Fitch Affirms Coffeyville (KS) Sr. 2015 Electric Rev Bonds at 'BBB+'; Outlook Stable
The Rating Outlook is Stable.
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.
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.
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.