Fitch Affirms Coffeyville (KS) Sr. 2015 Electric Rev Bonds at 'BBB+'; Outlook Stable
Fitch Ratings has affirmed the 'BBB+' rating assigned to the $48.9
million electric utility system revenue bonds series 2015-B issued by
Coffeyville, KS (Coffeyville).
The Rating Outlook is Stable.
SECURITY
The 2015-B bonds along with series 2011-A electric utility system
revenue bonds are secured by a first lien on net revenues of the city's
electric utility system. Outstanding series 2015-C taxable electric
utility system revenue bonds and series 2013-A general obligation
electric utility system refunding bonds are paid on a subordinate basis.
KEY RATING DRIVERS
SMALL, LOW-COST PROVIDER: Coffeyville owns and operates a small retail
electric utility serving 6,192 customers along the southeastern Kansas
border. The utility purchases low-cost, full-requirements electric power
and energy from the Grand River Dam Authority (GRDA; revenue bonds rated
'A'/Positive by Fitch).
NEW GENERATION AND OPERATING RISK: Coffeyville expects to complete the
construction of a 56MW natural gas-fired facility in early November
2016, ahead of the originally scheduled January 2017 completion date.
GRDA will purchase all capacity from the new facility. However,
Coffeyville retains operating risk to the extent the units become
inoperable, as GRDA capacity payments are subject to ongoing unit
availability. The mature, low-complexity project technology; existing
transmission tie-in; and established fuel sources help mitigate this
risk.
RELIANCE ON GRDA PAYMENTS: GRDA capacity payments for the new gas-fired
facility are critical to Coffeyville's financial operations and its
ability to comfortably service debt. The payments, expected in 2017, are
designed to recover a minimum of related fixed costs.
MIXED FINANCIAL POSITION: GRDA capacity payments largely drive
Coffeyville's sound projected cash flows, providing more than 2x annual
debt service coverage and an average of $5.6 million of free cash flow
(FCF) through 2019. FCF should help build liquidity from current levels
of approximately 81 days cash on hand.
LIMITED RATE FLEXIBILITY: Coffeyville's ability to raise retail rates in
response to reduced capacity payments, or the loss of its largest
customer, may be limited by its relative size. However, Coffeyville's
retail rates remain low relative to other utilities in the state.
RATING SENSITIVITIES
RELIANCE ON GRAND RIVER DAM AUTHORITY (GRDA) PAYMENTS: Given
Coffeyville, KS's reliance on capacity payments from GRDA (rated
'A'/Positive Outlook) to meet debt service, the rating on the series
2015-B bonds is likely to remain capped by the GRDA rating.
UNEXPECTED FINANCIAL PRESSURES: The loss of Coffeyville's largest
customer, which represents three-quarters of total sales, or reduced
capacity payments as a result of poor performance at the new gas-fired
power project, would be highly challenging for the utility to absorb and
would likely lead to negative rating action.
STRONGER LIQUIDITY: Greater overall revenue stability, a sizable
accumulation of excess cash flow and a meaningful reduction in leverage
could ultimately contribute to a higher rating.
CREDIT PROFILE
Coffeyville operates a small electric system serving 6,192 customers in
southeastern Kansas along the Oklahoma border. A principally industrial
economic base causes considerable customer concentration, and economic
indicators generally lag the state and nation.
NEW PROJECT COMPLETION
Expected project completion, together with the recent extension of its
GRDA power purchase and sale agreement, should allow Coffeyville to
increase system reliability, relieve transmission congestion, and
continue its low-cost operations. The new facility further develops
Coffeyville's long-term power supply relationship with GRDA, whereby the
city sells all capacity and output from its owned resources to GRDA and
purchases its full energy requirements from GRDA.
The natural gas-fired project consists of three reciprocating engines
totaling 56MW. The units are engineered by Wartsila, which has a
well-established presence in the utility space. The units are expected
to come online on or before the scheduled completion date of January
2017.
Coffeyville retains the risks of plant outages through corresponding
reductions in GRDA capacity payments. However, the city's experience
owning gas-fired generating assets and the mature, low-complexity
technology help mitigate this risk.
SOUND PROJECTED CASH FLOWS
GRDA capacity payments are critical to Coffeyville's financial
wherewithal. Therefore, GRDA's credit quality will continue to influence
Coffeyville's credit rating. The capacity payments are structured to
cover annual fixed costs for the new facility upon commercial operation.
Coffeyville's projected cash flows show healthy debt service coverage of
greater than 2x annually beginning in 2017, when the debt related to the
new facility begins to amortize. Coverage ratios assume the $6.2 million
total GRDA capacity payment and an approximately $1.85 million net
margin on Coffeyville Resources.
Moreover, projected financials suggest an approximately 50% increase in
FCF to $5.9 million by 2019, which should help build liquidity.
Coffeyville's current liquidity provides modest cushion to absorb
potential revenue losses. Estimated 2015 total cash on hand in was
approximately 81 days ($15.2 million), up from 55 days in FY 2014 ($9.2
million).
LIMITED RATE FLEXIBILITY
The complete loss of the full GRDA capacity payment and net margin from
Coffeyville Resources, in a worst-case scenario, would result in less
than 1x coverage of total debt service on a pro forma basis in each of
the years 2017 - 2019. This underscores the importance of these sources
to Coffeyville's overall financial operations.
Although Coffeyville's low rates and autonomous rate-setting ability
suggest ample rate-raising flexibility, the city's limited financial
position and rate base, and relatively small size create practical
limitations to its ability to absorb the loss of the GRDA capacity
payment or its largest customer.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
Additional Disclosures
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