Fitch Rates Stillwater Utilities Authority, OK's 2014 Revs 'AA-'; Outlook Stable
NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' rating to the following Stillwater Utilities Authority (SUA, or the authority) revenue bonds:
--$57,240,000 utility system and sales tax revenue bonds, series 2014A;
--$4,875,000 utility system and sales tax revenue bonds, series 2014B (federally taxable).
The bonds are scheduled to price via negotiation on July 29, 2014. Proceeds will be used to finance construction of a 55MW natural gas-fired, reciprocating engine power plant.
The Rating Outlook is Stable.
The bonds are secured by a senior lien on SUA's electric, water, and sanitary sewer system net revenues, as well as one-cent sales tax revenues received from the city of Stillwater (subject to the payment of operations and maintenance expenses).
KEY RATING DRIVERS
COMBINED RETAIL SYSTEM: SUA is a combined retail system purchasing low-cost, full requirements electric power and energy from the Grand River Dam Authority (GRDA; revenues bonds rated 'A'/Outlook Stable). Oklahoma State University (OSU; revenue bonds rated 'AA'/Outlook Stable) anchors the city's locally-based, but growing economy.
BROAD REVENUE DIVERSITY: SUA's broad revenue diversity sets it apart from its peers. The authority receives electric, water, and sanitary sewer system rate revenues, as well as one-cent sales tax revenues from the city of Stillwater. Moreover, automatic utility rate increases recover a minimum of annual inflation costs.
SOUND FINANCIAL POSITIONING: Strong cash flow metrics stemming from a series of rate increases beginning in fiscal 2008 position the authority well to finance capital projects. Relatively sizable debt issuance over the next few years will ultimately temper SUA's financial metrics. However, forecast ratios are solidly in line with Fitch's 'AA-' medians.
CONTRACTED NEW GENERATION: The planned facility poses manageable risk, given SUA's experience owning assets; the mature technology; and the expected sale of the plant's capacity and output to GRDA.
SIZABLE ECONOMIC ANCHOR: OSU anchors a growing economic base that benefits SUA operations. A large student population underpins low income levels, but SUA's collection rates remain steady and strong.
STYMIED REVENUE GROWTH: While not currently envisioned, a vote of the trustees or electorate to pare back automatic rate escalators or sales taxes, respectively, could ultimately compress financial margins below forecast levels and lead to negative rating action.
GENERAL FUND PRESSURE: An increase in already sizable general fund transfers that likewise compresses SUA's financial margins could lead to negative rating action.
SUSTAINED RATE FLEXIBILITY AND MARGINS: Conversely, the maintenance of ample revenue-raising flexibility, coupled with strong financial margins, manageable transfers, and continued economic growth, could lead to positive rating action.
SUA provides principally, electric, water, and sanitary sewer service in a 30-square mile service territory that encompasses the city of Stillwater, OK.
DISTRIBUTION CHARACTERISTICS PRESERVED
SUA primarily provides lower risk distribution services, despite owning and operating generating assets. The authority purchases low-cost, full requirements power and energy from GRDA pursuant to a recently renewed, long-term power purchase and sale agreement that extends to June 1, 2042. SUA has received wholesale power from GRDA since 1987.
The proposed 55MW natural gas-fired facility expected online by July 2016 poses manageable risk, as noted. GRDA will be SUA's market participant in the Southwest Power Pool's new Integrated Marketplace and credit SUA $4.3 million annually, plus an energy payment, following completion of the unit. The arrangement effectively preserves SUA's operating profile as a lower risk distribution provider, rather than a vertically integrated retail system. GRDA retains the power supply risk.
RATE INCREASES PROVIDE FOOTING
Rate increases over the past several years position SUA well to finance new infrastructure projects and balance overall system operations. Moreover, SUA distinguishes itself with a 2007 resolution providing for automatic annual rate increases. The escalator - equal to the lesser of 3% or the regional consumer price index - provides for regular rate relief. A majority vote of the trustees could repeal the automatic escalator, but the trustees currently have no such plans.
Of note, any direct or indirect limitations on the authority's revenue-raising flexibility could ultimately become a negative rating factor. Electric rates are now comfortably above the state average and water and sanitary sewer rates are above average relative to median household income.
BROAD REVENUE DIVERSITY
SUA's broad revenue sources should continue to bolster its financial flexibility and stability. The utility receives revenues across three systems: electric, water, and sanitary sewer. In addition, it receives considerable sales tax revenues from the city of Stillwater.
The one-cent sales tax, which was adopted by voters in 1979 and is available to SUA for any purpose, represents approximately 10% of the authority's total revenues and one-quarter of funds available for debt service. Monthly sales tax remittance is subject to annual appropriation under state law. However, such transfers are expected to continue until SUA's debt has been fully repaid. The tax has grown in nine of the past 10 years.
FINANCIALS FORECAST TO REMAIN STRONG
SUA's financial metrics are currently very strong, largely as a consequence of recent rate action. Debt service for the series 2014 bonds and proposed 2016-2018 bonds ($79 million par amount) begins to temper financial ratios. However, SUA's forecast coverage of senior and subordinate debt service remains a strong 4.0x by fiscal 2018. Coverage of full obligations that year (1.6x) is more in line with Fitch's 'AA-' rating category median (1.4x).
SIZABLE GENERAL FUND TRANSFERS
SUA's general fund transfers currently appear manageable. Service territory growth has aided city tax revenues and relieves some pressure on the utility.
The transfers have averaged a high 25.6% of SUA's total operating revenues over the past five fiscal years. Fitch's 'AA-' rating category average is 6.8%. Nevertheless, SUA's ratio of equity to capitalization (82.4%) is well above the category median (48.5%), i.e. the transfers have not limited the utility's ability to build equity. In addition, the resolution provides that transfers are made after payment of debt service.
UNIVERSITY ECONOMIC ANCHOR
The city is home to OSU. SUA benefits from the ancillary effects of a large, expanding university. However, Oklahoma Gas & Electric Co. (OG&E; long-term IDR 'A'/Outlook Stable) serves OSU, pursuant to a franchise agreement granted by Stillwater in 2006. OG&E does not have expansion rights in the city.
Additional information is available at 'www.fitchratings.com'.
This rating action was informed by information identified in Fitch's U.S. Public Power Rating Criteria.
Applicable Criteria and Related Research:
--'U.S. Public Power Peer Study -- June 2014' (June 13, 2014);
--'U.S. Public Power Peer Study Addendum - June 2014' (June 13, 2014);
--'U.S. Public Power Rating Criteria' (March 18, 2014);
--'Fitch Rates Oklahoma State University Revenue Bonds 'AA'; Outlook Stable' (July 18, 2013);
--'Grand River Dam Authority' (Nov. 7, 2012);
--'Transferring from Power: Transfer and PILOT Payment Characteristics in the Public Power Sector' (April 25, 2011).
Applicable Criteria and Related Research:
U.S. Public Power Peer Study -- June 2014
U.S. Public Power Peer Study Addendum - June 2014
U.S. Public Power Rating Criteria
Grand River Dam Authority, Oklahoma (Revenue Bonds)
Transferring from Power: Transfer and PILOT Payment Characteristics in the Public Power Sector