Fitch Ratings has assigned an ‘AA’ rating to the Board of Public Utilities of the City of Springfield, Missouri’s approximately $70 million lease/purchase agreement obligations (2012 lease). It is anticipated that the agreement will be available for delivery via competitive bid on June 5, 2012.
In addition, Fitch affirms the ‘AA’ rating on the utility’s approximately $752 million of outstanding utility system revenue bonds and certificates of participation, including certificates of participation series 2001 expected to be refunded with proceeds of the current offering.
The Rating Outlook is Stable.
The public utility and waterworks revenue bonds are secured by a senior lien on combined net revenues of the public utility and water systems. The certificates of participation and the 2012 lease obligations are subordinate to the revenue bonds and secured by a lien on combined excess revenues of the public utility and water systems and a security interest in the assets financed with the leases.
Key Rating Drivers
Combined Utility System: The city of Springfield has operated a combined municipal utility that provides electric, natural gas, water, transit and telecommunications services since 2009, when the board of public utilities approved the consolidation of the water utility and the remaining systems. The utility’s financial metrics have remained stable and were not affected by the consolidation.
Sound Financial Metrics: The utility has a record of strong financial performance in line with the respective rating category medians. Fiscal 2011 Fitch-calculated debt service coverage of 2.32 times (x), excluding capitalized interest, is supported by adequate liquidity of 119 days cash on hand (DCOH).
Projected Metrics Tighter But Strong: Debt service coverage is expected to be closer to 2.0x going forward, compared to the historically higher levels, as debt payments associated with the John Twitty Energy Center Unit 2 (JTEC Unit 2) start in fiscal 2012. The utility’s 18.5% electric rate increase implemented in October 2010 will partially offset the increase in debt obligations.
Regular Rate Adjustments Anticipated: The utility has demonstrated willingness to adjust rates for ongoing capital projects, and in concert with the expected rise in JTEC Unit 2 debt service obligations. The utility’s rates remain competitive, providing management with sufficient rate-making flexibility.
JTEC Unit 2 Completed: The JTEC Unit 2 was commissioned in January 2011 and has performed very well in the first year of operation, especially across a very hot summer peak in 2011. The unit is the cleanest and most efficient unit in the utility’s fleet.
Flexible Excess Power: The addition of the JTEC Unit 2 positions the utility to manage future load growth and changes in environmental legislation. Excess capacity from the unit could provide off-system sale opportunities when economically feasible.
Slow Service Area Growth: The city of Springfield and immediately surrounding Greene County offer a diverse service area economy with no one sector dominating employment. Economic growth remains slow with annual load growth expectations not expected to exceed 1%.
What Could Trigger a Rating Action
Weaker Financial Metrics: Fitch expects the utility to continue generating sufficient revenue to maintain coverage consistent with the rating category despite rising debt service costs. Failure to maintain anticipated financial metrics could result in downward rating pressure.
Stable Financial Performance
Financial metrics are healthy and have been stable throughout the past several years despite the effects of the economic downturn, unusual weather patterns, and the funding of the JTEC Unit 2 power station project. Fitch notes that management’s well-planned rate increases and financial management have allowed for minimal swings in key financial metrics over the last several years. Coverage has exceeded 2.0x and DCOH has averaged 100 days.
The utility’s debt service coverage is expected to be closer to 2.0x starting in fiscal 2012 as principal repayments begin on series 2006 bonds. Fiscal 2011 debt service payments increased to $47 million in 2010 from $27 million a year earlier, and will reach $52 million in 2012. Fitch still considers the anticipated coverage level to be consistent with the current rating and expects the utility to continue to make rate adjustments sufficient to maintain robust financial metrics.
Operating margins have been adequate, averaging 4.7% over the period 2007-2011. Fiscal 2011 revenues increased 11.9% to $402.2 million reflecting higher utility rates. Fiscal 2011 expenses stood at $368.4 million, a 9.2% increase primarily due to increased off-system demand that prompted production fuel expenses to rise. Operating expenses are generally well controlled, having averaged a 0.7% annual increase since 2007.
Excess Generation Capacity
The utility is expected to be long on power for the next several years with the completion of JTEC Unit 2. The electric department’s net generating capacity totals 1,060 megawatts (MW), including the new 300 MW JTEC Unit 2, and consists of coal fired generators and natural gas combustion turbines; the utility experienced peak gross demand of 866 MW in fiscal 2011, an increase of 56 MW over 2010.
Fitch believes that the utility will be able to leverage the JTEC station’s generation to meet future load growth, summer peaks and more easily meet potential changes in environmental legislation. Excess capacity could also provide the utility with additional opportunities, but at the same time would increase its exposure to the resale market and pricing volatility.
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 66.5 million gallons per day (mgd) meeting a peak demand of 52 mgd in fiscal 2011. It is currently projected that additional treatment capacity will need to be in place prior to summer of 2022.
Competitive Utility Rates
The utility continues to manage its rate structure to maintain sound financial metrics and fund capital projects and maintenance costs. A planned 18.5% adjustment to rates was implemented in fiscal 2011 (effective October 2010) to support the debt service associated with the construction of JTEC Unit 2. The utility plans for modest rate adjustments over the period 2012-2014.