Fitch Affirms Stillwater Utilities Authority, OK's 2014A Revs at 'AA-'; Outlook Stable
Fitch Ratings has affirmed the 'AA-' rating on the following Stillwater Utilities Authority (SUA, or the authority) revenue bonds:
--$61.83 million utility system and sales tax revenue bonds, series 2014A.
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; revenue bonds rated 'A'/Positive). Oklahoma State University (OSU; revenue bonds rated 'AA'/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.
EXPECTED COMPLETION OF NEW GENERATION: The Stillwater Energy Center facility is expected to be commercially operational by mid-July 2016. The 55MW gas-fired facility poses manageable risk, given SUA's experience operating similar assets, the mature technology, and the expected sale of the plant's capacity and output to GRDA.
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. Additional debt issuance over the next few years through a state revolving fund program with the Oklahoma Water Resources Board (OWRB) will ultimately temper SUA's financial metrics. However, forecast ratios are solidly in line with Fitch's 'AA-' medians.
ABOVE-AVERAGE RATES: Rate increases over the past nine years have raised SUA service rates to levels that are above the state average and high relative to income. Rate increases have been prudently used to fund infrastructure projects and capital improvements, and to support strong system financials, but pressure could develop over time.
STYMIED REVENUE GROWTH: While not currently envisioned, a vote of the trustees of the Stillwater Utilities Authority or its 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-RAISING FLEXIBILITY AND MARGINS: The maintenance of revenue-raising flexibility, strong financial margins, manageable transfers and continued economic growth could lead to positive rating action.
SUA provides electric, water and sanitary sewer service in a 30-square mile service territory that encompasses the city of Stillwater, OK. It is the second-largest municipally-owned electric utility in the state.
The city is home to OSU. While the authority benefits from the economic effects of a large, growing university, it does not directly serve the university load.
GRDA provides the authority full-requirements power and energy pursuant to a recently renewed, long-term power purchase and sale agreement.
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. Revenue attributable to the tax has grown by nearly 50% over the past 10 years. 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. .
FINANCIALS FORECAST TO REMAIN STRONG DESPITE ADDITIONAL DEBT
SUA's financial metrics are currently very strong, primarily as a result of recent rate increases across the system. The authority plans to issue $79 million of OWRB notes in order to fund system upgrades as part of SUA's Water 2040 capital plan. SUA received $30 million in subordinated debt funding from the OWRB in May 2016 and expects to issue an additional $20 million in subordinated debt in fiscal 2017. The timing of the remaining $30 million installment is uncertain and could be delayed until 2025 in order to defer water rate increases.
Debt service for the series 2014A bonds and OWRB notes will begin to temper financial ratios. However, SUA's forecast coverage of senior and subordinate debt service remains a strong 4.3x by fiscal 2020. Coverage of full obligations that year also remains very strong at 1.8x.
CONTINUED WILLINGNESS TO INCREASE RATES
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 electric rate increases. The escalator - equal to the lesser of 3% or the regional consumer price index - provides for regular rate relief. The same rate escalator was approved in a 2015 resolution for the water and wastewater system and will become effective on July 1, 2018. 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, which could lead to pressure over time.
SIZABLE GENERAL FUND TRANSFERS
SUA's general fund transfers are currently high, but appear manageable. The transfers have averaged 18.6% of SUA's total operating revenues over the past five fiscal years, well above Fitch's 'AA-' rating category average of 7.1%. Nevertheless, the transfers have not limited the utility's ability to build equity as evidenced by SUA's ratio of equity to capitalization (64.5%), which is above the category median (52.3%). In addition, the resolution provides that transfers are made after payment of debt service.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Public Power Rating Criteria (pub. 18 May 2015)
Dodd-Frank Rating Information Disclosure Form
Fitch Ratings, Inc.
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