Rating Action: Moody's assigns Aa2 to Colorado Springs (City of) CO Combined Utility Enterprise's $246 million of Series 2020 Utilities System Refunding Bonds and $85 million of new Improvement Revenue Bonds; outlook stable
Global Credit Research - 16 Jul 2020
New York, July 16, 2020 -- Moody's Investors Service has assigned an Aa2 rating to the Colorado Springs (City of) CO Combined Utility Enterprise's (CSU) proposed $195 million of senior lien Utilities System Refunding Revenue Bonds, Series 2020A and $51 million of Series 2020B (Private Activity), and approximately $85 million of new Utilities System Improvement Revenue Bonds, Series 2020C for a combined total of $331 million in debt issuance. The rating outlook is stable.
The assigned Aa2 rating reflects CSU's above average service area characterized by a large regional military presence; the history of sound rate setting and board policies to ensure stable financial metrics and strong liquidity.
To date, CSU's operating income has not been significantly impacted by coronavirus' related shutdowns as the 7% revenue decline has been offset by a similar reduction in operating expenses. Total electricity load for May year to date has declined by around 1%, with residential load increasing by 5.3% and small and medium commercial load declining by around 4%. At FY 2019, sales to residential customers represented around 33% of total electric demand, while commercial and industrial represented around 60% and military and other customers accounting for around 7%.
Through May 2020, year-to-date CSU's operating revenue decreased by $25.9 million year-over-year, but was offset by a corresponding $26.1 million decrease on the expense side through May 2020 year-to-date (including a $17.4 million decrease in purchased power, gas, and water for resale expense, a $7.9 million decrease in production and treatment expense, and $2.0 million decrease in maintenance expense). While it is still early to assess the full impact that the COVID-19 pandemic may have on CSU's 2020 financial performance, today's rating action considers the long-term resiliency and essentiality of the utility system which along with its liquidity should enable CSU to manage through the impact of the coronavirus including the potential for a slow economic recovery over the next eighteen months.
CSU has adjusted its five-year (2020-2024) capital plan upwards by around $400 million, given a recently approved Energy Integrated Resource Plan that calls for the retirement of Units 6 and 7 at Drake no later than 2023 and the retirement of Unit 1 at Nixon no later than 2030, in addition to other projects including advanced metering infrastructure and water treatment related projects, among others. It is anticipated that replacement generation would include a combination of natural gas, non-carbon resources, storage, and energy efficiency initiatives. With the planned retirement of Drake and Nixon units, CSU will be in a good position to meet current and future regulatory requirements.
Because of these incremental capital needs, the capital plan is expected to be 61% cash funded relative to the previous expectation of being 73% cash funded. In that regard, CSU now anticipates issuing ~ $551 million of new debt over the next five years relative to ~ $270 million previously assumed. That said, CSU has approximately $395 million in scheduled debt repayment over the same five year period, as well as built-in interest savings from the planned refunding, which will help mitigate any increase in leverage and enable the utility to maintain strong credit metrics over the 2020-2024 period including an average of 170 days cash of hand, a 2.0x debt service coverage and a debt ratio of not more than 45% (excluding net pension liabilities).
Although the capital program is sizeable, CSU has demonstrated its ability to manage significant capital projects in the recent past, continues to maintain competitive rates, along with an adequate liquidity profile. CSU continues to manage its variable rate debt exposure, and since September 2019, it has zero unhedged exposure. The variable rate debt is hedged and as of FY 2019, represented 17.8% of total debt outstanding.
The rapid spread of the coronavirus outbreak, the deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial impact it is having on public health and safety, with credit implications that will continue to play out in the years to come.
The stable outlook reflects our expectations that steady debt service coverage ratios and sound liquidity will continue despite the increased capital program and planned new debt issuance, aided by the utility's ability to implement incremental base rate increases.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS
- Implementation of a carbon transition plan to meet legislated emission reduction requirements, while maintaining rate competitiveness and adequate adjusted debt ratios and liquidity
- Deleveraging and maintenance of strong debt service coverage in excess of historical averages of > 2.0x, coupled with significant economic growth could positively affect the rating
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
- Significant increases in cost and leverage to meet environmental compliance requirements such as greenhouse gas regulations, or pension liabilities, resulting in a significant decrease in competitiveness
- Failure or inability to implement rate increases to maintain sound financial metrics similar to recent historical averages
- Growing transfers to the city in the form of surplus or additional payments (stormwater) that could hinder liquidity, coverage ratios or rate competitiveness
Similar to the outstanding parity revenue bonds, the Series 2020 bonds are secured by the net revenues of the combined CSU system. The rate covenant requires net revenues to cover debt service by at least 1.30x and Build America Bond interest subsidy payments are considered pledged revenues. The additional bonds test requires net pledged revenues to be at least 1.30x for the year preceding the new issuance, including the debt service of the new issuance.
The debt service reserve is funded at average annual interest (no principal), which we consider to be a credit weakness. The debt service reserve required for Series 2020 bonds of approximately $8.6 million will be surety funded by Build America Mutual Assurance Company (BAM, NR).
Of the debt service reserve on the outstanding bonds, approximately $20.5 million is already provided by reserve fund surety policies with Assured Guaranty Municipal Corp. (A2 stable), $9.5 million with BAM, and $1.5 million with National Public Finance Guarantee Corporation (Baa2 stable). The total reserve requirement for all revenue bonds post completion of current issuance is expected to be around $66.9 million, of which approximately 45% is surety funded (~ $31.5 million).
USE OF PROCEEDS
The approximate $246 million Series 2020A and 2020B refunding bonds will refund the Series 2009A, 2010A-1, 2010A-2, and 2010B-2, and 2010D-2 bonds, and the approximate $85 million Series 2020C new money bonds will support a number of general capital improvements to the utility system. The estimated net present value savings post issuance is approximately $46.7 million or 14.1% of refunded bonds. Savings will be uniform over the life of the bonds and there will be no extension of maturity.
Colorado Springs Utilities (CSU) operates a diverse mix of services pursuant to a city charter- a combined utility with water, electric, gas, wastewater and street light systems, all owned by the city. The service areas of the systems include the City of Colorado Springs (Aa2), population approximately 470,000. Some of the CSU system serves Manitou Springs, many of the suburban residential areas and the four military installations surrounding the city.
The principal methodology used in these ratings was US Public Power Electric Utilities with Generation Ownership Exposure Methodology published in August 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1170209. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
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Jennifer Chang Lead Analyst Project Finance Moody's Investors Service, Inc. 7 World Trade Center 250 Greenwich Street New York 10007 US JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Kurt Krummenacker Additional Contact Project Finance JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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