW combined cycle gas turbine move forward.

HIGHER RATING ON PRIOR LIEN DEBT: The 'AA' rating on the prior first-lien bonds reflects the closed nature of the lien, the very modest portion of the bonds that make up AE's and AWU's overall debt profile, and the strong DSC provided by the pledge of the combined utilities. Coverage of prior first-lien obligations should continue to strengthen given the decreasing annual debt service requirements.

RATING SENSITIVITIES

IMPLEMENTATION OF RESOURCE PLAN: Execution of AE's resource and generation plan absent rate increases needed to generate financial metrics consistent with the current rating would exert downward pressure on the rating and/or Outlook.

CREDIT PROFILE
AE ranks among the 10 largest municipally owned electric utilities in the U.S., providing retail electric service to an already large service territory that continues to grow at a rapid pace. The city of Austin makes up roughly half of the utility's defined geographical service territory, while sizeable portions of Travis and Williamson Counties make up the balance.

Residential electric sales and related revenues are sufficiently diverse, accounting for about 34% and 39%, respectively, of AE's total sales and income in fiscal 2014. Moreover, approximately 90% of customer accounts are residential and just one-fifth of total retail revenue is attributable to the 15 largest customers.

PROPOSED CHANGE IN POWER SUPPLY STRATEGY
AE's power supply portfolio is well diversified, consisting primarily of two jointly owned coal-fired units, an ownership interest in nuclear capacity, owned natural gas/oil units, and renewable projects derived from long-term purchased power contracts. Available resources currently total 3,471 MW, well in excess of the fiscal 2014 peak demand of 2,578 MW.

Austin's city council recently adopted modifications to a resource and generation plan that was previously put forth by a planning task force and approved by the city council in August 2014. The primary goals of the plan include closing AE's natural gas-fired Decker Creek Power Plant units (735 MW) by 2018, constructing a 500 MW highly efficient combined cycle plant, and retiring ownership interests in the coal-fired Fayette Power Project Units (570 MW) by 2023. Fitch notes the latter two initiatives would require additional debt financing and the retirement of outstanding debt obligations, which could prove challenging.

The plan, which also incorporates an aggressive increase in the city's current renewable energy goal to 55% in 2025, requires the implementation of each of the objectives be contingent upon the affordability of the initiatives given a city council-imposed limitation on annual rate increases of no more than 2% annually. To determine the costs of the various initiatives, an independent feasibility study will be required before major contracts are awarded and debt is issued. Fitch will continue to monitor the plan's impact, if any, on AE's credit quality as each of the various initiatives are considered and pursued.

MODEST IMPROVEMENT IN FINANCIAL METRICS EXPECTED
Audited financial results for fiscal 2014 were in line with prior expectations. Both debt service coverage and coverage of full obligations improved for the second consecutive year, growing to 2.3x and 1.5x, respectively. Unrestricted cash grew by more than \$32 million, increasing the number of days cash on hand slightly to about 90 days. Leverage ratios exhibited very little change, if any. AE's positive fiscal 2014 results were largely the result of a 2.2% increase in aggregate energy sales.

Financial projections through fiscal 2019 show debt service coverage in excess of 2.0x while liquidity steadily grows to about 170 days in the outer years. The forecast assumes modest rate increases in fiscals 2018 and 2020 and annual growth in energy sales of about 1.5% driven by continued growth in the service area. Fitch notes that proposed changes in AE's generation and resource plan are also reflected in the current financial projections.

COMPETITIVE RATES
AE's residential electric rates compare well to other large Texas utilities but are slightly higher relative to the January 2015 statewide average of 11.5 cents/kWh. Rates are approved by city council and are not subject to any additional outside oversight. AE's last approved rate adjustment occurred in June 2012 when a modest 7% rate increase was put into place. While the utility's competitive rates provide some flexibility, the city's historical general reluctance to raise rates poses some concern, particularly as the city considers adding costlier renewable resources to its resource portfolio.

MANAGEABLE DEBT BURDEN
AE's five-year capital program includes an estimated \$1.2 billion in planned investments. The majority of the capital program will be financed with additional debt, with excess cash flow making up the balance of expected funding sources. Fitch notes the current capital plan does not reflect the potential construction of the 500 MW combined cycle plant, which could represent a sizeable increase in planned spending.

AE's debt levels are in line with rating category medians. Debt to funds available for debt service (FADS) has remained comfortably below Fitch's median of 5.0x over the prior five years and equity to capitalization has exhibited little deviation, staying at or close to 54%.

STRONG SERVICE TERRITORY
Austin's economy continues to outperform that of many other large metro areas in the U.S. The city serves as the state capital and is home to seven colleges and universities, including the University of Texas (revenue bonds rated 'AAA'/Outlook Stable), one of the largest public universities in the country. The presence of the state government and numerous higher education institutions anchors the city's economy and has buffered the city historically from economic downturns.

The city's 2014 population, estimated at roughly 878,000, has grown more than 25% since 2000. Wealth indicators for the area are comparatively high and the city's February 2015 unemployment rate of 3.0% is exceptionally low relative to state and national averages. Accordingly, customer delinquencies are minimal and revenue collection is typically near the industry average, notwithstanding fiscals 2013 and 2014 when a new billing system was implemented and a temporary lag occurred.