The Rating Outlook on all bonds is revised to Stable from Positive.
The bonds are secured by installment payments made by the city of
KEY RATING DRIVERS
STRONG CASH RESERVES: The upgrade on both series of bonds reflects continued positive cash flow and strengthened reserves at the gas system, which has strengthened the underlying credit quality of both the senior and subordinate lien ratings.
SENIOR/SURBORDINATE BOND STRUCTURE: Both series of bonds are secured by unconditional installment payments made by the
SHARED RATE STABILIZATION FUNDS: The two series of bonds share the benefit of each system's respective rate stabilization fund, which can be used to support a shortfall of either series of bonds. Debt service reserve funds are in place for each series but do not provide cross-support to the other series.
LIMITED SERVICE AREA: The systems operate in a limited and concentrated local service area economy. Wealth levels are below state and national averages and unemployment in the county is high at 10.6% in 2013. Government employment accounts for more than 50% of the city's work force.
STABLE WATER SYSTEM: The rating on the senior lien bonds reflects the modest but stable financial margins of the water system, low treatment and delivery costs, diverse but small customer base and very high debt burden.
GROWING GAS SYSTEM: The rating on the subordinate lien bonds reflects the positive cash flows at the gas system, system growth through continued conversion of customers to natural gas, risk of revenue variability, low commodity costs, and a debt burden which remains high since start-up financing of the system that began service in 2001.
DECLINE IN RESERVE LEVELS: Depletion of the strong cash reserves at both systems could pressure the rating and/or outlook of either series of bonds.
INCREASED NATURAL GAS PRICES: Upward movement in the price of natural gas as compared to heating oil and propane over time could result in reduced revenues to the gas system given the city's use of a variable rate structure for certain large gas customers.
UPGRADE REFLECTS IMPROVED CASH RESERVES AT GAS SYSTEM
The gas system has built its cash reserves from
The growth in gas reserves to such strong levels mitigates concerns regarding the impact to financial margins that could occur from the variable-rate structure and the potential use of water system rate stabilization funds for gas system purposes.
SENIOR/SUBORDINATE BOND STRUCTURE IS COMPLEX
While the senior and subordinate bonds enjoy a combined pledge of both systems, the difference in Fitch's two ratings reflects the structure of the payments and a dependence of the subordinate lien bondholders on payments from the city's natural gas system. Fitch views the natural gas system as weaker in credit quality than the water enterprise, largely because of its growth through the conversion of existing customers to natural gas, vulnerability to commodity price variability in its rate structure, and its slowly amortizing and escalating debt burden.
The bond repayment structure is complex. The installment sale agreements that the
LIMITED AND CONCENTRATED SERVICE AREA
STABLE WATER ENTERPRISE
Financial performance of the water system is modest but consistent. Debt service coverage has averaged 1.7x over the past three years, resulting in surplus revenues annually of between
Debt levels are high at
GAS ENTERPRISE GENERATING POSITIVE MARGINS
During its initial years, the start-up nature of the gas enterprise resulted in the need for the gas system to rely on the city's general fund and water fund for operating cash. In fiscal 2010, the system began to break even, including coverage of its debt obligations, no outstanding loans from the water system or general fund, and positive year end cash reserves.
The city has continued to build its reserves through consistent customer growth and lower than budgeted natural gas prices on the un-hedged portion of its portfolio. Unrestricted cash totalled
Debt levels at the gas system are high and will remain high with the slow amortization, with 13% of principal repaid in 10 years and 40% in the next 20 years. Debt service coverage in fiscal 2013 was 1.53x. Coverage of maximum annual debt service with fiscal 2013 revenues was adequate at 1.26x, given the continued potential customer growth at the system.
RATE STRUCTURE RISK
The city's gas rates do not include a fuel cost adjustment to track movement in natural gas prices, as is typically done by investor-owned utilities. However, commodity price risk is reduced by the city's practice of forward hedging for much of its winter gas needs. While this may result in above-market prices given the nature of purchasing ahead, it provides a more known and stable gas cost to the utility.
The city's rate structure is exposed to variability in that 23% of its revenues are under variable rate pricing that allows customers to pay the lowest fuel cost of natural gas, propane, and fuel oil. The relatively low natural gas price environment seen in recent year is expected to continue, reducing any near-term risk from this rate structure.
Additional information is available at 'www.fitchratings.com'.
--'U.S. Public Power Rating Criteria',
--'U.S. Water and Sewer Revenue Bond Rating Criteria',
U.S. Public Power Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
Source: Fitch Ratings
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