HomeMy WebLinkAbout2017-007 Utility System Revenue Bond Sale 2017Date: January 20, 2017
INFORMAL STAFF REPORT
TO MAYOR AND CITY COUNCIL
SUBJECT:
City's sale of Utility System Revenue Bonds, Series 2017
BACKGROUND:
Report No. 2017-007
The purpose of this report is to provide the City Council with details regarding the sale of the
Utility System Revenue Bonds, Series 2017 (hereafter, the `Bonds") authorized on June 21, 2016
(Ordinance No. 2016-187). The Bonds were authorized for a maximum principal amount of
$265 million for the purpose of constructing the Denton Energy Center, a quick start peak power
generation facility. The Bonds are secured and payable only from revenues of the City's Utility
System, which is comprised by the Electric, Water and Wastewater Funds.
DISCUSSION:
On January 19, 2017, the City along with their financial advisor, First Southwest Company,
conducted a negotiated sale of the Bonds. The underwriting firms were: JP Morgan Securities
LLC, Citigroup Global Markets Inc., and Robert W. Baird & Co. Inc. The delivery date of
proceeds will be January 27, 2017. As approved by the City Council on June 21, 2016, the
Bonds were authorized to be issued provided they met the following parameters:
1. The maximum principal amount of bonds shall not exceed $265,000,000;
2. The final stated maturity shall not 20 years from the date of issuance;
3. The Bonds shall bear interest at a fixed rate, and the net effective interest rate on the
Bonds shall not exceed 4.000%;
4. The sale must occur on or prior to June 21, 2017;
5. The Bonds shall be rated by a Rating Agency for municipal securities in one of the four
highest categories for long-term obligations.
Staff is pleased to inform the Council that the above criteria were met. The amount of bond
proceeds was $247,157,116 at an all-in true interest cost of 3.53%. In addition, these bonds have
been rated as AA- by Standard and Poor's and A+ by Fitch. Staff would note that these ratings
are similar to ratings previously issued by Standard and Poor's of AA- and Moodys of Al for the
City's Utility System Revenue Bonds.
Date: January 20, 2017
Report No. 2017-007
As a reconciliation of amounts originally estimated and communicated to the Council on June
14, 2016, the table below reflects a side-by-side comparison to final sale proceeds:
Use Cate or Estimated Proceeds Actual Proceeds
Project Cost $240,000,000 $225,000,000
Capitalized Interest $ 23,000,000 $ 20,598,306
Issuance Costs $ 2,000,000 $ 1,558,810
Grand Total $265,000,000 $247,157,116
Attached are the final debt schedules and ratings reports. Please do not hesitate to contact me if
you have any further questions on the results of the City's most recent bond sale.
ATTACHMENTS:
l. Final Debt Schedule
2. Fitch Rating Report
3. Standard & Poor's Rating Report
STAFF CONTACT:
Chuck Springer, Director of Finance
(940)-349-8260
Charles. S�rin�er(a�lcityofdenton.com
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SOURCES AND USES OF FUNDS
City of Denton, Texas
$214,890,000 Utility System Revenue Bonds, Series 2017
(Electric Supported: $225 mm)
Tax-Exempt Rates As of 01/19/2017 (AA- / A1)
*** Amortized over 20 Years / Cap-I Until Dec. 31, 2018 / 10 Year Call ***
*** Final Numbers ***
Dated Date 01/27/2017
Delivery Date 01/27/2017
Sources:
Bond Proceeds:
Par Amount
Premium
Uses:
Project Fund Deposits:
Project Fund
Other Fund Deposits:
Capitalized Interest Fund
Delivery Date Expenses:
Cost of Issuance
Underwriter's Discount
Note: Final
214,890,000.00
32,267,116.00
247,157,116.00
225,000,000.00
20,598,305.56
565,992.47
992,817.97
1,558,810.44
247,157,116.00
Jan 19, 2017 1:27 pm Prepared by FirstSouthwest (aml) (Finance 7.017 DENTON:2017_ELC-2017_REV) Page 1
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BOND SUMMARY STATISTICS
City of Denton, Texas
$214,890,000 Utility System Revenue Bonds, Series 2017
(Electric Supported: $225 mm)
Tax-Exempt Rates As of 01/19/2017 (AA- / A1)
*** Amortized over 20 Years / Cap-I Until Dec. 31, 2018 / 10 Year Call ***
*** Final Numbers ***
Dated Date
Delivery Date
First Coupon
Last Maturity
Arbitrage Yield
True Interest Cost (TIC)
Net Interest Cost (NIC)
All-In TIC
Average Coupon
Average Life (years)
Weighted Average Maturity (years)
Duration of Issue (years)
Par Amount
Bond Proceeds
Totallnterest
Net Interest
Bond Years from Dated Date
Bond Years from Delivery Date
Total Debt Service
Maximum Annual Debt Service
Average Annual Debt Service
Underwriter's Fees (per $1000)
Average Takedown
OtherFee
Total Underwriter's Discount
Bid Price
Bond Component
Serial Bond
Par Value
+ Accrued Interest
+ premium (Discount)
- Underwriter's Discount
- Cost of Issuance Expense
- Other Amounts
Target Value
Target Date
Yield
Par
Value
214,890,000.00
214,890,000.00
os/v/zov
01/27/2017
06/01/2017
12/01/2036
2.996065%
3.503576%
3.831282%
3.527917%
4.980660%
12.662
12.641
9.627
214,890,000.00
247,157,116.00
135,522,638.89
104,248,340.86
2,720,977,666.67
2,720,977,666.67
350,412,638.89
18,077,750.00
17,657,971.72
3.864477
0.755645
4.620122
114.553631
Average Average PV of 1 bp
Price Coupon Life change
115.016 4.981% 12.662 177,080.95
12.662 177,080.95
TIC
214,890,000.00
32,267,116.00
-992,817.97
246,164,298.03
01/27/2017
3.503576%
All-In
TIC
214,890,000.00
32,267,116.00
-992,817.97
-565,992.47
245,598,305.56
01/27/2017
3.527917%
Arbitrage
Yield
214,890,000.00
32,267,116.00
247,157,116.00
01/27/2017
2.996065%
Jan 19, 2017 1:27 pm Prepared by FirstSouthwest (aml) (Finance 7.017 DENTON:2017_ELC-2017_REV) Page 2
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BOND SUMMARY STATISTICS
City of Denton, Texas
$214,890,000 Utility System Revenue Bonds, Series 2017
(Electric Supported: $225 mm)
Tax-Exempt Rates As of 01/19/2017 (AA- / A1)
*** Amortized over 20 Years / Cap-I Until Dec. 31, 2018 / 10 Year Call ***
*** Final Numbers ***
Note: Final
Jan 19, 2017 1:27 pm Prepared by FirstSouthwest (aml) (Finance 7.017 DENTON:2017_ELC-2017_REV) Page 3
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NET DEBT SERVICE
City of Denton, Texas
$214,890,000 Utility System Revenue Bonds, Series 2017
(Electric Supported: $225 mm)
Tax-Exempt Rates As of 01/19/2017 (AA- / A1)
*** Amortized over 20 Years / Cap-I Until Dec. 31, 2018 / 10 Year Call ***
*** Final Numbers ***
Period
Ending
09/30/2017
09/30/2018
09/30/2019
09/30/2020
09/30/2021
09/30/2022
09/30/2023
09/30/2024
09/30/2025
09/30/2026
09/30/2027
09/30/2028
09/30/2029
09/30/2030
09/30/2031
09/30/2032
09/30/2033
09/30/2034
09/30/2035
09/30/2036
09/30/2037
Note: Final
Principal
7,580,000
7,970,000
8,375,000
8,805,000
9,260,000
9,735,000
10,200,000
10,695,000
11,245,000
11,820,000
12,425,000
13,065,000
13,735,000
14,435,000
15,180,000
15,955,000
16,775,000
17,635,000
214,890,000
Coupon
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
** /
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
Interest
3,680,388.89
10,685,000.00
10,685,000.00
10,495,500.00
10,106,750.00
9,698,125.00
9,268,625.00
8,817,000.00
8,342,125.00
7,873,500.00
7,380,875.00
6,832,375.00
6,255,750.00
5,649,625.00
5,012,375.00
4,342,375.00
3,638,125.00
2,897,750.00
2,119,375.00
1,301,125.00
440,875.00
135,522,638.89
Total
Debt Service
3,680,388.89
10,685,000.00
10,685,000.00
18,075,500.00
18,076,750.00
18,073,125.00
18,073,625.00
18,077,000.00
18,077,125.00
18,073,500.00
18,075,875.00
18,077,375.00
18,075,750.00
18,074,625.00
18,077,375.00
18,077,375.00
18,073,125.00
18,077,750.00
18,074,375.00
18,076,125.00
18,075,875.00
350,412,638.89
Capitalized
Interest Fund
3,680,388.89
10,685,000.00
6,232,916.67
Net
Debt Service
4,452,083.33
18,075,500.00
18,076,750.00
18,073,125.00
18,073,625.00
18,077,000.00
18,077,125.00
18,073,500.00
18,075,875.00
18,077,375.00
18,075,750.00
18,074,625.00
18,077,375.00
18,077,375.00
18,073,125.00
18,077,750.00
18,074,375.00
18,076,125.00
18,075,875.00
20,598,305.56 329,814,333.33
Jan 19, 2017 1:27 pm Prepared by FirstSouthwest (aml) (Finance 7.017 DENTON:2017_ELC-2017_REV) Page 4
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NET DEBT SERVICE
City of Denton, Texas
$214,890,000 Utility System Revenue Bonds, Series 2017
(Electric Supported: $225 mm)
Tax-Exempt Rates As of 01/19/2017 (AA- / A1)
*** Amortized over 20 Years / Cap-I Until Dec. 31, 2018 / 10 Year Call ***
*** Final Numbers ***
Date Principal Coupon
06/01/2017
09/30/2017
12/01/2017
06/01/2018
09/30/2018
12/01/2018
06/01/2019
09/30/2019
12/01/2019 7,580,000 5.000%
06/01/2020
09/30/2020
sz/os/zozo �,9�0,00o s.000i
06/01/2021
09/30/2021
12/01/2021 8,375,000 5.000%
06/01/2022
09/30/2022
sz/os/zozz s,sos,000 s.000i
06/01/2023
09/30/2023
12/01/2023 9,260,000 5.000%
06/01/2024
09/30/2024
12/01/2024 9,735,000 5.000%
06/01/2025
09/30/2025
12/01/2025 10,200,000 ** %
06/01/2026
09/30/2026
12/01/2026 10,695,000 5.000%
06/01/2027
09/30/2027
sz/os/zoz� ss,zas,000 s.000i
06/01/2028
09/30/2028
sz/os/zozs ss,szo,000 s.000i
06/01/2029
09/30/2029
12/01/2029 12,425,000 5.000%
06/01/2030
09/30/2030
12/01/2030 13,065,000 5.000%
06/01/2031
09/30/2031
12/01/2031 13,735,000 5.000%
06/01/2032
09/30/2032
12/01/2032 14,435,000 5.000%
06/01/2033
09/30/2033
12/01/2033 15,180,000 5.000%
06/01/2034
09/30/2034
12/01/2034 15,955,000 5.000%
06/01/2035
Jan 19, 2017 1:27 pm Prepared by FirstSouthwest (aml)
Total Capitalized Net Annual
Interest Debt Service Interest Fund Debt Service Net D/S
3,680,388.89
5,342,500.00
5,342,500.00
5,342,500.00
5,342,500.00
5,342,500.00
5,153,000.00
5,153,000.00
4,953,750.00
4,953,750.00
4,744,375.00
4,744,375.00
4,524,250.00
4,524,250.00
4,292,750.00
4,292,750.00
4,049,375.00
4,049,375.00
3,824,125.00
3,824,125.00
3,556,750.00
3,556,750.00
3,275,625.00
3,275,625.00
2,980,125.00
2,980,125.00
2,669,500.00
2,669,500.00
2,342,875.00
2,342,875.00
1,999,500.00
1,999,500.00
1,638,625.00
1,638,625.00
1, 259,125.00
1, 259,125.00
860,250.00
3,680,388.89
5,342,500.00
5,342,500.00
5,342,500.00
5,342,500.00
12,922,500.00
5,153,000.00
13,123,000.00
4,953,750.00
13,328,750.00
4,744,375.00
13,549,375.00
4,524,250.00
13,784,250.00
4,292,750.00
14,027,750.00
4,049,375.00
14,249,375.00
3,824,125.00
14,519,125.00
3,556,750.00
14,801,750.00
3,275,625.00
15,095,625.00
2,980,125.00
15,405,125.00
2,669,500.00
15,734,500.00
2,342,875.00
16,077,875.00
1,999,500.00
16,434,500.00
1,638,625.00
16,818,625.00
1, 259,125.00
17,214,125.00
860,250.00
3,680,388.89
5,342,500.00
5,342,500.00
5,342,500.00
890,416.67 4,452,08333
4,452,08333
12,922,500.00
5,153,000.00
18,075,500.00
13,123,000.00
4,953,750.00
18,076,750.00
13,328,750.00
4,744,375.00
18,073,125.00
13,549,375.00
4,524,250.00
18,073,625.00
13,784,250.00
4,292,750.00
18,077,000.00
14,027,750.00
4,049,375.00
18,077,125.00
14,249,375.00
3,824,125.00
18,073,500.00
14,519,125.00
3,556,750.00
18,075,875.00
14,801,750.00
3,275,625.00
18,077,375.00
15,095,625.00
2,980,125.00
18,075,750.00
15,405,125.00
2,669,500.00
18,074,625.00
15,734,500.00
2,342,875.00
18,077,375.00
16,077,875.00
1,999,500.00
18,077,375.00
16,434,500.00
1,638,625.00
18,073,125.00
16,818,625.00
1, 259,125.00
18,077,750.00
17,214,125.00
860,250.00
(Finance 7.017 DENTON:2017_ELC-2017_REV) Page 5
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Date
09/30/2035
12/01/2035
06/01/2036
09/30/2036
12/01/2036
09/30/2037
NET DEBT SERVICE
City of Denton, Texas
$214,890,000 Utility System Revenue Bonds, Series 2017
(Electric Supported: $225 mm)
Tax-Exempt Rates As of 01/19/2017 (AA- / A1)
*** Amortized over 20 Years / Cap-I Until Dec. 31, 2018 / 10 Year Call ***
*** Final Numbers ***
Total Capitalized Net Annual
Principal Coupon Interest Debt Service Interest Fund Debt Service Net D/S
18,074,375.00
16,775,000 5.000% 860,250.00 17,635,250.00 17,635,250.00
440,875.00 440,875.00 440,875.00
18,076,125.00
17,635,000 5.000% 440,875.00 18,075,875.00 18,075,875.00
18,075,875.00
214,890,000 135,522,638.89 350,412,638.89 20,598,305.56 329,814,33333 329,814,33333
Note: Final
Jan 19, 2017 1:27 pm Prepared by FirstSouthwest (aml)
(Finance 7.017 DENTON:2017_ELC-2017_REV) Page 6
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AVERAGE TAKEDOWN
City of Denton, Texas
$214,890,000 Utility System Revenue Bonds, Series 2017
(Electric Supported: $225 mm)
Tax-Exempt Rates As of 01/19/2017 (AA- / A1)
*** Amortized over 20 Years / Cap-I Until Dec. 31, 2018 / 10 Year Call ***
*** Final Numbers ***
Dated Date 01/27/2017
Delivery Date 01/27/2017
Maturity
Bond Component Date
Serial Bond:
12/01/2019
12/01/2020
12/01/2021
12/01/2022
12/01/2023
12/01/2024
12/01/2025
12/01/2025
12/01/2026
12/01/2027
12/01/2028
12/01/2029
12/01/2030
12/01/2031
12/01/2032
12/01/2033
12/01/2034
12/01/2035
12/01/2036
Note: Final
Par
Amount
Takedown
$/Bond
Takedown
Amount
7,580,000
7,970,000
8,375,000
8,805,000
9,260,000
9,735,000
3,400,000
6,800,000
10,695,000
11,245,000
11,820,000
12,425,000
13,065,000
13,735,000
14,435,000
15,180,000
15,955,000
16,775,000
17,635,000
214,890,000
2.5000
2.5000
2.5000
2.5000
3.7500
3.7500
3.7500
3.7500
3.7500
3.7500
4.2500
4.2500
4.2500
4.2500
4.2500
4.2500
4.2500
4.2500
4.2500
3.8645
18,950.00
19,925.00
20,937.50
22,012.50
34,725.00
36,506.25
12,750.00
25,500.00
40,106.25
42,168.75
50,235.00
52,806.25
55,526.25
58,373.75
61,348.75
64,515.00
67,808.75
71,293.75
74,948.75
830,437.50
Jan 19, 2017 1:27 pm Prepared by FirstSouthwest (aml) (Finance 7.017 DENTON:2017_ELC-2017_REV) Page 9
Fir�t��waklww�st'�
�G�W'I�NHw NHfillYtip�"MW'�. �kll'�
UNDERWRITER'S DISCOUNT
City of Denton, Texas
$214,890,000 Utility System Revenue Bonds, Series 2017
(Electric Supported: $225 mm)
Tax-Exempt Rates As of 01/19/2017 (AA- / A1)
*** Amortized over 20 Years / Cap-I Until Dec. 31, 2018 / 10 Year Call ***
*** Final Numbers ***
Underwriter's Discount
$/i000
Amount
Average Takedown
Underwriters' Counsel
Management Fee
CUSIP
DALCOMP (Bookrunner & Wire Fees)
Day Loan
DTC
Note: Final
3.86448
0.40000
0.25000
0.00398
0.06930
0.02864
0.00372
4.62012
830,437.50
85,956.00
53,722.50
855.50
14,892.36
6,154.11
800.00
992,817.97
Jan 19, 2017 1:27 pm Prepared by FirstSouthwest (aml) (Finance 7.017 DENTON:2017_ELC-2017_REV) Page 10
Fir�t��waklww�st'�
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COST OF ISSUANCE
City of Denton, Texas
$214,890,000 Utility System Revenue Bonds, Series 2017
(Electric Supported: $225 mm)
Tax-Exempt Rates As of 01/19/2017 (AA- / A1)
*** Amortized over 20 Years / Cap-I Until Dec. 31, 2018 / 10 Year Call ***
*** Final Numbers ***
Cost of Issuance
$/i000
Amount
Financial Advisor Fee
Bond Counsel Fee
Paying Agent Acceptance Fee
Offical Statement Printing & Distribution
Fitch Rating Fee
S&P Rating Fee
Attorney General Fee
Other
Note: Final
0.89542
0.94188
0.00163
0.02792
0.39555
0.31900
0.04421
0.00826
2.63387
192,417.50
202,401.00
350.00
6,000.00
85,000.00
68,550.00
9,500.00
1,773.97
565,992.47
Jan 19, 2017 1:27 pm Prepared by FirstSouthwest (aml) (Finance 7.017 DENTON:2017_ELC-2017_REV) Page 11
Fir�t��waklww�st'�
�G�W'I�NHw NHfillYtip�"MW'�. �kll'�
FORM 8038 STATISTICS
Bond Component
Serial Bond:
Final Maturity
Entire Issue
City of Denton, Texas
$214,890,000 Utility System Revenue Bonds, Series 2017
(Electric Supported: $225 mm)
Tax-Exempt Rates As of 01/19/2017 (AA- / A1)
*** Amortized over 20 Years / Cap-I Until Dec. 31, 2018 / 10 Year Call ***
*** Final Numbers ***
Dated Date
Delivery Date
Date Principal
12/01/2019
12/01/2020
12/01/2021
12/01/2022
12/01/2023
12/01/2024
12/01/2025
12/01/2025
12/01/2026
12/01/2027
12/01/2028
12/01/2029
12/01/2030
12/01/2031
12/01/2032
12/01/2033
12/01/2034
12/01/2035
12/01/2036
7,580,000.00
7,970,000.00
8,375,000.00
8,805,000.00
9,260,000.00
9,735,000.00
3,400,000.00
6,800,000.00
10,695,000.00
11,245,000.00
11,820,000.00
12,425,000.00
13,065,000.00
13,735,000.00
14,435,000.00
15,180,000.00
15,955,000.00
16,775,000.00
17,635,000.00
214,890,000.00
Maturity Interest
Date Rate
oi/v/2oi�
01/27/2017
Coupon
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
3.250%
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
Price
Issue Price
Redemption
at Maturity
109.767
112.307
114.379
115.928
117.212
118.094
104.861
118.590
119.190
118.244
117.214
116.194
115.734
115.184
114.638
114.095
113.555
113.107
112.751
8,320,338.60
8,950,867.90
9,579,241.25
10,207,460.40
10,853,831.20
11,496,450.90
3,565,274.00
8,064,120.00
12,747,370.50
13,296,537.80
13,854,694.80
14,437,104.50
15,120,647.10
15,820,522.40
16,547,995.30
17,319,621.00
18,117,700.25
18,973,699.25
19,883,638.85
247,157,116.00
Stated Weighted
Issue Redemption Average
Price at Maturity Maturity
7,580,000.00
7,970,000.00
8,375,000.00
8,805,000.00
9,260,000.00
9,735,000.00
3,400,000.00
6,800,000.00
10,695,000.00
11,245,000.00
11,820,000.00
12,425,000.00
13,065,000.00
13,735,000.00
14,435,000.00
15,180,000.00
15,955,000.00
16,775,000.00
17,635,000.00
214,890,000.00
Yield
12/01/2036 5.000% 19,883,638.85 17,635,000.00
247,157,116.00 214,890,000.00 12.6407 2.9961%
Proceeds usedforaccruedinterest
Proceeds used for bond issuance costs (including underwriters' discount)
Proceeds used for credit enhancement
Proceeds allocated to reasonably required reserve or replacement fund
Note: Final
0.00
1,558,810.44
0.00
0.00
Jan 19, 2017 1:27 pm Prepared by FirstSouthwest (aml) (Finance 7.017 DENTON:2017_ELC-2017_REV) Page 12
Fir�t��waklww�st'�
�G�W'I�NHw NHfillYtip�"MW'�. �kll'�
PROOF OF ARBITRAGE YIELD
City of Denton, Texas
$214,890,000 Utility System Revenue Bonds, Series 2017
(Electric Supported: $225 mm)
Tax-Exempt Rates As of 01/19/2017 (AA- / A1)
*** Amortized over 20 Years / Cap-I Until Dec. 31, 2018 / 10 Year Call ***
*** Final Numbers ***
Date
Debt Service
Present Value
to 01/27/2017
@ 2.9960649979%
06/01/2017
12/01/2017
06/01/2018
12/01/2018
06/01/2019
12/01/2019
06/01/2020
12/01/2020
06/01/2021
12/01/2021
06/01/2022
12/01/2022
06/01/2023
12/01/2023
06/01/2024
12/01/2024
06/01/2025
12/01/2025
06/01/2026
12/01/2026
Delivery date
Par Value
Premium (Discount)
Target for yield calculation
3,680,388.89
5,342,500.00
5,342,500.00
5,342,500.00
5,342,500.00
12,922,500.00
5,153,000.00
13,123,000.00
4,953,750.00
13,328,750.00
4,744,375.00
13,549,375.00
4,524,250.00
13,784,250.00
4,292,750.00
14,027,750.00
4,049,375.00
14,249,375.00
3,824,125.00
156,789,125.00
308,366,138.89
Proceeds Summary
3,642,882.18
5,210,007.18
5,133,111.50
5,057,350.75
4,982,708.16
11,874,349.77
4,665,152.18
11,705,263.04
4,353,359.28
11,540,436.18
4,047,195.53
11,387,720.96
3,746,334.27
11,245,672.92
3,450,486.08
11,109,002.81
3,159,493.26
10,953,871.15
2,896,318.16
116,996,400.64
247,157,116.00
oi/v/2oi�
214,890,000.00
32,267,116.00
247,157,116.00
Jan 19, 2017 1:27 pm Prepared by FirstSouthwest (aml) (Finance 7.017 DENTON:2017_ELC-2017_REV) Page 13
Fir�t��waklww�st'�
�G�W'I�NHw NHfillYtip�"MW'�. �kll'�
PROOF OF ARBITRAGE YIELD
City of Denton, Texas
$214,890,000 Utility System Revenue Bonds, Series 2017
(Electric Supported: $225 mm)
Tax-Exempt Rates As of 01/19/2017 (AA- / A1)
*** Amortized over 20 Years / Cap-I Until Dec. 31, 2018 / 10 Year Call ***
*** Final Numbers ***
Assumed Call/Computation Dates for Premium Bonds
Bond
Component
SERIAL
SERIAL
SERIAL
SERIAL
SERIAL
SERIAL
SERIAL
SERIAL
SERIAL
SERIAL
Bond
Component
SERIAL
SERIAL
SERIAL
SERIAL
SERIAL
SERIAL
SERIAL
SERIAL
SERIAL
SERIAL
Note: Final
Maturity
Date
12/01/2027
12/01/2028
12/01/2029
12/01/2030
12/01/2031
12/01/2032
12/01/2033
12/01/2034
12/01/2035
12/01/2036
Call
Rate Yield Date
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
2.860% 12/01/2026
2.970% 12/01/2026
3.080% 12/01/2026
3.130% 12/01/2026
3.190% 12/01/2026
3.250% 12/01/2026
3.310% 12/01/2026
3.370% 12/01/2026
3.420% 12/01/2026
3.460% 12/01/2026
Call
Price
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
100.000
Yield To
Call/Maturity
2.8608749%
2.9708499%
3.0808988%
3.1309065 %
3.1910106%
3.2510176%
3.3110346%
3.3710595 %
3.4211176%
3.4610653%
Relected Call/Computation Dates for Premium Bonds
Maturity Call Call Yield To Increase
Date Rate Yield Date Price Call/Maturity to Yield
12/01/2027
12/01/2028
12/01/2029
12/01/2030
12/01/2031
12/01/2032
12/01/2033
12/01/2034
12/01/2035
12/01/2036
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
5.000%
2.860%
2.970%
3.080%
3.130%
3.190%
3.250%
3.310%
3.370%
3.420%
3.460%
3.0155152%
3.2389444%
3.4309080%
3.5518488%
3.6650704%
3.7653164%
3.8549928%
3.9359030%
4.0032138%
4.0585666%
0.1546404%
0.2680945 %
0.3500092%
0.4209423%
0.4740598%
0.5142988%
0.5439583%
0.5648436%
0.5820963%
0.5975013%
Jan 19, 2017 1:27 pm Prepared by FirstSouthwest (aml) (Finance 7.017 DENTON:2017_ELC-2017_REV) Page 14
Denton, Texas
lJtilit� ��t� ������ ��d�
� I��u� ��p��t
Ratings � ����� ���II�
New Issue Sale Information: $224,050,000 Utility System Revenue Bonds, Series 2017.
$224,050,000 Utility System
Revenue Bonds, Series 2017 A+ Security: Payable from the net revenues of the combined utility system, including the water,
wastewater and electric light and power systems.
Rating Outlook
Stable
Key Utility Statistics
Fiscal Year Ended 9/30/15
..................................................................................................................................................................................................
System Type Combined
Utility
NERC Region ERCOT
Annual Revenues ($ Mil.) 229.6
Debt Service Coverage (x) 1.65
Days Operating Cash 275
.E.9uity/Ca..P...italization....�%.) ..................................................................50 7
.
Related Criteria
U.S. Public Power Rating Criteria
(May 2015)
Revenue-Supported Rating Criteria
(June 2014)
Related Research
Fitch Rates Denton, TX's Utility System
Rev Bonds 'A+'; Outlook Stable
(December 2016)
U.S. Public Power (Peer Study)
(June 2016)
Analysts
Matthew Reilly, CFA
+1 415 732-7572
matthew. reilly@fitchratings. com
Rebecca Meyer
+1 512 215-3733
rebecca.meyer@fitchratings. com
Purpose: Bond proceeds will be used to finance the development of new peak power
generation facilities, fund capitalized interest and pay the costs of issuance.
Final Maturity: Dec. 1, 2036.
�� ��iV"� CiV��'�
Combined Utility System: The city of Denton, TX owns and operates a combined utility
system, providing retail electric, water and wastewater services to the city and surrounding
areas. The service area is characterized by manageable population growth, low unemployment
rates and income levels modestly below the state average.
Transitioning Power Supply: The electric system is transitioning toward a greater reliance on
renewable energy and away from coal and market purchased energy. The strategy will be
supported by the construction and operation of the 220-MW natural gas-fired Denton Energy
Center (DEC). The increased operational risk is mitigated by reduced exposure to market
pricing and volatility.
Elevated Debt Levels: The system's projected ratio of debt to funds available for debt service
is to rise considerably to 11.3x in fiscal 2017, driven in part by planned debt issuance related to
the development of the DEC. However, the rating reflects Fitch Ratings' expectation that
anticipated rate increases, improvement in financial margins and the relatively rapid
amortization of the revenue bonds will all contribute to reduced leverage beginning in fiscal
2019.
Strong Liquidity Metrics: Liquidity levels are healthy, with approximately 275 days cash on
hand at the end of fiscal 2015, and should remain robust, offsetting to some degree the
combined system's increased debt burden.
Demonstrated Rate Flexibility: The diversity of revenue from essential electric, water and
wastewater services is a credit strength, although the electric system is the largest contributor
to overall financial performance. Utility rates can be modified at the discretion of the city council,
which has regularly increased rates over the past several years.
��IV� �V��i�iVi�i��
Reduction in Leverage: The current rating reflects Fitch's expectation that the utility system
will increase funds available for debt service and reduce overall leverage as projected through
consistent rate increases, higher electric sales and improved operating margins. Failure to
achieve the projected reduction in leverage would likely pressure the rating.
�vwwefut�hc�tup�gse�orn J��p�u��cy 3, 2Q1 i
` �,
�"'
��fIV�� �I�f��`� The city of Denton is located approximately 35 miles north of the cities of Dallas and Fort Worth
outiooki and serves as a quickly growing suburb to the greater metropolitan area. Denton provides
Rating Action watcn Date electric, water and wastewater services through city-owned utilities. The electric system is the
a+ Assigned Stable 12/29/16 largest of the combined utilities and accounts for the majority of the revenues, followed by the
water and wastewater systems.
�v��o�ao��� ao� ao�a � �o�f f�'af� y
The utility system is governed by the city council, consisting of six elected council members
and the city's mayor. The city council receives and acts upon recommendations and advice
provided by the seven-member Public Utilities Board (the board). The board serves as an
advisor to the city council and is responsible for reviewing annual budgets, capital improvement
plans, system rates and the issuance of debt. The city council has approved all of the board's
rate recommendations to date.
Strategically, the three utilities — electric, water, and wastewater — are budgeted for and
operated on a self-supporting and stand-alone basis. Each of the separate utilities has board-
and council-approved financial policies, including liquidity and debt service coverage targets. A
brief presentation of the targets by utility is presented in the table below.
�,i ui ity ao� �bt ��vi�� ��v��a � l�a� �t�
Electric Water Wastewater
Liquidity Reserve Target (Days) 60-75a 120-180 100-140
Debt Service Coverage (x) 1.25 1.25 1.25
aTexas Municipal PowerAgency debt payments are not included in the city's liquidity reserve calculation.
Source: Denton (TX).
Texas Municipal Power Agency
Denton, along with the cities of Garland, Bryan and Greenville, created the Texas Municipal
Power Agency (TMPA) in 1975. Through TMPA, the cities developed the Gibbons Creek
Steam Electric Station (GCSES), located in Grimes County, TX. The single-unit, coal-fired plant
has a net capacity of 470 MW and burns Powder River Basin coal.
TMPA owns the coal plant and provides power to its four members under identical court-
validated, take-0r-pay power sales contracts (PSCs) that expire in September 2018. The PSCs
financially obligate the members to pay certain expenses to TMPA, including its debt service
costs, regardless of actual plant operations.
The four members recently approved
a joint operating agreement (JOA),
effective September 2016. The JOA
establishes the framework for how
TMPA and its assets and liabilities are
to be managed, regardless of whether
the PSCs are extended beyond
September 2018. TMPA's assets and
operations are divided into three
l� � �a�ti�i�pati�o� Iha���
city
Garland
Denton
Bryan
Greenville
Source: Denton (TX).
Share °/a
47.0
21.3
21.7
10.0
business lines under the JOA: generation, transmission and mining. Denton, Garland and
Bryan agreed to continue as TMPA members along all three business lines after
L7�ntan, T�xas 2
January 3, 2017
September 2018. Greenville chose to continue as a transmission and mining member, but
opted not to continue as a generation member.
The JOA allocates costs, ownership interests, decommissioning and remediation
responsibilities to members based on their participation share. Denton's participation share is
21.3%.
�u�t� �� ���fil� ao� � i�� ��a
The utilities serve an area characterized by strong employment gains, a low unemployment
rate, a growing workforce and below-average income levels.
The city is known for its institutions of higher education and regionally prominent medical sector.
Denton is home to the University of North Texas and Texas Woman's University, with
combined enrollment exceeding 48,500. The city's growing heath care facilities serve north
Texas and southern Oklahoma. These institutions include Columbia Medical Center Denton,
Texas Health Presbyterian Hospital and The Heart Hospital Baylor Denton.
Electric System
Denton's electric system serves an approximately 60-square-mile, single certified area within
the city of Denton's city limits and an additional 53-square-mile area that is multiple certified
outside the city's boundaries. The city has not opted in to retail competition, so its customers in
the single certified area are generally unable to change electric providers. However, the system
does face competition with respect to new customers who move into the multiple certified area.
Approximately 5.5% of Denton's electric customers reside in the multiple-certified area.
The electric system served approximately 51,085 customers in fiscal 2016. The customer base
is largely residential, comprising approximately 88% of total customers. However, commercial
and industrial customers drive the majority of total MWh sales, accounting for approximately
64% of total MWh sold in fiscal 2016. All system sales are retail, with no exposure to wholesale
ma rkets.
Customer concentration is moderate, with the top 10 ratepayers providing approximately 18%
of electric revenues and 28% of total MWh sales in fiscal 2016. The largest customer
accounted for 9% of MWh sales and 4.6% of electric revenues. The diversity of the pledged
revenues from the combined utility systems further mitigates concentration risks.
Annual MWh sales tend to fluctuate with weather conditions, particularly in response to
summertime temperatures when the system experiences its peak demand. The graph below
shows the annual variation in MWh sales during 2011-2016.
MWh Sales Trends — 2012-2016
L7�ntan, T�xas
January 3, 2017
(MWh)
1,480,000
1,440,000
1,400,000
1,360,000
1,320,000
uuuuuuuuuuuuuuuuuuum Total Retail Sales YoY Change in Retail Sales
(%)
4.0
2.0
0.0
(2.0)
(4.0)
3
Source: Denton (TX), Fitch.
2016
Water System
The water system provides retail water service to a growing customer base within the city and
sells raw and treated water wholesale to the Upper Trinity Regional Water District (UTRWD) for
resale to two of its customer cities. Wholesale sales comprised less than 2% of total gallons
sold in fiscal 2015.
The water system's top 10 customers reflect relatively stable entities, including the University of
North Texas, the local school district and local health centers and hospitals. In fiscal 2016, the
top 10 customers comprised approximately 10% of water revenues.
Wastewater System
The wastewater system provides retail wastewater collection and treatment service to a
growing customer base within the city and to four wholesale customers. The four wholesale
customers — the cities of Corinth, Krum, Argyle and the Lake City Municipal Authority — made
up less than 1% of the wastewater system average volume in fiscal 2015.
���f� �V� ���'�fi�V��
Electric System
Denton's electric system is undergoing a significant change in its power supply and operational
profile. The system has historically relied on GCSES and market purchases to provide the bulk
of the system's power supply. However, under the city's Renewable Denton Plan (RDP),
renewable energy is expected to increase to approximately 70% of the system's power supply,
supported by the DEC, a newly built, directly owned 220-MW natural gas-fired peaking plant.
Fitch views the transition as presenting some additional operational risks, as the system has
historically not owned or operated generation resources. However, these risks are offset to
some degree by the contracting of renewable energy resources at generally fixed rates for the
bulk of the system's power supply, decreasing the system's exposure to potentially volatile
market pricing.
L7�ntan, T�xas 4
January 3, 2017
Gibbons Creek Steam Electric Station
Denton's primary source of power over the past decade has been TMPA's 470-MW GCSES.
While the plant's operational availability remains sound, its competitive position has eroded
over the past few years as low natural gas prices and a significant increase in wind generation
in ERCOT have combined to reduce market power prices. TMPA's decision in fiscal 2016 to
place GCSES in reserve shutdown for a little over a month following a scheduled outage
reflected the change in market dynamics.
TMPA members have authorized a
potential sale of GCSES, and an i���V�� ����� ����fiV� f�fi�fi��
agreement has been reached with two (°%>
potential buyers. The buyers are Fiscal Year Availability Capacity Factor
2015 79.9 55.3
currently completing their due 2016 sa.s 3s.a
diligence, with a signing of the sales Source: TMPA.
agreement expected in early 2017.
The purchase price under the two
sales agreements is $57.5 million for GCSES. The purchaser for GCSES has also agreed to
post $35 million towards an environmental escrow and a letter of credit for $25 million for
environmental purposes. A related transaction to a separate buyer includes the sale of
approximately 25% of TMPA's transmission assets for the price of $71.5 million.
Fitch views the potential sale as a credit positive, but insufficient on its own to materially affect
the current rating. Benefits from the potential transaction include the use of the proceeds to pay
down a portion of TMPA's outstanding debt, reducing Denton's obligations by a modest amount.
More significantly, the sale of GCSES would eliminate Denton's and other member cities'
exposure to decommissioning and other environmental liabilities, allowing for potentially
significant future savings. Failure to complete the sale would be unlikely to affect the current
rating, as TMPA would retain the option to pursue other sales opportunities while continuing to
run the plant at the reduced levels of the past few years.
Renewable Denton Plan and Denton Energy Center
The city's RDP calls for increasing renewables as a percentage of the city's power supply to
70% by 2019. The plan outlines the renewable resource balance as 52% from wind, 17% from
solar and 1% from locally owned landfill gas. Wind and solar resources are expected to be
secured under long-term power purchase agreements at generally fixed prices. Wind energy
supplied approximately 10% of system needs in fiscal 2016. Negotiations for additional
resources are ongoing, with the expectation that most of the needed resources will be secured
under contract by the end of 2017.
The RDP also calls for the development and operation of the DEC, a 220-MW natural gas-fired
electric generation facility consisting of 12 separate reciprocating internal combustion engines.
The DEC is designed to economically supply power to firm up intermittent wind and solar
resources. In addition, the DEC will act as a physical hedge against high market prices, with
the DEC utilized when cheaper than purchasing power from the market and vice versa,
effectively hedging against the risk of high peak power prices. Management estimates that the
DEC will supply approximately 13% of the system's power needs.
The RDP projects that short-term purchased power will contribute approximately 17% of the
system's energy needs. Management will continue to hedge the system's exposure to
potentially volatile market prices by securing needed supply three to six months ahead of time
and layering contracts.
L7�ntan, T�xas 5
January 3, 2017
Water System
The city's water system consists of two water treatment plants, 618 miles of water mains,
14 million gallons of ground storage, and 11 million gallons of elevated storage. The system
provides water to all customers within the city of Denton and to the UTRWD for resale to the
cities of Sanger (population 7,601) and Krum (population 4,919).
Denton's water system has sufficient water supply to meet projected needs. The city has a
combined 24.62 million gallons per day (MGD) of available surface water from the Ray Roberts
Reservoir and the Lewisville Reservoir, which is adequate to meet the city's retail and
wholesale treated water volume of approximately 17.26 MGD (fiscal 2016). Likewise, the
systems treatment capacity is viewed as adequate to meet demand. The system's two
treatment plants provide 48.75 MGD of treatment and pumping capacity, providing a significant
cushion relative to the maximum volume pumped to date of 37.52 MGD in 2011.
Wastewater System
The city's wastewater system provides retail wastewater collection and treatment to all
customers within the city and to four wholesale customers. The system consists of 521 miles of
gravity wastewater lines, 25 miles of force mains and 27 lift stations.
The system's total permitted treatment capacity is 21 MGD, which is sufficient to meet the
average demand of 16.74 MGD (2016). The four wholesale customers accounted for
approximately 0.89 MGD of treatment volume in 2016.
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The city council has the authority to establish and modify rates for each of the utility systems
without state or federal oversight. Regular rate increases over the past several years have
demonstrated the council's willingness to increase rates as necessary. A brief history of recent
base rate increases by utility is provided in the table below. Please note that the electric system
rate changes based on the energy cost adjustor are not reflected in the table.
v��a ��tail at� lo����a�� by lJtility y�t�
��ro>
Fiscal Year Electric Water Wastewater
2017E 4.5 5.0 2.0
2016 4.5 5.0 2.0
2015 4.7 3.0 6.0
2014 2.5 — 9.0
2013 9.0
E — Expected.
Source: Denton (TX).
Electric Rate Structure
The electric system's rate structure is viewed as a credit positive, as it provides the utility with
the flexibility to recapture potentially volatile energy costs in a timely manner. The structure
includes a fixed charge, a volumetric charge, an Energy Cost Adjustment Factor (ECA) and a
Transmission Cost Recovery Factor (TCR).
The ECA is designed to capture and pass through to customers the utility's fuel and purchased
power costs. The ECA is adjusted on a quarterly basis to stay within a$5 million range. The
L7�ntan, T�xas C
January 3, 2017
general manager of the electric system recommends adjustments to the board on a quarterly
basis, when the $5 million threshold is projected to be breached.
The electric utility also has a TCR that is designed to capture and pass through to customers
the utility's net transmission costs. This has provided another valuable means for capturing
increasing fixed costs following ERCOT's build-out of its transmission system.
Fio�ao��ial ��rf�� ao��� ao� �,� al ���vi�i�u��
The financial performance of the combined utility system is largely driven by the electric system,
which accounted for an average of 48.7% of the combined system's net operating revenues
during fiscal 2011-2016. The water system and the wastewater system contributed
approximately 30.6% and 20.8%, respectively. A breakdown of the combined system's net
operating revenues by utility is provided in the chart below.
Combined Utility System Net Operating Revenue by Utility
�o�o� uuuu Electric moi Water um Wastewater
100
80
60
40
20
0
Source: Denton (TX).
As shown in the chart, the electric system's financial performance was noticeably weaker in
fiscals 2013 and 2014. This was largely driven by the ongoing but temporary period of
increased TMPA obligations, including TMPA debt service costs, that runs through fiscal 2018.
Denton's payment of its respective share of TMPA's O&M and debt service costs is recorded
as a purchased power expense. Once the final payment on TMPA's generation debt is made in
fiscal 2018, Denton expects purchased power costs will decline by approximately $33 million.
However, DEC operations are expected to increase operation expenses by $7 million—
$9 million, offsetting some of the expected savings.
The financial performance of the combined utility system will become increasingly dependent
on the electric system after 2018. With the reduction in TMPA obligations that begins in fiscal
2019, Denton's electric system will contribute approximately 75% of the projected net operating
revenues for the combined utility system.
Recent Financial Metrics
The financial metrics of the combined utility system are relatively low but adequate for the
rating. Fiscal 2015 debt service coverage and coverage of full obligations was 1.65x and 1.14x,
respectively. Preliminary and unaudited financial reports for fiscal 2016 reflect Fitch-calculated
coverage metrics of approximately 1.70x and 1.10x, respectively.
Liquidity levels for the combined utility system are healthy, with approximately $119.8 million in
unrestricted cash and investments, or 275 days cash on hand, at the end of fiscal 2015.
Liquidity levels are expected to increase in fiscal 2016 to approximately $158.6 million
L7�ntan, T�xas 7
January 3, 2017
2015 2016 Average
(2011-2016)
(unaudited), due in part to the release of certain bond funds following recent refundings. A
portion of the increased reserves are expected to be spent on capital projects in fiscal 2017.
The combined system's cash balances have declined moderately over the past several years
as funds have been used for capital needs and to meet increased TMPA obligations. Additional
draws are expected, including a planned $17 million use of reserves in fiscal 2017, although
cash balances are projected to stabilize at still-sound levels thereafter.
Financial Outlook
Projected financial metrics are adequate for the rating and relatively consistent with recent
performance. Fitch-calculated all-in debt service coverage ratios are projected to remain in the
1.60x-1.90x range through fiscal 2021, with the notable exception of fiscal 2018 when
coverage is expected to decline to a low of 1.19x. Fiscal 2018 is the final year of elevated
TMPA costs for the electric system as the outstanding generation debt is repaid. Increasing
debt service costs through 2021 will keep coverage levels relatively low over the period despite
improving financial margins driven by lower electric system costs after 2018.
Management's financial projections are based on several assumptions, including 2.5% annual
electric load growth, 4.5% annual electric rate increases in fiscals 2017-2019 and the
realization of approximately $25 million in non-contracted wholesale electric revenue beginning
in fiscal 2019. An inability to achieve these assumptions could result in weaker-than-expected
financial performance.
General Fund Transfers
Each of the utility systems pays three separate transfer amounts to the city's general fund. The
transfers include an indirect cost allocation, a"rate of return" to the city authorized in the city
charter and a payment in lieu of franchise taxes. While the indirect cost allocation transfer is
considered an operating expense by the utilities, the rate of return and payment in lieu of
franchise taxes transfers are subordinate to debt service per the city ordinance authorizing the
revenue bonds.
The transfer amounts have been relatively stable over the past several years. The indirect cost
allocation amount is established by an independent consultant. The rate of return and payment
in lieu of franchise taxes are set at 3.5% and 5%, respectively, of each utility system's
ica�ca�n«�
Debt Profile
The senior lien revenue bonds are expected to comprise approximately 25% of the combined
utility system's total outstanding debt in 2017. The majority of the debt is in the form of general
obligation (GO) bonds and certificates of obligation (CO) that are issued and secured by the
general government, but actually paid from the underlying utility systems. All of the outstanding
debt is fixed-rate. Fitch's coverage and debt calculations include the GO and CO bonds and
the respective debt service paid by the utility systems.
The combined utility system's debt metrics are elevated, projected at 11.3x debt/FADS in fiscal
2017. The rating incorporates the combined utility system's plans for around $343 million in
additional GO bonds and a potential issuance of $40 million in revenue bonds over the next
five years. The relatively high debt load reflects the systems' significant investment in additional
generation, transmission and other investments. The relatively quick repayment period,
including the 20-year amortization rate on the revenue bonds, together with improved operating
L7�ntan, T�xas 8
January 3, 2017
earnings is expected to reduce the elevated debt/FADS ratio beginning in 2019 and restore
future debt capacity, if needed.
Legal Provisions
The bond's legal provisions are viewed as permissive but adequate for the rating. The bonds
are payable from a first lien on the net revenues of the combined utility system. Operating costs
are defined in the ordinance to include transfers of indirect costs, but exclude return on
investment and payment in lieu of franchise tax transfers. The bonds feature a sum-sufficient
rate covenant and do not have a debt service reserve fund.
L7�ntan, T�xas
January 3, 2017
Fio�ao��ial u a�y -- �o�t�o� �l� �
($000, Audited Years Ended Sept. 30)
Debt Service Coverage (x)
Debt Service Coverage 4.6 1.9 1.3 1.3
Adjusted DSC (Including Purchased Power Adjustment as D/S) 2.3 1.5 1.2 1.1
Adjusted DSC (Including Transfer/PILOT/Dividend as O&M Expense) 3.5 1.5 0.9 0.8
Coverage of Full Obligations (PP as D/S and Transfer/PILOT/Dividend as O&M Expense) 2.0 1.3 0.9 0.9
Liquidity Metrics
Days Cash and Investments on Hand 415.1 451.3 337.9 283.5
Days Liquidity on Hand 415.1 451.3 337.9 283.5
Leverage Metrics
DebUFADS (x) 5.7 5.8 8.4 9.4
Adjusted Debt Qncluding PP Adj.)/Adjusted FADS Qncluding PP Adj.) (x) 6.3 6.4 8.3 8.8
DebUTotal Retail Customers 3,443.5 3,520.5 3,621.2 4,097.8
Net DebUNet Capital Assets (%) 43.7 41.1 44.0 51.3
Equity/Capitalization (%) 54.9 55.5 54.9 52.2
DebUCapitalization (%) 45.1 44.5 45.1 47.8
Adjusted DebUCapitalization (%) 55.5 54.7 57.0 59.1
Other Financial & Operating Metrics
Operating Margin (%) 25.2 24.5 14.9 14.3
Retail Electric Revenue/kWh (Cents/kWh) 9.1 9.5 9.7 10.4
Transfer and PILOT and Tax/Total Operating Revenue 0.3 0.4 0.4 0.5
Capex/Depreciation and Amortization (%) 215.7 242.7 314.6 389.7
Debt Service/Cash Operating Expenses (%) 10.4 21.6 19.8 19.9
Income Statement
Total Operating Revenue 186,359 189,645 197,126 208,666
Total Operating Expense 139,416 143,145 167,855 178,900
Operating Income 46,943 46,500 29,272 29,766
Adjustment to Operating Income for Deferred Revenue 18,286 19,236 18,733 19,784
Funds Available for Debt Service 65,229 65,736 48,004 49,550
Total Annual Debt Service 14,271 34,484 37,143 39,756
Balance Sheet
Unrestricted Funds (Cash and Liquid Investments) 139,272 155,025 138,938 124,553
Restricted Funds 95,370 98,204 107,779 129,929
Total NetAssets/Member's Equity 447,800 476,564 492,549 505,466
Total Debt 368,396 382,703 403,996 463,410
Cash Flow Statement
FCF (FADS - Transfer and PILOT - Total Annual Debt Service) 36,014 16,094 (4,572) (6,516)
Capex 36,556 43,101 55,831 72,319
FCF Less Capex (543) (27,007) (60,402) (78,836)
DSC - Debt service coverage. D/S - Debt service. PP - Purchased power. FADS - Funds available for debt service. PILOT - Payment in lieu of taxes.
Source: Denton (TX), Fitch.
L7�ntan, T�xas
January 3, 2017
2015
1.7
1.4
1.3
1.1
275.4
275.4
7.1
7.4
4,466.5
53.5
50.7
49.3
59.1
21.7
11.3
0.7
411.2
21.6
229,583
179,740
49,844
22,478
72, 322
43,722
119,781
142,112
526,301
512,604
10, 742
86,200
(75,458)
�
The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
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L7�nian, T�xas 11
January 3, 2017
� �
Rati ngs
, , ,
,;
, �� ,
Denton, �'�xas; Co���i�e�. �"tility
Primary Credit Analyst:
Jeffrey M Panger, New York (1) 212-438-2076; jeff.panger@spglobal.com
Secondary Contact:
Scott W Sagen, New York (1) 212-438-0272; scott.sagen@spglobal.com
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Rationale
Outlook
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US$224.05 mil util sys revbnds ser 2017 dtd O1/O1/2017 due 12/O1/2036
Long Term Rating
AA-/Stable New
i ,�,
S&P Global Ratings has assigned its 'AA-' rating to Denton, Texas' utility system revenue bonds, series 2017. The
outlook is stable.
The rating reflects our assessment of the following credit strengths:
• An expanding and diverse service area economy with good access to employment throughout the strong and
diverse Dallas-Fort Worth metropolitan area;
• Strong liquidity, measuring 250 days of operating expenses ($120 million), roughly half of which is designated for
rate-stabilization, built up to mitigate the need for interim rate increases as Denton transitions to a lower-cost power
supply; and
• A transition to what we would view as a more favorable power portfolio, from a coal-heavy supply to one based on
wind and solar energy firmed up through owned gas-fired generation and market purchases. We expect that, in
2018, power costs will be lower, enabling the utility to post stronger cover metrics and build liquidity.
The rating also reflects what we view as the following credit risks:
• The transition creates some uncertainties. The utility has a take-or-pay contract with the Texas Municipal Power
Agency (TMPA) and, as such, participates in the Gibbon's Creek coal project, which accounted for 26% of Denton's
2015 energy needs (and more in previous years). The contract expires in 2018, but the TMPA is selling the unit and
a portion of related transmission before then. Denton expects to replace it with wind and solar purchased power
agreements (PPAs), boosting renewable generation to 70% of energy needs (from the current 40%), and quick start
gas units, with the later firming up supply and providing economic dispatch optionality when more advantageous
than market purchases. While management expects the power supply change will result in lower energy and fixed
costs, there are uncertainties related to the fact the units have not yet been built, coupled with potential volatility
associated with a greater reliance on market purchases or gas-fired generation.
• Coverage of fixed costs have been just adequate over the past three years, supplemented by draws on
rate-stabilization reserves. Although management projects solid coverage in 2016, we expect coverage in 2017 and
2018 at levels we would characterize as weak for the rating; however, the utility's strong liquidity, including a large
rate-stabilization reserve that provides a cushion during the transition, mitigates the risk.
• Denton anticipates a sizable 75% increase in utility-supported debt by 2020 to meet combined system capital needs.
Bond proceeds will finance the construction of quick start gas-fired units that will firm up delivery of renewable energy
as part of the utility's Renewable Denton plan.
The combined utilities' business risk profile of '4' is better than average, reflecting our assessment of rate setting
W W W. STANDARDANDPOORS.COM/ RATINGSDIRE CT
DECEMBER 19, 2016 2
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autonomy and a residential service area exhibiting credit supportive demographics. We assign business risk profiles on
a scale from ' 1' to ' 10', ' 1' being the strongest.
A first-lien pledge of net revenues of Denton's combined electric, water and sewer systems secure the bonds. The
electric system dominates revenues, typically accounting for about three-quarters of the total, and about half of the net
revenue available to service debt.
Denton's power supply includes firm power purchases of wind energy, which accounts for about 40% of energy needs;
market purchases (30%); and the city's 21.3% participation share in the Gibbons Creek coal plant. We understand that
the TMPA (and its members) are selling the plant for $57.5 million, with the buyer assuming all decommissioning
liabilities. The agency is also selling one-quarter if its transmission assets for $71.5 million, to a separate buyer. The
TMPA expects to use the proceeds pay down about one-quarter of its $473 million debt. The remaining portion
attributable to generation will be serviced by the respective members though its 2018 final maturity; the portion that is
attributable to transmission will be serviced from transmission revenue from the Electric Reliability Council of Texas
(ERCOT), beginning in 2019. The utility expects that, in replacing the TMPA power, it will bring renewables to 70% of
energy needs (including 52% wind and 17% solar). Given the intermittent nature of renewable energy, Denton is
issuing the 2017 bonds to finance the construction of 12 reciprocating combustion turbines (for 220 megawatts) which
will be used to firm up delivery when economically advantageous relative to market purchases. We understand that
Denton has no additional capacity needs in the foreseeable future for its water or wastewater systems.
According to the U.S. Department of Energy's Energy Information Administration, Denton's electric rates were 113%
of the state average in 2015, the most recent year of available comparative information, although residential rates are
4% below the state average. With a portion of customers (about 20%) in areas that are multiply certified, the utility is
somewhat exposed to price-sensitive customer switching, although this has historically not been a problem for it.
Combined water and sewer bills is also high, at $86 per month for a 7,500 gallon residential customer, a function of 8%
average annual wastewater rate increases over the last three years. Management projects 4.5% electric rate increases
in 2017 and 2018, and small annual water and wastewater rate increases through 2021.
Denton has posted inconsistent financial results from recurring revenue, but has stabilized financial operations by
using rate-stabilization reserves in 2013 and 2014 to meet higher fixed costs (direct debt and fixed cost payments to
the TMPA). Not including the reserves, fixed cost coverage was 0.97x in 2013, 1.27x in 2014, and 1.20x in 2015.
Including them, fixed cost coverage was 1.2x in 2013 and 1.54x in 2014 (management did not use stabilization
reserves in 2015). Financial operations for 2016 (11 months, year-to-date) have been solid; including a modest amount
of rate-stabilization reserves, the utility projects 1.38x coverage of fixed costs, which we consider solid at this rating.
However, the 2017 budget suggests much thinner margins (due to higher operating and personnel costs, as well has
higher purchased power expenses), producing 1.12x fixed cost coverage. For 2018, the utility projects 1.2x coverage
with the use of $4 million in stabilization reserves, neither of which are consistent with the rating. Nevertheless, the
liquidity from the significant level of available rate-stabilization reserves mitigates the risk. As the utility transitions to a
lower-cost power supply with lower fixed costs, we expect fixed cost coverage to rise into the 1.4x range by 2019, and
the utility expects to dedicate $50 million in surplus revenue toward replenishing and enhancing rate-stabilization
reserves to nearly $93 million by fiscal year-end 2020.
W W W. STANDARDANDPOORS.COM/RATINGSDIRECT
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Debt was 49% of total capitalization in 2015, which we believe is fairly high for a utility with no generation assets on its
balance sheet. Denton is fairly leveraged and we anticipate that debt ratios will weaken over the next five years as it
pursues a sizable, $614 million five-year capital plan, the bulk of which it expects to finance with utility-supported debt.
We anticipate a 75°/o increase in utility-supported debt by 2020, so we expect the debt ratio will weaken.
Denton benefits from its location in the diverse Dallas-Fort Worth Metroplex. Customer growth for the combined
utility system has averaged 2% over the past four years, which we consider solid. In our opinion, concentration among
customers is modest, with the lO leading customers accounting for about 22% of total combined system revenue.
Residential customers account for nearly 38% of revenue, and commercial customers account for the bulk of the rest.
Demographics are good, with median household effective buying incomes at 91% of the nation and unemployment
low at 3.4% in 2015.
The stable outlook reflects our view of Denton's strong liquidity, supplementing uneven coverage metrics as the utility
transitions to a lower-cost power supply.
Upside scenario
We do not expect to raise the rating over the next two years given Denton's financial forecast and capital program.
Downside scenario
We could lower the rating if the utility fails to meet projected metrics for coverage and liquidity.
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors,
have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria.
Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is
available to subscribers of RatingsDirect at www.globalcreditportal.com. All ratings affected by this rating action can
be found on the S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box
located in the left column.
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Copyright OO 2016 by Standard & Poor's Financial Services LLC. All rights reserved.
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