Fitch Rates Colorado Springs (CO) Series 2014A Rev Bonds 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA' rating to the following City of Colorado Springs, CO bonds issued on behalf of Colorado Springs Utilities (CSU):

--$125,000,000 utilities system revenue bonds, series 2014A-1 and 2014A-2.

The 2014A proceeds will be used to finance a portion of the capital improvement costs of the Southern Delivery System (SDS) series A-1 bonds and the costs of a number of general improvements to the utility system series A-2 bonds, plus funding the reserve fund.

In addition, Fitch affirms the following:

--$2.33 billion utility system revenue bonds at 'AA'.

The Rating Outlook on all bonds is Stable.

SECURITY

The bonds are payable from net pledged revenues of CSU's combined utility system (electric, water, wastewater and gas). As of June 30, 2014, aggregate parity bonds totaled $2.33 billion, of which $827.6 million, or roughly 35.5%, consists of variable rate demand bonds.

KEY RATING DRIVERS

FINANCIALLY SOUND: The combined utilities system has a record of good financial performance, with a targeted board policy of at least 2x adjusted debt service coverage (which is after surplus payments to the city and includes development fees). Variable rate debt as a percentage of total debt is high at approximately 35%, but is mostly hedged.

CAPITAL REQUIREMENTS SIGNIFICANT: Capital needs for the period 2014-2018 are estimated at approximately $1.3 billion, with the largest portion used to fund SDS and for environmental modifications to electric generating facilities. CSU expects to internally fund 60% of these costs.

MODERATE RATE INCREASES: Rates of the various utility systems are generally competitive with regional utilities. Following a period of rapid rate increases to support construction of major projects, CSU expects future rate adjustments to be more moderate in size and less frequent.

GRADUAL ECONOMIC PICKUP: Residential construction has begun to pick up from the 2009 level, but development is expected to remain below the rate experienced in the earlier part of the decade. The impact of regional drought conditions on the utility has not significantly affected CSU's performance, but remains a longer-term concern.

RATING SENSITIVITIES

DECLINE IN FINANCIAL RATIOS: If costs for capital projects were to escalate substantially and the utility limited necessary rate adjustments, the 'AA' rating could be at risk.

DISLOCATION IN SHORT-TERM MARKETS: Heavily reliant on variable rate debt, CSU could potentially be exposed to swings in interest rates (particularly on unhedged bonds), and renewal/replacement risk on expiring liquidity facilities and collateral posting requirements.

CREDIT PROFILE

The combined utilities system is owned by the city of Colorado Springs and operates as an enterprise fund of the city. Rates are approved by the city council. The city of Colorado Springs, located in the south central Front Range, has a population of about 430,000. The El Paso county unemployment rate moderately exceeds that of the state. CSU serves customers in the city of Colorado Springs and surrounding suburban communities. Percentage operating revenues for calendar year 2013 were: electric (49.4%), gas (25.0%), water (16.9%), wastewater (7.9%) and other (0.8%). Electric and water systems provide the largest share of operating income.

ELECTRIC RESOURCES DIVERSE; ENVIRONMENTALLY IMPACTED

In 2013, CSU's electric system provided service to almost 217,273 active meters. Electric revenues are diversified among customer class.

CSU's generating resources available for summer 2014 totaled 895 megawatts (MW) and included: coal-fired generation (32%), natural gas and oil (64%) and hydro generation (4%). With the acquisition of the gas-fired Front Range power plant in December 2010, CSU's owned generating capacity has become more weighted to natural gas from coal. Nonetheless, coal will remain a dominant fuel on an energy basis for years to come. Power purchases total 192 MW. No major new electric generation is likely to be needed until 2027, assuming continued operation of existing generating units. CSU expects to provide 10% of its total electric energy through renewable sources by 2020.

CSU's fossil fueled plants have sufficient emission allowances to satisfy sulfur dioxide emission reductions into 2018. Additionally, Colorado's Regional Haze State Implement Plan phases in emission limits for stationary sources, such as the Ray Nixon power plant. The CSU Board has directed management to evaluate possible options for its two coal plants. While it is too early to know what decisions will be made, the current likelihood is the plants will remain open, but will be fitted with updated environmental controls. The costs of these upgrades are not expected to have a major impact on system financials or rates.

WATER SYSTEM CAPACITY BEING EXPANDED

CSUs' water supply is heavily reliant on the Colorado River Basin and the Arkansas and South Platte River systems. Even with drought conditions in the western United States, CSU believes it will have sufficient water supply to meet the growing needs of the area until approximately the 2040 decade. A new treatment plant, which is part of SDS, is scheduled to be on line in 2016. This will significantly add to the utility's treatment capability.

To supplement and back up Colorado Springs' current water resources, the city has been planning the construction of the SDS raw water delivery system from the Pueblo Reservoir (federally owned facility) since 1996. Colorado Springs will be the majority owner in the SDS project.

The project was initially scheduled to be completed in 2012; however, due to delays, Phase 1 is now expected to be completed in 2016. As of March 2014, the forecasted project cost through completion of construction in 2016 and mitigation payments through 2021 is $841 million, of which CSU is responsible for 94.81%. Of this amount, approximately $338 million remains to be spent to complete the project.

Annual water rate increases started in 2010 to support Phase 1 of the project. In May 2010, the city council approved annual water rate increases of 12% per year for 2011, and 2012. In July 2012, the city council approved 10% water rate increases for 2013 and 2014. Future rate increases beyond 2014, if necessary, will be brought to the city council for review.

FINANCIAL GOALS SUPPORT THE RATING

CSU maintains solid financial metrics on both a combined basis and individual system basis. Fitch-calculated debt service coverage (DSC) approximated 1.85x in 2013 and coverage of full obligations equaled 1.65x. This gives no credit for connection fees, which adds about 20 basis points to DSC. CSU's Board maintains a goal of achieving an adjusted rate coverage ratio around 2.0x, which is after any surplus payments to the city.

While internal liquidity is generally below the rating category median for 'AA' rated retail systems, available bank lines helped to bolster CSU's overall liquidity position to 200 days on hand at year-end 2013. Cash on hand improved to 150 days, from 116 days the year before.

At Dec. 31, 2013, CSU had $827.6 million of variable rate parity bonds outstanding which were supported by liquidity facilities. This equates to 35.5% of its total outstanding bonds. However, only 6.0% is not hedged. Pursuant to its financial risk management policy, CSU is allowed to have up to 30% of its total outstanding debt in unhedged variable rate debt. Total transfer payments to the city average a reasonable 3.8% of total operating revenues.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. Public Power Rating Criteria'(March 18, 2014);

--'U.S. Public Power Peer Study' (June 13, 2014).

Applicable Criteria and Related Research:

U.S. Public Power Peer Study -- June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749789

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=851874

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Contacts

Fitch Ratings
Primary Analyst
Alan Spen, +1-212-908-0594
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Lina Santoro, +1-212-908-0522
Senior Director
or
Committee Chairperson
Joanne Ferrigan, +1-212-908-0723
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Alan Spen, +1-212-908-0594
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Lina Santoro, +1-212-908-0522
Senior Director
or
Committee Chairperson
Joanne Ferrigan, +1-212-908-0723
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com