Fitch Ratings has assigned an 'AA' rating to the following Colorado Springs Utilities, CO (CSU) bonds:
--Up to $199,000,000 utilities system revenue bonds, series 2012C-1 and 2012C-2.
Proceeds of the 2012C-1 bonds (estimated at about $130 million) will refund, along with other available moneys, all or a portion of the outstanding utilities system subordinate lien refunding revenue bonds (series 2002A and 2002B) and fund the debt service reserve fund. Proceeds of the series 2012C-2 bonds (estimated at $50 million) will finance general capital improvements to the utility system and fund the reserve fund. The bonds are scheduled to price via negotiated sale in mid-September.
In addition, Fitch affirms the outstanding ratings as follows:
--$2.3 billion utility system revenue and improvement system revenue bonds at 'AA'.
The Rating Outlook on all bonds is Stable.
The series 2012C bonds are secured by a net revenue pledge of the combined utilities system and are on parity with outstanding utility system revenue bonds. The combined utilities' system encompasses CSU's electric, water, wastewater, natural gas distribution and street lighting systems.
KEY RATING DRIVERS
SOLID FINANCIAL POSITION: CSU has a record of consistent financial performance, with debt service coverage in excess of 2.0 times (x), or 1.5x excluding development fees and after the transfer to the city's general fund. CSU's balance sheet is solid with equity to total capitalization of 35.6% in fiscal 2011, but cash levels have trended lower with the use of cash for capital and collateral posting requirements and the softer economy.
COMBINED SYSTEM: CSU's 'AA' rating reflects the diverse revenue stream of the combined utility system, with four major retail utility components (electric, natural gas, water, and wastewater); each of which are self-supporting systems.
LARGE CAPITAL PROGRAM: Capital needs from 2012 through 2016 are considerable, totaling $1.34 billion (excludes allowance for funds used during construction), primarily for long-term water supply development ($713 million) and required upgrade of the utility's coal-fired generation ($483 million). Fitch views the capital pressure to be manageable given CSU's plan to fund 55% of capital needs from revenues and future rate increases.
ADDITIONAL RATE INCREASES NEEDED: Rates of the various systems are generally competitive despite sizable increases for three of the four systems in fiscal 2012. CSU is targeting an overall average annual increase of 6% for its four utility systems' typical residential bill over the next five years, to meet capital needs, rebuild working capital and maintain acceptable coverage ratios. Fitch's rating assumes the maintenance of historical financial margins going forward.
STABLE SERVICE AREA: Colorado Springs has a population of about 416,000 and is located in the south central Front Range of Colorado. The recent economic recession has affected the area economy moderately; however, CSU benefits from a fairly diversified customer composition and the presence of four U.S. military bases. The Waldo Canyon fire, while the most destructive in Colorado history, had only minor impact on CSU utility infrastructure and operations. Continuing drought conditions in Colorado, and most of the Western United States, is affecting the region and could result in increased demand side and water management strategies in the future.
WHAT COULD TRIGGER A RATING ACTION
DIFFICULTY IN FUNDING CAPITAL NEEDS: If costs for new capital projects were to increase significantly, funding became more problematic or if the utility experiences decreased financial margins as a result of capital pressures, the 'AA' rating could be vulnerable.
CSU is a combined utility system serving customers in the city of Colorado Springs and surrounding suburban communities. Operations include: water and wastewater systems, an electric light and power system (vertically integrated), a natural gas distribution system, street lighting, and other minor systems. CSU's total operating revenues (includes interdepartmental sales) by system for fiscal year end 2011 consisted of: 45.2% electric, 30.3% gas distribution, 16.2% water, 7.6% wastewater, 0.5% street lighting and 0.2% other. The combined utilities system is owned by the city of Colorado Springs and operates as an enterprise fund of the city.
Despite the absence of an independent board of directors, Fitch believes CSU operates in a favorable governance environment. For the most part, rates have been approved by a historically supportive City Council and support appears likely for the coming multi-year rate increases needed to keep financial metrics intact during the construction of the Southern Delivery System project.
ELECTRIC SYSTEM POSITIONED TO COMPLY WITH CHANGING REGULATIONS
The electric system provides the largest share of operating income. The 2011 fuel (energy) mix consisted of: coal (61.6%), natural gas (24.4%), hydroelectric (10.4%), and wholesale purchases (3.6%). The coal-fired assets require capital investments to comply with anticipated more stringent environmental standards but CSU anticipates making these investments in its near-term capital plan and retaining its coal-fired plants. CSU is well positioned to meet the state's relatively modest renewable portfolio standard through the purchase of renewable energy credits. In time, coal is expected to fall to about 50% of CSU's fuel mix.
Included in CSU's long-term energy vision is: (i) providing 20% of total electric energy through renewable sources; (ii) achieve 10% less average electric usage and (iii) maintain a 20% regional cost advantage.
SOUTHERN DELIVERY SYSTEM INVESTMENTS PROCEEDING
To supplement and back up Colorado Springs' current water resources, the city has been planning the construction of the Southern Delivery System (SDS) raw water delivery system from the Pueblo Reservoir (federally owned facility) since 1996. Colorado Springs is the majority owner in the SDS project (95.3% share ownership), with neighboring water systems owning the remaining share of the project. The first phase of the project is estimated to cost $880 million (2009 dollars), of which CSU is responsible for approximately $838 million. When SDS is completed, estimated in 2016, Colorado Springs Utilities water supply is expected to be adequate through 2040.
FINANCIAL PERFORMANCE REMAINS SOLID
CSU maintains solid financial metrics on both a combined basis and individual system basis as each of the separate utility systems is financially self-sufficient and there is no cross-subsidization of utility financial performance. The consistency of financial performance is viewed as a credit strength. Debt service coverage, including development fees, has remained comfortably above 2.0x for the past five years. Excluding development fees (a non-operating revenue source), coverage is still strong at more than 1.8x. On a projected basis, coverage is expected to remain above 2.0x through 2016.
While internal liquidity (unrestricted cash) is relatively low for the rating level, CSU maintains available bank lines of credit totaling $125 million, or the equivalent of 156 days liquidity on hand as of June 30, 2012. Aided by future rate increases, cash balances should recover to historical levels by the 2014-2015 timeframe. Longer term, management expects to reduce its reliance on variable-rate demand obligations and use more fixed-rate long-term debt.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
-'U.S. Public Power Rating Criteria', Jan. 11, 2012;
--'Revenue-Supported Rating Criteria', June 12, 2012;
-'US Public Power Peer Study', June 15, 2012.
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
Revenue-Supported Rating Criteria
U.S. Public Power Peer Study Addendum: June 2012
Alan Spen, +1 212-908-0594
One State Street Plaza
New York, NY 10004
Lina Santoro, +1 212-908-0522
Dennis Pidherny, +1 212-908-0738
Elizabeth Fogerty, +1 212-908-0526