TEXT-Fitch rates Sikeston, Mo. electric refunding revs
July 5 - Fitch Ratings assigns an initial 'BBB+' rating to the following city of Sikeston, MO revenue bonds: --$71,600,000 electric system revenue refunding bonds, 2012 series. Proceeds of the bonds, which are scheduled to price via negotiation on or about July 19, 2012, will be used to refund a portion of the city's outstanding electric revenue bonds for approximately 15% savings of the refunded par amount. In addition, Fitch assigns a 'BBB+' rating to the city's $129,455,000 of electric system revenue refunding bonds, 1996 series. Approximately $43.7 million of the 1996 bonds is expected to remain outstanding after this refunding. The Rating Outlook is Stable. SECURITY The bonds are secured by net revenues of the city's electric system, including revenues derived of power sales contracts (PSCs) with four municipal offtakers. KEY RATING DRIVERS SIZABLE OFF-SYSTEM SALES: The Sikeston Board of Municipal Utilities (BMU) sells 82% of the generating capacity from its 235 megawatt (MW), coal-fired generating facility in the wholesale market. Forty-nine percent of capacity is sold pursuant to long-term, take-or-pay PSCs and a considerable 28% is sold in the spot market, which is unusual for a municipal utility. RETAIL RATES REVEAL RISKS: Sizable margins from wholesale spot market sales have contributed to the city's traditionally low retail rates that ranked as the most affordable of 134 Missouri providers in 2010. By design, BMU's retail system produces negative net margins on a standalone basis. VOLATILITY IN NET MARGINS: The extent of BMU's wholesale spot market sales has caused volatility in annual net margins, which included a net loss in 2010. Its reliance on wholesale operations that could ultimately result in the narrow or under-recovery of overall annual financial obligations is a fundamental risk that drives BMU's 'BBB+' rating. MIXED FINANCIALS EXPECTED TO WEAKEN: A recent history of strong liquidity equal to over 300 days cash on hand has provided BMU with cushion to absorb fluctuations in annual financial operations. However, BMU intends to halve its cash balances over the next several years with capital spending on environmental projects. In addition, debt service coverage is projected to average a modest 1.3x through fiscal 2018, or slightly below BMU's five-year historical average of 1.4x. POTENTIAL REVENUE-RAISING FLEXIBILITY: BMU's low retail rates should provide headroom to raise additional revenues, if wholesale spot market margins weaken in the currently low natural gas price environment. However, rate increases require city council approval, which adds a political element to BMU's rate-making process. GOOD MUNICIPAL OFFTAKERS: The four municipal offtakers evidence good economic and financial metrics, including low debt levels and solid cash flow metrics, in support of Sikeston's 'BBB+' rating. WHAT COULD TRIGGER A RATING ACTION INSUFFICIENT RATE ACTION: A tightening of wholesale spot market margins without offsetting retail rate increases to preserve overall net margins could cause downward rating pressure. FINANCIAL CUSHION: Stronger cash flow metrics, along with the maintenance of substantial cash and liquid investments to absorb any financial volatility caused by wholesale spot market operations, could lead to upward rating action. CREDIT PROFILE BMU provides electric, water, and sanitary sewer services to the city of Sikeston, MO. The electric utility, which has been in operation since 1931, directly serves 9,123 retail customers from a mix of owned and purchased power resources. In addition, the utility makes sizable wholesale sales representing nearly one-half the capacity of its 235MW, coal-fired generating asset to four municipal offtakers - the cities of Carthage, Columbia, Fulton, and West Plains - pursuant to long-term, take-or-pay PSCs. Sizable wholesale net margins principally from spot market sales have contributed to BMU's historically well below-average retail rates ranking among the lowest, if not the lowest, in the state. While projections of continued low natural gas prices could erode some of BMU's realized margins in the wholesale spot market, the city's low retail rates should provide some revenue-raising flexibility to benefit overall net margins, insofar as city council approves timely increases. BMU's financial performance is characterized by modest levels of debt service coverage equal to an average of 1.4x over five years - including 1.1x in fiscal 2011 - and variability in overall net margins that causes some concern about the adequacy of retail rates. Currently strong liquidity equal to 340 days cash on hand provides cushion to absorb some fluctuation in annual financial operations. However, BMU is expected to more than halve its cash balances over the next few years with capital spending on environmental projects that are expected to total a manageable $30 million. Sikeston, located approximately 155 miles south of St. Louis, covers an area of 14.5 square miles. The city's 2010 population of 16,318 was slightly below its 2000 level, underscoring some of the reason for the utility's considerable excess capacity.
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