News Column

Fitch Affirms Sikeston, MO's Electric Revs at 'BBB+'; Outlook to Negative

June 20, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings affirms the 'BBB+' rating on the following city of Sikeston, MO revenue bonds:

--$96,735,000 electric system revenue refunding bonds, 1996 and 2012 series.

The Rating Outlook is revised to Negative from Stable.

SECURITY

The bonds are secured by a first lien on net revenues of the SikestonBoard of Municipal Utilities (BMU), including wholesale revenues from power sales contracts (PSCs) with four municipal offtakers.

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 October 2012 (17.4%), as its wholesale margins have tightened. At half the state average, BMU's retail rates should provide headroom to generate additional revenues.

CASH PROVIDES SUPPORT: Healthy cash on hand equal to 261 days ($39 million) in fiscal 2013 provides a stopgap measure to manage volatile cash flows. Moreover, lower environmental capex has caused a $10 million favorable variance in BMU's forecast cash balances.

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. Sikeston's own economic metrics are generally below average.

RATING SENSITIVITIES

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.

CREDIT PROFILE

COMPRESSED MARGINS

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 2014 (est. 0.85x-0.95x) and downward revised forecasts of only 1.03x and 1.16x coverage in fiscal years 2015 and 2016, respectively, include an anticipated rate increase in fiscal 2015 (13%). The prior increase was in October 2012 (17.4%).

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 ($39 million) and higher forecast balances in fiscal years 2015-2017 ($30 million) versus 2012 forecasts ($20 million) are a backstop that provide considerable flexibility for such purposes. Earlier estimates of a $20 million-$25 million scrubber refurbishment project have been abandoned in favor of far less expensive technology for compliance with the EPA's Mercury and Air Toxics Standards in April 2016.

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.

ASSET OPERATIONS

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 Southwest Power Pool'sIntegrated Marketplace likely later this year will provide additional opportunities.

UTILITY OVERVIEW

BMU provides electric, water, and sanitary sewer services to the city of Sikeston, MO. The electric utility, which has been in operation since 1931, directly serves 9,197 retail customers principally from a single, owned coal-fired resource. In addition, the utility makes sizable wholesale contract sales representing one-half the capacity of its generating asset to four municipal offtakers -- the cities of Carthage, Columbia, Fulton, and West Plains -- pursuant to long-term, take-or-pay PSCs that extend to the later of June 1, 2022 (the year the city's electric revenue debt fully matures), or the useful life of the plant, with certain exceptions. The obligations of the municipal purchasers are several, not joint.

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.

Applicable Criteria and Related Research:

--'U.S. Public Power Peer Study -- June 2014' (June 13, 2014);

--'U.S. Public Power Peer Study Addendum - June 2014' (June 13, 2014);

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

--'2014 Outlook: U.S. Public Power and Electric Cooperative Sector' (Dec. 12, 2013);

--'City of Sikeston, Missouri (Board of Municipal Utilities)' (July 10, 2012).

Applicable Criteria and Related Research:

U.S. Public Power Peer Study -- June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749789

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750283

U.S. Public Power Rating Criteria

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

2014 Outlook: U.S. Public Power and Electric Cooperative Sector (Calm Under Pressure)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725447

City of Sikeston, Missouri (Board of Municipal Utilities) Revenue Bonds

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=683225

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=835715

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

Ryan A. Greene

Director

+1 212-908-0593

Fitch Ratings, Inc.

33 Whitehall Street

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, New York

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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