Fitch Rates Concord, NC's $19.5MM Utilities Systems Revs 'AA'; Stable Outlook
OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to the City of Concord, North Carolina's (Concord) $19.45 million of utility system revenue refunding bonds, series 2016.
The bonds, with a final maturity of Dec. 1, 2035, are scheduled to price via negotiation on April 21, 2016. Bond proceeds will advance refund a portion of the outstanding 2008 bonds and pay costs incurred in connection with the sale and issuance of the 2016 bonds.
In addition, Fitch affirms the 'AA' rating on Concord's $68.6 million of outstanding utility system revenue bonds (series 2008, 2009, 2009B and 2012), including a portion of the series 2008 bonds expected to be refunded with proceeds from the current offering.
The Rating Outlook is Stable.
The 2016 bonds are secured and payable from a combined pledge of net revenues from the city's electric, water, and wastewater utility systems, on parity with its outstanding utility systems revenue bonds.
KEY RATING DRIVERS
COMBINED UTILITY SYSTEM: The city of Concord maintains a combined utility system (the utility) providing retail electric, water and wastewater services. More than two-thirds of operating revenues are favorably generated from electric sales, which are largely residential.
NEW POWER SUPPLIER: The City of Concord entered into a full requirements power sales agreement with NTE Carolinas, LLC, (NTE) in 2014, which will replace the existing Duke Energy Carolina, LLC (Duke Energy; 'A' Issuer Default Rating with a Stable Outlook) agreement expiring in 2018. While the new power supply agreement is projected to result in lower purchased power costs, NTE is an unrated, new power developer, with four power projects under active development but not yet operable, which adds operating and counterparty risk for Concord.
STRONG FINANCIAL METRICS: Concord has maintained solid financial performance, with debt service coverage (DSC) in excess of 2.0x for the past five years. Days cash on hand (DCOH) is equally sound at 428 days at fiscal year-end (FYE) 2015, above the peer utility median of 303 days. Financial metrics are projected to moderate in 2016-2018, with DSC closer to 2.0x, then rebound in 2019 (DSC to 3.0x) with a scheduled decline in debt service and projected lower purchased power expense.
MODESTLY LEVERED: Concord's leverage, as measured by debt-to-FADS has been on the decline since 2011, and stood at just 2.6x at FYE 2015, compared to 5.8x for the rating category median. Concord has funded capital expenditures in recent years from operating revenues and cash reserves. Projected capital expenditures through 2020 appear manageable ($46.9 million), with limited new debt needs through 2018.
SOUND SERVICE TERRITORY: The city of Concord, with a solid general obligation debt rating of 'AA+', has benefited from its proximity to Charlotte and access to major interstate highways. The county's unemployment and population growth levels are outperforming the state, as per U.S. Census Bureau data for 2015.
MAINTAINING STRONG FINANCIAL POSITION: The Concord Utility Systems' ability to sustain its strong financial metrics, consistent with the rating category medians, is key to the rating. Of particular importance is maintaining ample liquidity as the electric system faces higher purchased power expenses through 2018 and increased operating exposure in 2019 with the transition to a new power provider (NTE Carolinas, LLC).
The City of Concord is located one mile northeast of Charlotte, a growing service area with a population of 85,560. The utility is a combined system that provides electric, water, and wastewater services to the city and smaller surrounding areas serving a total of 37,000 distinct accounts. The utility is accounted for as an enterprise fund of the city. The customer base has remained stable over the last five years growing at an average of 1% annually.
POWER SUPPLY STRATEGY
Concord has entered into a full requirements contract with NTE Carolinas beginning in 2019 that will replace its existing purchased power agreement with Duke Energy, which expires at the end of 2018. The new contract is designed to increase power supply flexibility and reduce costs to Concord customers.
NTE Carolinas will supply Concord with power and energy from its Kings Mountain Energy Center, a 475 MW natural gas fired combined cycle facility, currently under construction in North Carolina. The generating plant is expected to be commercially operable in mid-2018. Plant construction is proceeding on time and below budget. In the event the project is not completed prior to 2019, NTE Carolinas is obligated to replace Concord's power supply at no incremental cost to the electric system.
The 20-year NTE Carolinas contract has several more favorable terms than the existing Duke agreement. These include: (a) pricing billing demand based upon Concord's monthly peak, rather than an annual peak which can be abnormally high; (b) capacity charges that are based upon a fixed, albeit moderately escalating, schedule; (c) billing capacity credits for power produced via Concord's owned generation (peak shaving facilities and SEPA); and (d) the ability for Concord to purchase energy from market sources when the price of energy is lower than that which can be produced at the NTE Carolinas natural gas facility.
While Concord's power supply agreement with NTE Carolinas is expected to generate cost savings, it also increases the utility's operating and counterparty risk, relative to its existing supplier, Duke Energy. Duke Energy Carolinas is a sound, long standing power provider, with substantial power resources in the state and a solid Issuer Default Rating of 'A'. NTE, established in 2009, does not yet have any generation facilities commercially operable, and is unrated.
Offsetting this operating and counterparty exposure is Concord's sound financial position and flexibility as evidenced by its consistently healthy liquidity, solid cash flow and low leverage. Concord's financial strength is supported by conservative fiscal practices of management and the City Council, as well as, the added fiscal oversight by the North Carolina Local Government Commission (LGC), a division of the State Treasurer's Office, and a unique credit positive for municipalities in the state.
SOUND FINANCIAL PERFORMANCE
Historical utility financial metrics are strong and above medians for the 'AA' rating category. Fiscal 2015 DSC was 2.81x and liquidity stood at 428 days operating cash. Leverage is modest, as measured by debt/FADS at 2.6x for fiscal 2015. The peer utility median is 5.8x debt/FADS. Even after adjusting for purchased power expense (treating a portion of it as debt), leverage is low at 4.4x adjusted debt/FADS. Positively, each of the separate utility systems is financially self-sufficient.
On average, the utility has averaged 371 DCOH over the last five years, consistently increasing this metric in each consecutive year. Carrying excess liquidity has allowed the utility to manage any increases in Duke Energy's wholesale costs and allows it to fund its capital plan with reserves. Maintenance of these ample reserves is key to the rating, particularly given the absence of an automatic purchased power recovery mechanism and the pending shift to the NTE Carolinas power supply contract.
Projected financial performance will moderate in fiscal 2016-2018, due to escalating purchased power costs under the Duke agreement. DSC will fall in those years, to 2.0x or slightly less, but remain adequate for the rating category. In fiscal 2019, annual debt service steps down considerably and the purchased power costs are projected to decline under the NTE power contract. DSC should rebound closer to 3.0x in 2019. Concord's electric rates should remain competitive, as the city is not projecting to increase rates through 2020.