NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the approximately $32 million certificates of participation (COPs), series 2015 issued by the Board of Public Utilities of the City of Springfield, Missouri (City Utilities).
The bonds are expected to price on Sept. 16, 2015 via a competitive bid. Proceeds will be used to refund all of the outstanding series 2006A&B COPs and pay cost of issuance.
In addition, Fitch has affirmed the 'AA' rating on the following:
--$530.8 million public utility revenue bonds, series 2015 issued by the city on behalf of City Utilities;
--$34.7 million COPs, series 2006A&B issued by City Utilities (to be refunded);
--$43.8 million COPs, series 2012 issued by City Utilities;
--$35.4 million COPs, series 2014 issued by City Utilities.
The Rating Outlook is Stable.
SECURITY
The COPs are subordinate to the revenue bonds and secured by a lien on combined excess revenues of the public utility system, inclusive of the electric, natural gas, water, transportation and telecommunication systems, and a security interest in the assets financed with the leases.
The public utility revenue bonds are secured by a senior lien on combined net revenues of the public utility system.
KEY RATING DRIVERS
DIVERSIFIED UTILITY SERVICE PROVIDER: The city of Springfield, MO (the city), operates City Utilities, a combined utility system that provides a diverse host of services, including electric and gas distribution, water, transit and telecommunications services. The largest of the utility's services is the electric system, which accounted for 63% of fiscal 2014 (Sept. 30) revenue.
SOUND FINANCIAL METRICS: Financial metrics have strengthened in fiscal years 2013 and 2014 due to a series of implemented rate increases. The rebound occurred after a number of years with tightened metrics due to slowed energy sales and increased debt associated with the construction of John Twitty Energy Center Unit 2 (JTEC Unit 2).
REGULAR RATE ADJUSTMENTS ANTICIPATED: The utility has demonstrated a willingness to adjust rates to support ongoing capital projects and increased debt service obligations. Planned rate increases will support solid liquidity and financial metrics, with debt service coverage (DSC) projected to remain in the range of 2.3 - 2.4x DSC through fiscal 2020. Competitive rates provide sufficient rate-making flexibility.
DIVERSE SERVICE AREA: The city's economy is varied, with a range of industry sectors and minimal customer concentration. Housing and subdivisions have shown renewed growth and residential sales make up a healthy 45% of combined retail revenue, which provides stability.
EXPOSURE TO ENVIRONMENTAL REGULATIONS: The majority of the electric system's power is derived from coal-fired generation, which could pose a challenge for the utility as environmental standards become more stringent. Positively, capital expenditures financed by the series 2014 COPs include plant upgrades and conversions to make the utility Mercury and Air Toxics Standards (MATS) compliant by its April 2016 deadline.
RATING SENSITIVITIES
MANAGEMENT OF RATES: The Board of Public Utilities of the City of Springfield, Missouri's ability to manage rates to maintain sound financial performance is key to the rating given increasing environmental standards that have the potential to be costly, along with variability in electric, natural gas and water sales. While not expected, an inability to maintain rates that support robust financial metrics could put downward pressure on the rating.
CREDIT PROFILE
City Utilities is a component unit of the City of Springfield, Missouri that provides electric, natural gas, water, transportation and telecommunication services to the city. The largest of the utility services is the electric system, which serves 111,214 customers. The water system had historically operated separately from the combined electric, natural gas and transportation system but was consolidated into City Utilities in 2009. For the combined system, residential and commercial sales are approximately equal, at 38% and 44% of revenues, respectively.
GENERATION CAPACITY & WATER SUPPLY
City Utilities' electric system is vertically integrated, and the majority of power supply comes from owned generation. Combined gross generating capacity of 1,121 megawatts (MW) is more than sufficient to meet the utility's gross peak 2014 demand of 775 MW and 12% reserve requirement. Fitch believes the utility will be able to leverage its long power supply position to meet future load growth, summer peaks, and more easily meet potential changes in environmental regulation.
Exposure to coal-fired generation is significant, at 77% of the utility's 2014 energy mix. A heavy reliance on coal is typical for utilities in this region of the U.S., given the proximity to Powder River Basin coal supplies. The coal supply is low-sulfur coal, which emits fewer pollutants when combusted than other coal types and puts the utility in a good position to comply with certain environmental standards.
The utility has an ample and diverse water supply through 2040 from six sources: Fellows Lake, McDaniel Lake, James River, Fulbright Spring and two deep wells supplemented by pumping from Stockton Lake as needed. The water system has sufficient treatment capacity of 68.4 million gallons per day (MGD) as compared to its peak demand of 42.8 MGD in fiscal 2014. Ongoing improvements at the Blackman Water Treatment Plant are expected to increase treatment capacity to 72 MGD in fiscal 2015.
For additional information, please see Fitch's report, titled 'City Utilities of Springfield, Missouri', dated Oct. 3, 2014.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990327
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990327
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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.