NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the rating on the following Los Alamos County (the utility), New Mexico's utility system revenue bonds to 'A' from 'A-':
--$29.3 million utility system revenue bonds series 2004A and 2004B;
--$5.8 million utility system revenue bonds series 2006A and 2006B.
The Rating Outlook is Stable.
SECURITY
Bonds are secured by, and payable from, the pledge of the trust estate, which includes net revenues and moneys in the acquisition fund, the bond fund and the rate stabilization reserve fund.
KEY RATING DRIVERS
COMBINED UTILITY SYSTEM: The utility is a combined utility system providing electric, natural gas, water, and wastewater services to Los Alamos County. The county is located in northern New Mexico and serves a small but economically stable territory of approximately 18,000 people.
RATING UPGRADE TO 'A': The upgrade reflects the utility's upcoming series 2004 debt maturity in 2016, which will significantly lower debt balances and corresponding debt service obligations. The scheduled maturity will further improve the utility's financial metrics and provide even greater financial flexibility.
CUSTOMER CONCENTRATION RISK: The Los Alamos National Laboratory (LANL) accounted for approximately 53% ($31.7 million) of the utility's 2012 operating revenues. This risk is mitigated, however, by the stability exhibited by LANL over the course of time, and the lab's importance to U.S. national security. LANL is one of two labs of its kind in the country where multi-disciplinary science and technology research is conducted.
STABLE FINANCIAL PERFORMANCE: The combined utility continues to generate healthy profit margins, averaging 9.8% since fiscal 2008. It has also reported low system leverage at 3.3x debt-to-funds available for debt service (FADS), adequate debt service coverage of 1.73x, and healthy liquidity of 160 days cash on hand (DCOH) in fiscal 2012.
MANAGEABLE CAPITAL PROGRAM: The utility's five-year capital program is sized at a manageable $64.7 million. Approved electric production projects will be funded 80% by the Department of Energy (DOE) and the remaining 20% will be financed through rate pass-through. Water and sewer projects will be financed with a mix of state grants/loans, utility rates, and county participation.
NARROW BUT ECONOMICALLY STABLE SERVICE AREA: LANL operations currently account for approximately 62.7% of the county's employment. However, the lab has also been instrumental in fostering a strong and stable local economy with superior wealth levels and low unemployment.
RATING SENSITIVITIES
SIGNIFICANT REDUCTION IN LANL's OPERATIONS: A significant and drastic reduction in LANL's workforce would severely affect the county's economic stability. The effect on utility revenues could result in downward pressure on the rating and/or Outlook.
CREDIT PROFILE
The utility is a combined utility system providing electric (74.6% of revenues), natural gas (9.1%), water (9.4%), and wastewater (6.9%) services to Los Alamos County. The county is located in northern New Mexico, approximately 35 miles northwest of Santa Fe. LANL employs approximately 10,490 employees (12,000 in 2010), or 62.75% (64% in 2010) of total county employment. Unemployment stood at 3.3% as of April 2013.
Pooled Generating Sources
The county and LANL own and operate ample generation resources totaling 126 megawatts (MW), and have an agreement to pool these resources for a more efficient dispatch. The county owns or has contracts for approximately 75 MW of generation and has transmission contracts to deliver the energy from those facilities to the Los Alamos service area.
The DOE owns two approximately 20-MW generation units that are located on site at LANL, both of which are currently for emergency generation only. Additionally, the DOE has contracts with the federal Western Area Power Administration (WAPA) for up to 12 MW of hydroelectric capacity.
The utility recently installed an additional 3 MW at their existing Abiquiu hydroelectric plant to increase the facility's capacity for renewable energy production. The turbine generator successfully completed its first year of operation in May 2012.
The utility has a 7.2% or 36-MW ownership interest in Unit 4 of the coal-fired San Juan electric generating station, built in 1982 and operated by Public Service Company of New Mexico (PNM). The utility's agreement expires in 2022. An extension to the station's life is under evaluation, as the San Juan operating committee and the EPA are in negotiations and have reached an agreement in principle regarding environmental requirements, which could have a significant effect on the utility's future operating costs. A final ruling on the matter is not expected before 2014.
Improving Debt Profile
Leverage is low at 3.3x debt-to-FADS. The utility's debt service profile is flat through 2015 and sized at about $9.2 million annually. Thereafter, debt service drops significantly to $866,000 in 2016 when the series 2004A bonds mature providing the utility with added debt capacity if needed. All debt is fixed-rate and final debt maturity is in 2024.
Fitch views the utility's financial performance as stable, demonstrated by the healthy metrics and an average operating margin of 9.8% since fiscal 2008. Fiscal 2012 revenues increased to $60.2 million, largely from higher electric sales. Operating costs remained flat due to good management of salaries and contractual obligations. The utility has adequate liquidity of $18.5 million for operational needs (160 days DCOH), a significant improvement from fiscal 2010 when draws were made to finance capital projects.
Minor Cutbacks at LANL
Fitch views the county's continued practice of adopting conservative fiscal measures as a mitigant against adverse unforeseen changes associated with the operation of LANL. Recent federal cutbacks, albeit immaterial, have resulted in some workforce reduction at the lab. However, LANL still provides employment to over 10,000 employees and plays a preeminent position in U.S. national security and fundamental science including nuclear technology, space exploration, and renewable energy.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria, this action was informed by information from CreditScope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 2013);
--'U.S. Public Power Rating Criteria' (December 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499
U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696027
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=795941
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.