Loading...
2022-053 Fitch Utility Sys Annual RatingDate: August 19, 2022 Report No. 2022-053 INFORMAL STAFF REPORT TO MAYOR AND CITY COUNCIL SUBJECT: Fitch Ratings annual rating review of the Utility System revenue bonds. BACKGROUND: The purpose of this report is to provide City Council notice of the annual bond credit rating from Fitch Ratings (Fitch) for the City’s Utility System revenue bonds. During July and August, staff and the City’s financial advisor, Hilltop Securities Inc., participated in several question-and-answer correspondences with analysts from Fitch providing data regarding the City’s financials and Utility System including updated budget and capital improvement project forecasts. As a result, Fitch affirmed the rating of ‘A’ and revised the outlook to “Stable”. DISCUSSION: Fitch has affirmed our 'A' rating to the Utility System revenue bonds. This affirmation reflects increasing leverage as a result of debt financing anticipated to fund approximately $688 million in capital improvement projects in 2023-2027, 16% higher than the previous five-year plan for 2022-2026. The “Stable” outlook reflects the utilities’ financial profile to remain supportive of the rating, even incorporating the additional planned debt issuance and large increases in retail sales associated with Core Scientific this year. The ‘A’ rating continues to classify the Utility System debt as “Investment Grade”. The revision to the outlook from “Negative” to “Stable” reflects a low likelihood that the structural risks of the ERCOT market and outstanding costs stemming from the 2021 Winter Event are likely to pressure the rating. Operating risk in the ERCOT market remains elevated, but market reforms and Denton’s risk mitigation actions should reduce the magnitude of financial risk related to future market disruptions. For your review, staff has attached the Fitch rating report and a ratings definition chart. ATTACHMENTS: Fitch 2022 Utility System Revenue Bonds Rating Action Commentary Fitch Rating Definitions STAFF CONTACT: Randee Klingele, Treasury Manager (940)-349-8206 Randee.Klingele@cityofdenton.com 8/12/22, 4:01 PM Fitch Affirms Denton, TX's Utility System Rev Bonds at 'A'; Outlook Revised to Stable https://www.fitchratings.com/research/us-public-finance/fitch-affirms-denton-tx-utility-system-rev-bonds-at-a-outlook-revised-to-stable-12-08-2022 1/10 RATING ACTION COMMENTARY Fitch AfØrms Denton, TX's Utility System Rev Bonds at 'A'; Outlook Revised to Stable Fri 12 Aug, 2022 - 4:57 PM ET Fitch Ratings - Austin - 12 Aug 2022: Fitch Ratings has afØrmed the 'A' rating on the following bonds issued by the City of Denton, TX on behalf of its combined utility system: --$333.0 million utility system revenue bonds, series 2017 and utility system revenue refunding bonds, taxable series 2021. In addition, Fitch assesses the standalone credit proØle (SCP) of the City of Denton utility system at 'a'. The SCP represents the credit proØle of the utility on a stand-alone basis, irrespective of its relationship with the related credit quality of the city of Denton (AA+/Stable). The Rating Outlook is revised to Stable from Negative. ANALYTICAL CONCLUSION The revision of the Outlook to Stable on the Denton combined utility system reÙects a low likelihood that the structural risks of the Electric Reliability Council of Texas (ERCOT) market and outstanding costs stemming from the 2021 winter storm are likely to pressure the rating. Operating risk in the ERCOT market remains elevated, but market reforms and Denton's risk mitigation actions should reduce the magnitude of Ønancial risk related to future market disruptions. The 'A' rating reÙects increasing leverage at the utility as a result of debt Ønancing anticipated to fund planned capex. Denton's anticipated Øve-year 2023-2027 capital improvement plan (CIP) is approximately $688.3 million, approximately 16% higher than the 2022-2026 CIP. Approximately 76% of the CIP is expected to be debt Ønanced. Elevated capital spending comes on top of additional debt issued in 2021 to Ønance approximately $141 million in winter storm costs. The Stable Outlook reÙects that the utility's Ønancial proØle is expected to remain supportive of the rating, even incorporating the additional planned debt issuance and large increase in retail sales associated with a new large customer in the city in 2022, Core ScientiØc. Core ScientiØc is constructing a cryptocurrency mining operation in the city that is expected to double the city's existing retail electrical load by 2023 and will result in Core ScientiØc accounting for just over 35% of electric utility revenues. Once fully built out in 2023, Core ScientiØc's load is expected to be approximately 300 MW, compared with Denton's peak demand of 360 MW without the new customer. Denton and Core ScientiØc have entered into a purchase power agreement (PPA) that enables Denton to recover full costs or purchasing power for Core ScientiØc on a timely basis and limits Ønancial risk to other retail customers from the new load. Core ScientiØc has a net carbon-neutral goal that aligns with the Denton's Renewable Resource Plan (DRRP), adopted in 2018, and established a goal to provide 100% of retail energy supplies from renewable energy. Purchased power to serve the facility will be emissions-free power supplemented by renewable energy credits (RECs). CREDIT PROFILE The city of Denton, TX (AA+/Stable), is a high growth suburb located approximately 35 miles north of the cities of Dallas and Fort Worth. With a population of about 148,000, Denton is located at the northern end of the Dallas-Fort Worth (DFW) metro area. The city provides 8/12/22, 4:01 PM Fitch Affirms Denton, TX's Utility System Rev Bonds at 'A'; Outlook Revised to Stable https://www.fitchratings.com/research/us-public-finance/fitch-affirms-denton-tx-utility-system-rev-bonds-at-a-outlook-revised-to-stable-12-08-2022 2/10 retail electric, water, and wastewater services through its municipally owned utilities. The electric system is the largest of the city's combined utilities and accounts for the majority of the revenues. Fitch considers the combined utility to be a related entity of the City of Denton, given the organization of those operations as enterprise funds of the city and the city's oversight, including budget and rate setting. The rating on the utility revenue bonds is not constrained by the credit quality of the city. However, as a result of being a related entity, the rating could become constrained in the event of a very material decline in the general credit quality of the city. February 2021 Winter Storm Event Denton's net storm costs totaled approximately $141 million, allocable to the electric utility, which have been Ønanced as long-term debt over 30 years. The costs include net energy service costs from ERCOT and natural gas suppliers incurred during the week of Feb. 14-19, 2021. The exponential prices spikes were prompted by unprecedented and prolonged below freezing temperatures across the state and the resulting ERCOT market dislocation, when over 30,000 MW of various fuel-type generation failed to deliver in the extreme conditions. Denton experienced outages at its own generation resources, curtailed gas delivery to the Denton Energy Center and a wind energy contract that failed to deliver, which collectively exposed the utility to market prices that reached and remained at the $9,000 per megawatt hour (MWh) ERCOT market price cap for multiple days during the event. Denton's net storm costs are net of receipts from ERCOT for generation delivered in the hours its gas and wind generation resources were available. Denton has taken steps to provide more resiliency should a similar event occur in the future, including winterization of its natural gas plant, the Denton Energy Center (DEC), increased customer communications regarding storm events, internal operational improvements and coordination, and revised load shed plan. KEY RATING DRIVERS Revenue Defensibility: 'aa' Rapidly Growing Retail Municipal Utility with Rate Flexibility Revenue defensibility is very strong and supported by combined retail electric, water and wastewater services to a growing service area in and around the city. The service area is characterized by very strong customer growth and a responsive rate structure with an adjustable component to recover actual power supply costs. Customer concentration increased in 2022 when Core ScientiØc began operations in the service area. Although Core ScientiØc will represent a sizable (over 35%) percentage of utility revenues, the customer amounts to a substantially smaller portion of utility net margin. Increased customer concentration introduced by the Core ScientiØc facility represents an Asymmetric Credit Rating Consideration but does not diminish the very strong revenue defensibility assessment since Ønancial risk to the city is mitigated by the terms of the PPA. Operating Risk: 'a' Low Cost Burden; Weaker Operating Cost Flexibility Denton's operating cost burden remains low, at 11.5 cents per kWh in Øscal 2020, and reÙects costs associated with Denton's DRRP and the city's achievement of its 100% renewable target in 2021. Fitch considers operating Ùexibility weaker based on ERCOT's structural market weaknesses exposed by the February 2021 winter weather event. Future projected CIP totals continue to increase. Each of the last three CIP increased between 17% and 38% over the prior plan, reÙecting new projects in all three utilities need to serve growth in the service area, reinvestment in utility infrastructure, and increased costs for planned projects. A substantial 76% of the Øve-year CIP is expected to be debt Ønanced. Capital needs are manageable but will result in increased leverage. Financial ProØle: 'a' 8/12/22, 4:01 PM Fitch Affirms Denton, TX's Utility System Rev Bonds at 'A'; Outlook Revised to Stable https://www.fitchratings.com/research/us-public-finance/fitch-affirms-denton-tx-utility-system-rev-bonds-at-a-outlook-revised-to-stable-12-08-2022 3/10 Leverage to Increase from Planned Debt and Capex Denton's leverage proØle weakened in 2021 after storm related costs were Ønanced over 30 years and capital spending required additional debt issuance. Leverage (measured by Fitch as net adjusted debt to adjusted funds available for debt service) ended FY2021 at 8.3x, compared to 6.1x at the end of FY2020. Leverage is expected to trend upwards to between 9x to 10x over the next Øve years with the CIP and planned debt issuance. The utility's leverage proØle reÙects the combined service lines, including the water and wastewater operations, which are able to support higher leverage than electric utilities. If the full planned CIP and debt issuance occur, leverage could increase above 10x in certain stress years. The combined utility could sustain this level of leverage on a short-term basis at the current rating. Asymmetric Additional Risk Considerations No asymmetric additional risk considerations affected the rating outcome. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: --Lower than expected capital spending, or increased pay-go funding of the capital program could lower leverage from current anticipated levels to approximately 9.0x or below in Fitch's base and stress case. Factors that could, individually or collectively, lead to negative rating action/downgrade: --Regulatory changes that impose material new capex or operating costs for utilities; --Although unexpected, increased operating risk associated with providing power to the city's new large customer, Core ScientiØc. --Weaker liquidity proØle or leverage consistently above 10.0x in Fitch's base or stress case. BEST/WORST CASE RATING SCENARIO International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (deØned as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (deØned as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-speciØc best- and worst-case scenario credit ratings, visit https://www.Øtchratings.com/site/re/10111579. SECURITY The bonds are payable from the net revenues of the combined utility system, including the water, wastewater, and electric light and power systems. REVENUE DEFENSIBILITY Denton derives its revenues from the sale of electric (76% in Øscal 2020), water (17%) and wastewater (7%) services to retail customers. Revenue percentages were skewed temporarily in 2021 due to revenues associated with the winter storm. Denton's electric system serves an approximately 55 square mile, single certiØed area within the city of Denton's city limits and an additional 53 square mile area that is served by multiple suppliers outside of the city's boundaries. The electric system served approximately 57,900 customers in Øscal 2021. The city faces limited competition for new customers that move into limited dual and triple certiØed areas around the perimeter of the city of Denton. Roughly 6% of Denton's electric customers reside in the multi-certiØcated area. Service Area Characteristics Denton's electric system serves an approximately 55 square mile, single-certiØed area within city limits and an additional 53 square mile area that is multiply certiØed outside of the city's boundaries. The electric system served approximately 57,900 customers in Øscal 2021. 8/12/22, 4:01 PM Fitch Affirms Denton, TX's Utility System Rev Bonds at 'A'; Outlook Revised to Stable https://www.fitchratings.com/research/us-public-finance/fitch-affirms-denton-tx-utility-system-rev-bonds-at-a-outlook-revised-to-stable-12-08-2022 4/10 Demand for services is supported by strong customer growth, averaging 2.5% over the past Øve years. Average electric sales over the same period has been Ùat, reÙecting national trends of energy efØciency and declining per capital electric usage. Service area characteristics in the city of Denton include median household income (MHI) that approximates the national average and unemployment that has been well below the national average in recent years (87% in 2021). Rate Flexibility Rate Ùexibility is very strong. Utility rates are determined independently by City Council and are not subject to third-party regulation. Electric distribution rates approximate that of the state and are highly affordable. According to the most recent data available from the US Energy Information Administration in 2020, Denton's average retail electric rate is 142% of the state average but average residential revenue is more competitive at 112% of the state residential average. Total average annual energy costs as measured as a percentage of MHI was 2.5% in 2020, indicating high affordability. Electric rates include Øxed and volumetric charges and adjustable components to recover or return costs that exceed or outperform budgeted levels. The energy cost adjustment factor (ECA) is adjusted on a quarterly basis to stay within a $5 million over/under range on fuel and purchased power costs. Rates also include a transmission cost recovery (TCR) factor, adjusted annually, that recovers the utility's net transmission costs from its electric customers. The city receives approximately 25% of its electric revenues from its owned transmission assets. Transmission revenues are collected from utilities across the ERCOT regional market, as opposed to Denton's retail electric customers, to socialize transmission costs across the state. Denton collects a regulated transmission tariff on its owned transmission assets. Transmission rates are regulated by the Public Utility Commission of Texas (PUCT). The PUCT required Denton to complete a full transmission cost of service Øling by November 2021 to consider the city's transmission tariff. The rate case is still proceeding at the PUCT. Asymmetric Credit Factor Consideration - Customer Concentration Core ScientiØc's load is expected to reach full capacity by January 2023. As noted above, Core ScientiØc will account for over 35% of electric system revenues. Protections against Ønancial risk included in the seven-year PPA include Core ScientiØc and the project developer responsible for all interconnection costs, Denton responsible for protective interconnection equipment construction costs, Denton will purchase all energy and related services from the ERCOT market with a pass-through of all actual costs, daily settlement terms with Core ScientiØc to be consistent with those of ERCOT settlements, and full securitization of potential payables with a short cure period for payment default. ERCOT requires that large data center loads, such as this one, register as Controllable Load Resources, which allows ERCOT to curtail the load under emergency grid conditions, such as occurred during the winter storm. Other than Core ScientiØc, the utility customer base is well diversiØed. Top-10 electric customers provided about 19% of electric revenues in Øscal 2020, the largest of which, University of North Texas, accounted for approximately 4% of electric revenues. OPERATING RISK Denton's operating cost burden (calculated by Fitch as total electric operating costs in relation to energy sales) has been low and relatively stable around 11 cents per kWh between 2017 and 2020, with the exception of Øscal 2019 when expenditures included a large one-time noncash decommissioning expense for the Gibbons Creek coal plant. The calculation reached an unusual 20 cents in Øscal 2021 due to one-time volume and price disruptions related to the winter storm but is expected to decline to more typical levels in 2022. Fitch's operating cost calculation includes the electric fund transfer to the city's general fund. Each of the three utilities make transfers to the general fund made up of three components: an indirect cost allocation, a 6.0% return on investment (ROI; increased from 3.5% in 2020) and a payment in lieu of franchise fees equal to 5% of revenues. While the indirect cost allocation portion of the transfer is considered an operating expense, the other components are subordinate to debt service per the revenue bond ordinance. All three components are included in Fitch's operating cost burden calculation and included as operating expenditures in Denton's audited Ønancial statements. Operating Cost Flexibility Fitch views Denton's operating cost Ùexibility as weak as a result of ongoing risks associated with ERCOT market operating weaknesses and potentially volatile energy and natural gas prices, as occurred during the winter storm event. Denton has not opted into ERCOT's deregulated market by offering its retail electric customers the choice of generation providers but is required to transact all electric sales and purchases through ERCOT, exposing the utility to counterparty risk of all ERCOT market participants. 8/12/22, 4:01 PM Fitch Affirms Denton, TX's Utility System Rev Bonds at 'A'; Outlook Revised to Stable https://www.fitchratings.com/research/us-public-finance/fitch-affirms-denton-tx-utility-system-rev-bonds-at-a-outlook-revised-to-stable-12-08-2022 5/10 While the operating risk in ERCOT remains elevated, the PUCT and ERCOT market administrators have taken steps to limit future operational and Ønancial risk to utilities. Additional winterization requirements and reduced market price caps (from $9,000/kWh to $5,000/kwh) are expected to have the most meaningful impact on overall market Ønancial risk. Additionally, ERCOT administrators expect to maintain higher reserve margins the coming years as additional generation units come on line, which should provide additional resource adequacy. ERCOT's summer 2022 planning reserve margin increased to 23% from less than 10% during the 2019 summer. Environmental Considerations and Clean Energy Transition Denton embarked on a renewable energy plan in 2015, adopted as the DRRP in 2018, with a goal to secure 100% of its energy demand through renewable purchase power agreements (PPA) by 2020. The DRRP incorporated the closure of Gibbons Creek, a coal-Øred power plant owned by the Texas Municipal Power Agency (TMPA) and replaced the loss of this capacity with Denton's construction of the 225 MW Denton Energy Center (DEC), a combined cycle natural gas plant located in the city that entered commercial operation in 2018. The DEC is designed to act as a physical insurance policy and back-up generation capacity while 100% of the city's energy supply is provided by multiple wind and solar PPAs. Denton reached its target of 100% renewable energy in calendar year 2021 and is expected to do the same in 2022. Approximately 70% of power supply was provided by wind energy with the other 30% provided by solar energy. Denton Energy Center The DEC is a 225 MW combined cycle natural gas-Øred generation plant located in the city of Denton. The DEC is designed to Ørm the intermittent renewable resources provided by multiple wind and solar PPAs and to act as a physical price hedge against potential high market prices within ERCOT. The DEC provided 24% of energy supply in Øscal 2020. As additional PPAs were entered into, Denton was able to reduce DEC production to opportunistic sales into the ERCOT market, when economic. The facility provides a strong physical hedge to delivery risk related to the energy-only PPAs, and market risk related to volatile energy price movement in ERCOT. Gas deliveries to the DEC were curtailed during Winter Storm Uri, which in turn, resulted in a freezing of certain plant components. The city is exploring longer-term options to improve gas supply reliability at the DEC, including the installation of a second delivery pipeline to the plant, installation of a natural gas compressor to support pressure on the existing delivery pipeline, or the installation of on-site liquiØed natural gas storage. Capital Planning and Management Fitch considers lifecycle investment needs as moderate, although Denton's increased its CIP reÙects larger planned investments in system aging infrastructure, speciØcally the wastewater system. Denton's Øve-year CIP (2023-2027) is projected at $688 million, up from the $595 million 2022-2026 CIP. 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 comprise less than 2% of total gallons sold. Raw water supplies and treatment capacity appear sufØcient to meet expected water demands. The water system experienced operational impacts from Winter Storm URI but did not experience material over budget costs like the electric utility. The water system's top 10 customers, including wholesale customers reÙect relatively stable entities, including the University of North Texas, the local school district, and local health centers and hospitals. Top 10 customers comprise 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. Treatment capacity is sufØcient. The top ten customers contribute less than 10% to the wastewater system's revenue. FINANCIAL PROFILE Denton's operating performance has exhibited variability, but remained generally strong. The combined utility system's leverage ratio has ranged between 6x and 10x over the last Øve years, reÙecting variability in operating income and FADS, as well as higher levels of outstanding debt beginning in Øscal 2017 to Ønance the DEC construction. 8/12/22, 4:01 PM Fitch Affirms Denton, TX's Utility System Rev Bonds at 'A'; Outlook Revised to Stable https://www.fitchratings.com/research/us-public-finance/fitch-affirms-denton-tx-utility-system-rev-bonds-at-a-outlook-revised-to-stable-12-08-2022 6/10 Denton's leverage ratio declined to 6.1x in Øscal 2020 with stronger cash Ùow resulting from lower expenditures and relatively strong sales, notwithstanding the closures of a few of its largest electric customers during the initial months of the coronavirus pandemic. Leverage weakened in 2021 to 8.3x with $141 million debt issuance to Ønance storm-related costs and $77 million in new debt to fund a portion of the combined utility CIP. Robust Liquidity Buffers Winter Storm Liquidity Crisis Liquidity is considered neutral to the rating but Denton's strong reserve levels and available liquidity through its ECP program were instrumental in responding to the winter storm event and the acute liquidity crisis that developed within days. Combined utility cash on hand totaled 383 days at the end of Øscal 2020, and cash reserves at the electric fund accounted for approximately $83 million of the $173.6 million in unrestricted cash at the end of Øscal 2020. As a result of the long-term debt Ønancing of storm-costs, the utility cash combined cash reserves remained steady, with $171.9 million at the end of Øscal 2021, with electric fund cash accounting for $87 million. The winter storm event prompted Denton to increase its minimum targeted reserves levels in September 2021. The electric fund target for working capital and operating reserves increased to at least 175 days of budgeted expenses, up from 60 days. The water and wastewater funds each have respective minimum reserve targets of 120 days and 100 days, given the large capital programs at those utilities to meet growth requirements. Fitch Analytical Stress Test (FAST) - Base Case and Stress Case Fitch's analysis and Fitch Analytical Stress Test (FAST) are informed by Denton's combined utility Ønancial projections. Denton's sales forecast reÙects generally robust growth for all three utilities over the next Øve years and no base rate increases are assumed for any of the three utilities. The forecast also factors a reduction in transmission revenues given the ongoing transmission rate case. Base case capital requirements and debt issuances are informed by the utility's Øve-year CIP that has increased 16% since last year. The base case also includes the substantial increase in retail sales (over 100%) assumed in 2023 related to the new load of Core ScientiØc. The model assumes the accompanying higher purchased power costs and other operating expenditures related to the additional load, although no additional debt will accompany the new customer. While revenues and expenditures with both increase, the overall impact to operating margins is expected by Fitch to be positive, but relatively modest, in comparison to the change in overall sales at the electric utility. Fitch's base case scenario indicates that Denton's leverage ratio is expected to increase to between 9x and 10x over the next Øve years, driven primarily by the increased debt funding to support higher capex, no planned rate increases other than adjustments to the ECA to reÙect actual power costs, and expectations for lower transmission revenues. To the extent that actual capex and debt issuance occurs below projected levels, as it has in recent years, leverage should remain closer to 9x. Coverage and liquidity levels remain consistent with historical levels. Fitch's stress case imposes a modest decline in energy demand to the existing base case expectations in the Ørst two years, followed by a three-year recovery. Water, wastewater and transmission revenues are not stressed. The stress case indicates that leverage could be marginally higher in certain years, but should approximate 10x. Other key Ønancial metrics, including DCOH and coverage levels, remain sufØcient and supportive of the rating. Debt ProØle Denton's debt proØle is neutral to the rating. The majority of the city's utility debt is in the form of general obligation (GO) bonds and certiØcates of obligation (CO) that are issued and secured by a dual pledge of utility system revenues and general government tax receipts, but consistently paid from utility system revenues. The combined utility has approximately $548 million in GO and CO debt. Fitch's coverage and debt calculations include the GO and CO bonds and the respective debt service paid by the utility systems. Utility system revenue bonds include the series 2017 and series 2021 bonds at approximately $333 million. Similar to the revenue mix, the electric system is responsible for the majority (over 80%) of the total combined debt obligations of the electric, water and wastewater debt. All of the outstanding long-term debt is Øxed rate with a Ønal maturity in 2050. The ECP program (not rated by Fitch) is the only variable rate debt in the portfolio. In addition to the sources of information identiØed in Fitch's applicable criteria speciØed below, this action was informed by information from Lumesis. 8/12/22, 4:01 PM Fitch Affirms Denton, TX's Utility System Rev Bonds at 'A'; Outlook Revised to Stable https://www.fitchratings.com/research/us-public-finance/fitch-affirms-denton-tx-utility-system-rev-bonds-at-a-outlook-revised-to-stable-12-08-2022 7/10 REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG CONSIDERATIONS Denton (TX) [Electric] has an ESG Relevance Score of '4' for Exposure to Environmental Impacts due to the effects of the 2021 winter storm and structural aspects of the ERCOT organized market, which has a negative impact on the credit proØle, and is relevant to the ratings in conjunction with other factors. Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit- neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.Øtchratings.com/esg VIEW ADDITIONAL RATING DETAILS FITCH RATINGS ANALYSTS Kathy Masterson Senior Director Primary Rating Analyst +1 512 215 3730 kathryn.masterson@Øtchratings.com Fitch Ratings, Inc. 2600 Via Fortuna, Suite 330 Austin, TX 78746 Rebecca Meyer, CFA, CPA, CISA Director Secondary Rating Analyst +1 512 215 3733 rebecca.meyer@Øtchratings.com Dennis Pidherny Managing Director Committee Chairperson +1 212 908 0738 dennis.pidherny@Øtchratings.com MEDIA CONTACTS Sandro Scenga New York +1 212 908 0278 sandro.scenga@theØtchgroup.com Additional information is available on www.Øtchratings.com PARTICIPATION STATUS RATING ACTIONS ENTITY / DEBTbbRATINGbbPRIORbb Denton (TX) [Electric]b b LT AbRating Outlook Stable AfØrmed AbRating Outlook Negative Denton (TX) /Utility System Revenues/1 LT b 8/12/22, 4:01 PM Fitch Affirms Denton, TX's Utility System Rev Bonds at 'A'; Outlook Revised to Stable https://www.fitchratings.com/research/us-public-finance/fitch-affirms-denton-tx-utility-system-rev-bonds-at-a-outlook-revised-to-stable-12-08-2022 8/10 The rated entity (and/or its agents) or, in the case of structured Ønance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure. APPLICABLE CRITERIA APPLICABLE MODELS Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). FAST Econometric API - Fitch Analytical Stress Test Model, v3.0.0 (1) ADDITIONAL DISCLOSURES Dodd-Frank Rating Information Disclosure Form Solicitation Status Endorsement Policy ENDORSEMENT STATUS DISCLAIMER & DISCLOSURES All Fitch Ratings (Fitch) credit ratings are subject to certain limitations and disclaimers. Please read these limitations and disclaimers by following this link: https://www.Øtchratings.com/understandingcreditratings. In addition, the following https://www.Øtchratings.com/rating-deØnitions-document details Fitch's rating deØnitions for each rating scale and rating categories, including deØnitions relating to default. ESMA and the FCA are required to publish historical default rates in a central repository in accordance with Articles 11(2) of Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 and The Credit Rating Agencies (Amendment etc.) (EU Exit) Regulations 2019 respectively. Published ratings, criteria, and methodologies are available from this site at all times. Fitch's code of conduct, conØdentiality, conÙicts of interest, afØliate Ørewall, compliance, and other relevant policies and procedures are also available from the Code of Conduct section of this site. Directors and shareholders' relevant interests are available at https://www.Øtchratings.com/site/regulatory. Fitch may have provided another permissible or ancillary service to the rated entity or its related third parties. Details of permissible or ancillary service(s) for which the lead analyst is based in an ESMA- or FCA-registered Fitch Ratings company (or branch of such a company) can be found on the entity summary page for this issuer on the Fitch Ratings website. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable veriØcation of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party veriØcation it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party veriØcations such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party veriØcation sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party veriØcation can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to Ønancial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of Ønancial and other information U.S. Public Power Rating Criteria (pub. 09 Apr 2021) (including rating assumption sensitivity) Public Sector, Revenue-Supported Entities Rating Criteria (pub. 01 Sep 2021) (including rating assumption sensitivity) Denton (TX) EU Endorsed, UK Endorsed 8/12/22, 4:01 PM Fitch Affirms Denton, TX's Utility System Rev Bonds at 'A'; Outlook Revised to Stable https://www.fitchratings.com/research/us-public-finance/fitch-affirms-denton-tx-utility-system-rev-bonds-at-a-outlook-revised-to-stable-12-08-2022 9/10 are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be veriØed as facts. As a result, despite any veriØcation of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or afØrmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is speciØcally mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identiØed in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, veriØed and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement Øled under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efØciency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian Ønancial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001. Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the “NRSRO”). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.Øtchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the “non-NRSROs”) and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO. Copyright © 2022 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800- 753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. READ LESS SOLICITATION STATUS The ratings above were solicited and assigned or maintained by Fitch at the request of the rated entity/issuer or a related third party. Any exceptions follow below. ENDORSEMENT POLICY Fitch’s international credit ratings produced outside the EU or the UK, as the case may be, are endorsed for use by regulated entities within the EU or the UK, respectively, for regulatory purposes, pursuant to the terms of the EU CRA Regulation or the UK Credit Rating Agencies (Amendment etc.) (EU Exit) Regulations 2019, as the case may be. Fitch’s approach to endorsement in the EU and the UK can be found on Fitch’s Regulatory Affairs page on Fitch’s website. The endorsement status of international credit ratings is provided within the entity summary page for each rated entity and in the transaction detail pages for structured Ønance transactions on the Fitch website. These disclosures are updated on a daily basis. Utilities and Power US Public Finance North America United States 8/12/22, 4:01 PM Fitch Affirms Denton, TX's Utility System Rev Bonds at 'A'; Outlook Revised to Stable https://www.fitchratings.com/research/us-public-finance/fitch-affirms-denton-tx-utility-system-rev-bonds-at-a-outlook-revised-to-stable-12-08-2022 10/10 Fitch Ratings - Issuer Default Ratings AAA Highest credit quality AAA ratings denote the lowest expectation of default risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events. AA Very high credit quality AA ratings denote expectations of very low default risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events. A High credit quality A ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings. BBB Good credit quality BBB ratings indicate that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this capacity. BB Speculative BB ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial flexibility exists that supports the servicing of financial commitments. B Highly speculative B ratings indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment. CCC Substantial default risk CCC ratings indicate that default is a possibility. CC Very high default risk CC ratings indicate that a default of some kind appears probable. C Exceptionally high default risk C ratings indicate that a default or default-like process has begun, or the issuer is in standstill, or for a closed funding vehicle, payment capacity is irrevocably impaired. Note: The modifiers "+" or "-" may be appended to a rating to denote relative status within major rating categories.