Fitch Rates Provo City, UT's $18.9MM Energy System Rev Bonds 'AA-'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has assigned an 'AA-' rating for the following bonds issued by Provo City, UT on behalf of the electric utility system Provo City Power:

--$18.9 million energy system revenue bonds series 2015A.

Proceeds will be used to fund the demolition of existing smoke stacks and other retired power plant facilities and the construction of a new energy system administration and operations building. The bonds will be issued via competitive sale on April 21, 2015.

The Rating Outlook is Stable.

SECURITY

Bonds are secured by a pledge of net revenues of the electric system.

KEY RATING DRIVERS

ELECTRIC DISTRIBUTION SYSTEM: Provo City Power (Provo) is an enterprise fund of the city of Provo, providing electric distribution services within an exclusive service territory that is coterminous with the city's boundaries. Provo is the largest (approximately 60% of total revenues) member of the Utah Municipal Power Agency (UMPA), which provides Provo with its power supply pursuant to an all-requirements contract that extends through 2025.

IMPROVED MARGINS AND LIQUIDITY: Rising retail sales and a series of rate increases that began in 2011 have improved financial margins and tripled cash reserves over the past few years. At the end of fiscal 2014, Provo had $25.7 million or 182 days in available funds on hand. Future reserves are expected to fluctuate to some degree as cash is used for capital needs, but remain in compliance with the council approved policy of 25% of revenues(excluding designated capital funds).

MODEST LEVERAGE: Provo benefits from a modest debt profile as the proposed series 2015 bonds will represent the utility's only outstanding debt issue. Future capital needs are expected to be cash-funded through dedicated reserves. Including Provo's share of UMPA's fixed obligations, Fitch-calculated leverage increases but remains acceptable for the rating category.

HIGH PROJECTED COVERAGE: Debt service coverage is expected to remain well over 10.0 times (X) through 2020 due to the utility's strong operating margins (three year average of 22.6%), low debt levels, and lack of additional debt plans. Broader coverage of full obligations, including transfers to the city and UMPA fixed obligations is lower, but still strong at an average of 1.8x over the projected time period.

GROWING, CONCENTRATED CUSTOMER BASE: The utility benefits from a growing customer base and increasing MWh sales. However, sales and revenues are concentrated in the largest customer, Brigham Young University, which accounted for 18% of MWh sales and 11.7% of operating revenues in fiscal 2014.

RATING SENSITIVITIES

COMPLIANCE WITH FINANCIAL POLICIES: The rating reflects Fitch's expectation that Provo will comply with its council adopted financial policies of maintaining cash reserves equal to 25% of operating revenues and keep recurring transfers to the general fund at no more than 11% of operating revenues. Failure to comply could negatively pressure the rating or Outlook.

SUSTAINED PERFORMANCE AND RESOURCE STABILITY: Sustained financial performance well above policy coupled with long-term resource stability at UMPA could support consideration of an upgrade.

CREDIT PROFILE

Provo City Power, an enterprise fund of the city of Provo, Utah, provides electric service to a predominately residential customer base of 35,807 within the city of Provo's boundaries. Provo is the largest municipally owned retail public power utility in the state and biggest of the six member-participants in UMPA.

RETAIL SYSTEM RISK PROFILE

Fitch views Provo's operating risk profile as relatively low and commensurate with a distribution system despite its ownership of generation assets. Under the terms of Provo's power purchase agreement and the corresponding capacity purchase agreement with UMPA, UMPA is responsible for the management and scheduling of all member-owned power resources, including those owned by Provo, and for meeting all member power requirements. UMPA owns or has contractual rights to capacity sufficient to meet member peak demand, which includes partial ownership of a series of coal-fired units, as well as contracted hydroelectric and natural gas peaking capacity.

GROWING, CONCENTRATED CUSTOMER BASE

Provo's customer base is somewhat concentrated with the top 10 customers accounted for 33.8% of MWh sales and 25.2% of operating revenues in fiscal 2014. The largest customer -- Brigham Young University (BYU) -- is the utility's only industrial customer and accounted for 18% of MWh sales and 11.7% of operating revenues in fiscal 2014. A reduction in sales to BYU would reduce Provo's sales and could negatively affect revenues.

While Provo's customer base is predominately residential (87%), its revenue base is shifted towards commercial customers that comprised 51.8% of rate revenues in fiscal 2014. Residential customers and BYU, the utility's only industrial customer, accounted for 36.5% and 11.7% of rate revenues, respectively.

Positively, Provo continues to experience increased demand as additional residential and commercial customers enter the service area. MWh sales have increased at an annual 1% rate from fiscal 2010-2014 with all three customer classes contributing to the growth.

SOLID LIQUIDITY, HIGH PROJECTED COVERAGE

Provo's financial performance has improved significantly in recent years as a series of rate increases were implemented beginning in 2011. Operating margins increased sharply, averaging 25.8% from fiscal 2012-2014 compared to 13.3% in fiscal 2010.

Cash reserves, which had declined to a low of $1.1 million at the end of fiscal 2010, were built up relatively quickly, rising to $25.7 million (182 days cash on hand) at the end of fiscal 2014. Financial policies adopted over the same time period specified that cash reserves would be maintained at a minimum of 25% of operating revenues (approximately 90 days cash) not including cash set aside for future capital projects.

The utility's outstanding revenue bonds fully matured in fiscal 2014, leaving the series 2015 bonds as the only outstanding debt issue for the utility. Even with the issuance the utility's equity/capitalization ratio (100% in 2014) is expected to remain high at around 79% before factoring Provo's share of UMPA obligations. Provo has no additional debt plans currently and expects to cash-fund future capital needs through operating cash and designated funds.

Projected debt service coverage and coverage of full obligations are expected to remain high with averages of 16.6x and 1.8x, respectively, from fiscal 2016 through 2020. Significant factors that could lower these levels, include higher than expected increases in power costs as UMPA replaces expiring power contracts, volatility in the wholesale power market that could reduce UMPA's sales to non-members, and the potential reduction in load if BYU elects to generate power to support a portion of its load.

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

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 16, 2014);

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

--'U.S. Public Power Peer Study Addendum - February 2015' (Feb. 9, 2015).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Public Power Rating Criteria

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

U.S. Public Power Peer Study Addendum -- February 2015

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=861490

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982934

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Contacts

Fitch Ratings
Primary Analyst
Matthew Reilly
Director
+1 415-732-7572
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Dennis Pidherny
Managing Director
+1 212-908-0738
or
Committee Chairperson
Christopher Hessenthaler
Senior Director
+1 212-908-0773
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Matthew Reilly
Director
+1 415-732-7572
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Dennis Pidherny
Managing Director
+1 212-908-0738
or
Committee Chairperson
Christopher Hessenthaler
Senior Director
+1 212-908-0773
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com