Colorado Springs Utilities Receives Positive Ratings News From Moody's, S&P
July 23, 2020
by Paul Ciampoli
APPA News Director
Posted July 23, 2020
Public power utility Colorado Springs Utilities recently received positive ratings news from Moody’s Investors Service and S&P Global Ratings.
Moody’s Investors Service has assigned an Aa2 rating to the Colorado Springs (City of) CO Combined Utility Enterprise’s proposed $195 million of senior lien Utilities System Refunding Revenue Bonds, Series 2020A and $51 million of Series 2020B (Private Activity), and approximately $85 million of new Utilities System Improvement Revenue Bonds, Series 2020C for a combined total of $331 million in debt issuance.
The rating outlook is stable.
The assigned Aa2 rating reflects the utility’s “above average service area characterized by a large regional military presence; the history of sound rate setting and board policies to ensure stable financial metrics and strong liquidity,” Moody’s said.
To date, Colorado Springs Utilities operating income has not been significantly impacted by coronavirus’ related shutdowns as the 7% revenue decline has been offset by a similar reduction in operating expenses, the rating agency noted.
Total electricity load for May year to date has declined by around 1%, with residential load increasing by 5.3% and small and medium commercial load declining by around 4%. At Fiscal Year 2019, sales to residential customers represented around 33% of total electric demand, while commercial and industrial represented around 60% and military and other customers accounting for around 7%.
Through May 2020, year-to-date the utility’s operating revenue decreased by $25.9 million year-over-year, but was offset by a corresponding $26.1 million decrease on the expense side through May 2020 year-to-date — including a $17.4 million decrease in purchased power, gas, and water for resale expense, a $7.9 million decrease in production and treatment expense, and $2.0 million decrease in maintenance expense, the rating agency noted.
While it is still early to assess the full impact that the COVID-19 pandemic may have on the utility’s 2020 financial performance, the rating action “considers the long-term resiliency and essentiality of the utility system which along with its liquidity” should enable Colorado Springs Utilities to manage through the impact of the coronavirus including the potential for a slow economic recovery over the next eighteen months, Moody’s said.
The rating agency noted that the utility has adjusted its five-year (2020-2024) capital plan upwards by around $400 million, given a recently approved Energy Integrated Resource Plan that calls for the retirement of Units 6 and 7 at Drake no later than 2023 and the retirement of Unit 1 at Nixon no later than 2030, in addition to other projects including advanced metering infrastructure and water treatment related projects, among others.
It is anticipated that replacement generation would include a combination of natural gas, non-carbon resources, storage, and energy efficiency initiatives.
With the planned retirement of Drake and Nixon units, the utility will be in a good position to meet current and future regulatory requirements, Moody’s said.
Although the capital program is sizeable, the utility “has demonstrated its ability to manage significant capital projects in the recent past, continues to maintain competitive rates, along with an adequate liquidity profile.”
Colorado Springs Utilities continues to manage its variable rate debt exposure, and since September 2019, it has zero unhedged exposure, Moody’s said.
Meanwhile, S&P Global Ratings assigned its ‘AA+’ rating to the city of Colorado Springs, Colo.’s utilities system revenue refunding bonds series 2020A and 2020B, and its utilities system improvement revenue bonds series 2020C.
At the same time, S&P Global Ratings affirmed its ‘AA+’, ‘AA+/A-1+’, and ‘AA+/A-1’ ratings on the system’s parity debt outstanding. The outlook is stable.
The rating reflects S&P’s view of the utility’s extremely strong fixed-charge coverage (FCC), diverse customer base, and its decision to eliminate its coal exposure by closing Drake Units 6 and 7 by 2023 and its Nixon Unit 1 by 2030.
“In our opinion, the system’s robust liquidity and coverage metrics provide flexibility and a cushion to mitigate potential short-term disruptions as a result of COVID-19 and the related recession.”
As of fiscal 2019, the system had more than 298 days’ cash on hand, “which we imagine will likely provide a sufficient cushion in the event of short-term disruptions. Management indicates that the system has experienced minimal load loss to date because of stay-at-home orders and social-distancing measures,” S&P said.
The rating also reflects S&P’s opinion of the system’s very strong enterprise and extremely strong financial risk profiles.
S&P said the enterprise risk profile reflects its view of the system’s:
* Very strong service area economic fundamentals, reflecting its large, primarily residential, and diverse customer base;
* Strong market position, based on the utility’s weighted-average electric system rate that is about 2% above the state average;
* Very strong operational and management assessment, as its diverse power supply relative to that of the region indicates. “We consider the utility’s financial policies and practices very strong. These include regularly updated strategic plans, multiyear capital planning and financial forecasts, and an automatic power cost adjustment mechanism;” and
* Extremely strong industry risk relative to other industries and sectors.