The Rating Outlook is revised to Negative from Stable.
The bonds are secured by a first lien on net revenues of the
KEY RATING DRIVERS
OUTLOOK REVISION TO NEGATIVE: The Negative Rating Outlook reflects Fitch's view that soft wholesale spot market conditions and limited retail rate action will challenge BMU's efforts to meet its downward revised financial forecasts over the next two fiscal years.
SIZABLE OFF-SYSTEM SALES: BMU sells 82% of the capacity from its single, 235MW coal-fired generating facility in the wholesale market. Half of total capacity is sold pursuant to long-term, take-or-pay PSCs with four solid municipal offtakers. A considerable one-third of the total is sold on a spot basis, which is unusual for a municipal utility and causes revenue volatility.
WEAK FORECAST CASH FLOWS: Less than 1x debt service coverage in fiscal 2014, the second time in four years, is a violation of its bond ordinance and fundamental credit concern. Forecast coverage ratios remain near 1x through fiscal 2016, including an anticipated rate increase in fiscal 2015 (13%).
SLOW RETAIL RATE ACTION: BMU has been slow to implement additional retail rate increases since
CASH PROVIDES SUPPORT: Healthy cash on hand equal to 261 days (
GOOD MUNICIPAL OFFTAKERS: BMU's four municipal offtakers' good economic and financial metrics, including low debt levels and solid cash flow metrics, support its rating.
INSUFFICIENT RATE ACTION: Insufficient retail rate increases to offset tightening spot margins and stabilize debt service coverage ratios as forecast would likely lead to downward rating action. Continued draws on BMU's currently healthy cash balances would indicate an unwillingness to exercise the autonomous rate-setting authority that is a hallmark of municipal utility ratings.
ADDITIONAL CONTRACT SALES: Additionally contracted capacity leading to more stable long-term cash flows, together with the maintenance of healthy cash balances, would support BMU's credit profile.
Soft wholesale market conditions and limited retail rate action risking the full recovery of costs prompt Fitch's Negative Rating Outlook. BMU's less than 1x debt service coverage in fiscal
Wholesale spot market sales that provide all of its net margins tightened more than expected in fiscal 2014 and caused BMU to violate its rate covenant. Traditionally, BMU's sales of excess capacity in the spot market have allowed its retail system to produce negative net margins and consequently operate with the lowest rates in the state.
Non-compliance with the rate covenant to provide 1.10x annual debt service coverage from net revenues does not trigger an immediate event of default under the bond ordinance. As in fiscal 2010, BMU will transfer into the revenue fund an amount sufficient to remedy the shortfall.
Its sizable cash on hand equal to 261 days in fiscal 2013 (
Nevertheless, Fitch expects that investment grade utilities will generate sufficient revenues to cover all operating expenses and debt service, and suitably higher ratios where cash flows are volatile. Fitch noted in 2012: while projections of continued low natural gas prices could erode some of BMU's realized margins in the wholesale spot market, the city's low retail rates should provide revenue-raising flexibility to benefit overall net margins, insofar as city council approves timely increases.
For context, eliminating all wholesale margins would require a roughly 40% increase in retail rates. Such increase would still leave BMU as the third lowest provider in the state.
BMU's 235MW, coal-fired generating unit provides it with competitively priced power. The unit average heat rate improved to 10,275 Btu/kWh in 2013, which is in line with industry standards for coal-fired plants. Periodic maintenance caused declines in 2012 and 2013 availability factors to 77.1% and 87.5%, respectively. Capacity factors, too, declined but remained above average at 73.8% and 82.1%.
BMU expects that its participation in the
BMU provides electric, water, and sanitary sewer services to the city of
Approximately one-fifth of total capacity serves the city's retail base. The excess is sold on a spot basis.
Additional information is available at 'www.fitchratings.com'.
This action was informed by the sources of information identified in Fitch's U.S. Public Power Rating Criteria.
--'U.S. Public Power Peer Study --
--'U.S. Public Power Peer Study Addendum -
--'U.S. Public Power Rating Criteria' (
--'2014 Outlook: U.S. Public Power and Electric Cooperative Sector' (
U.S. Public Power Peer Study --
U.S. Public Power Peer Study Addendum -
U.S. Public Power Rating Criteria
2014 Outlook: U.S. Public Power and Electric Cooperative Sector (Calm Under Pressure)
Source: Fitch Ratings
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