The Rating Outlook is Stable.
Outstanding electric revenue bonds are secured by a first lien on net revenues of the city's electric system.
KEY RATING DRIVERS
SMALL DISTRIBUTION SYSTEM: The city of
SHORT-TERM POWER SUPPLY AGREEMENTS: While the city has made favorable progress with increasing the duration of its power supply agreements from just three years to six years for the bulk of its requirements, the length of the contracts remains somewhat short, exposing the city to supply risk that could lead to future cost volatility.
IMPROVING FINANCIAL PROFILE: Timely cost recovery and historical base rate increases have kept debt service coverage comfortably above 3.0x and increased the system's liquidity to a more acceptable level of about 25 days of cash on hand. Coupled with an undrawn
COMPETITIVE RATES PROVIDE FLEXIBILITY: The system's affordable retail rates relative to regional and statewide averages provide ample flexibility, and the ability and demonstrated willingness to adjust rates on a quarterly basis to recover changes in fuel costs ensures timely cost recovery.
REDUCTION IN DEBT LEVELS EXPECTED: Debt metrics have steadily improved from a previously high level over the last several years as capital needs continue to be fully funded from excess cash flow. The ratio of debt to funds available for debt service (FADS) now approximates the rating category median of 5.1x while equity has grown from a negative position following the system's 2005 purchase from Duke Energy to a more acceptable 21% of capitalization. Fitch expects this trend will continue as internal resources are expected to fund the entirety of capital needs over the next several years.
TIMELY COST RECOVERY: Deviation from making timely rate adjustments to recover costs could exert downward pressure on the rating, particularly given the system's already narrow cash position and modest exposure to auction rate securities.
RENEWAL OF POWER SUPPLY AGREEMENTS: The city's ability to renew its power supply agreements in advance of stated expiration dates will continue to be a risk that Fitch will monitor.
CHANGE IN POWER SUPPLIERS
Following the expiration of two three-year power supply agreements at the close of calendar 2013, the city elected to extend for one additional year a load following contract with
The balance of
The city's transition from shorter-term power supply agreements with the same expiration date to relatively longer-term agreements from a more diverse pool of suppliers with staggered expiration dates is viewed favorably by Fitch. While the still somewhat shorter duration of the agreements poses some risk, the current rating assumes the city will continue to be proactive in procuring sufficient capacity without service interruption.
IMPROVING FINANCIAL PERFORMANCE LIKELY TO CONTINUE
The electric utility's financial profile continues to strengthen, as does the city's other operating funds. The city relied historically on a city-wide pooled cash approach, which routinely left both the water and sewer and electric utilities with little or no cash on their respective balance sheets. Timely cost recovery in more recent years coupled with the implementation of historical base rate increases have provided for stronger net operating margins in the electric fund, which in turn has led to consistently high debt service coverage (DSC) and positive cash flow after meeting all obligations, including annual capital expenditures.
Financial projections through 2019 appear achievable and include the continuation of healthy debt service coverage in excess of 2.0x. The forecast assumes no change in electric base rates and does not reflect the issuance of additional debt.
MODEST CAPITAL NEEDS
The utility's five-year capital program is sized at a relatively affordable and manageable level, and is not anticipated to require additional debt. Proposed spending through fiscal 2019 totals
SOUND ECONOMY UNDERPINS SERVICE AREA
The city's electric utility serves a very stable service territory that exhibits good diversity among ratepayers, high customer wealth levels, and consistently low unemployment, all of which contribute to near perfect revenue collection.
Additional information is available at 'www.fitchratings.com'.
--'U.S. Public Power Peer Study --
--'U.S. Public Power Peer Study Addendum -
--'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
Source: Fitch Ratings
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