News Column

Fitch Rates Kansas City BPU Bonds 'A+'; Outlook Stable

May 30, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'A+' rating to the Unified Government of Wyandotte County/Kansas City Board of Public Utilities (BPU) $196.6 million utility system improvement revenue bonds series 2014A.

Fitch also affirms the 'A+' rating on the following outstanding BPU bonds:

--$462.8 million utility system revenue bonds.

The Rating Outlook is Stable.

PROCEEDS

Bond proceeds will be used to fund planned environmental capital expenditures at BPU's Nearman coal-fired generating station and refund a portion of outstanding debt for interest savings.

SECURITY

The bonds are payable from net revenues of the combined electric and water system on parity with outstanding utility system revenue bonds (senior lien).

KEY RATING DRIVERS

STABLE FINANCIAL PERFORMANCE: The rating reflects the continuance of the Kansas City Board of Public Utilities' (BPU) improved and stable financial performance aided by regular rate increases. Moderating the performance is the elevated level of payments in lieu of taxes (PILOT) and weaker than average liquidity.

REGULAR RATE INCREASES: BPU completed a multi-year rate increase plan, with a final 7.5% base rate increase implemented in January 2013. Projected electric base rate increases of 5.0% in 2015 and 2016 will be necessary to cover system improvements and maintain debt service coverage ratios in line with BPU's current rating.

INCREASED USAGE OF NATURAL GAS: The recent acquisition of combined cycle natural gas generating capacity along with planned plant conversions from coal to gas should add greater balance to BPU's fuel and generating mix. By 2015, Fitch expects gas-fired generation to represent approximately 50% of BPU's installed capacity versus the current level of 25%.

CAPEX PLAN SUPPORTED BY SURCHARGE: Sizable capital additions are planned, primarily for environmental compliance projects at BPU's coal-fired plants. Costs for environmental modifications to the Nearman Station, BPU's core baseload resource, are budgeted at $250 million. Positively, an environmental rate rider implemented in 2011 is projected to cover incremental debt service incurred by BPU.

WEAK SERVICE AREA DEMOGRAPHICS: The 'A+' rating takes into account the service area's below-average wealth indicators, large commercial and industrial customer base, and relatively flat sales growth. Favorably, recent economic trends continue to demonstrate improvement. These concerns are also mitigated by the lack of customer concentration and BPU's strengthened financial metrics.

RATING SENSITIVITY

ADHERENCE TO RATE INCREASE PLAN: The recently improved and sustained financial metrics are based on prior and planned rate increase activity. Adherence to BPU's rate plan, including continuance of the environmental rider, to fund the utility's sizable capex plan remains a key rating consideration.

CREDIT PROFILE

BPU is a combined electric and water utility system serving approximately 63,000 electric and 50,000 water customers. The utility's electric system is an integrated system consisting of generation, transmission, and distribution assets. Approximately 83% of BPU's revenue is derived from the electric system, with the balance coming from the water system. Sales to commercial and industrial customers account for about 60% of the electric system revenue, with residential customers accounting for approximately 30%.

IMPROVED POWER SUPPLY

As a utility that derived 88% of its 2013 energy from older vintage coal-fired units, BPU is exposed to looming environmental regulations promulgated by the U.S. Environmental Protection Agency (EPA), including Mercury and Air Toxic Standards (MATS) which take effect on April 15, 2015. Following a strategic review, BPU is executing a plan aimed at meeting air quality standards and reducing dependence on coal to less than 60% of energy requirements by 2015.

The first step was completed in December 2012 with the acquisition of a 17% ownership interest (110 MW) in the Dogwood Generating Facility, an efficient combined-cycle gas-fired power plant. The next phase in BPU's compliance plan entails a combination of capital upgrades and fuel switching at its two legacy coal units. The cornerstone of the project is a $250 million capital investment at the 257 MW Nearman Station to bring the plant into compliance with air quality standards by 2017.

STABILIZED FINANCIAL METRICS

BPU's financial performance remains stable following a period of variability during the recession, particularly in 2008 and 2009 when BPU's commercial and industrial volumes were adversely affected and PILOT payments to the UG were increased. Key credit and liquidity measures for 2012 and 2013 strengthened to levels more commensurate with BPU's 'A+' rating with debt service coverage (after PILOT payments) approximating 1.6x. The full implementation of BPU's multi-year rate plan largely drove the improvement.

After dropping to just 19 days cash on hand during fiscal 2008, liquidity improved to 51 days in 2013. BPU reached its target of 60 days cash on hand with 59 days reported as of March 31, 2014.

Fitch expects BPU to maintain debt service coverage through 2016 of between 1.5x and 1.6x after payment of the PILOT, essentially in line with results achieved in recent years. Fitch notes that BPU will require periodic rate increases beyond 2014 in order to fund the environmental capex plan and sustain credit measures at levels commensurate with the current rating.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. Public Power Rating Criteria', March 18, 2014;

--'U.S. Public Power Peer Study: June 2013', June 13, 2013

Applicable Criteria and Related Research:

--'U.S. Public Power Rating Criteria', March 18, 2014;

--'U.S. Public Power Peer Study: June 2013', June 13, 2013

Applicable Criteria and Related Research:

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

U.S. Public Power Peer Study Addendum -- February 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735601

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832384

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.



Fitch Ratings

Primary Analyst

Hugh Welton

Director

+1-212-908-0742

33 Whitehall St.

New York, NY 10004

or

Secondary Analyst

Alan Spen

Senior Director

+1-212-908-0594

or

Committee Chairperson

Dennis Pidherny

Managing Director

+1-212-908-0738

or

Media Relations

Elizabeth Fogerty, New York, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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