Fitch Ratings has assigned an 'A+' rating to the following issuances by
the Unified Government of Wyandotte County/Kansas City Board of Public
Utilities (BPU), KS:
--$43,060,000 utility system refunding revenue bonds, series 2016-B;
--$52,635,000 utility system improvement revenue bonds series 2016-C.
Fitch has also affirmed the 'A+' rating on the following outstanding BPU
bonds:
--$570.7 million utility system improvement revenue bonds.
The Rating Outlook is Stable.
Proceeds from the 2016-B bonds will refund the outstanding 2009-A bonds
and pay the costs of issuance. Proceeds from the 2016-C bonds will
finance various system improvements. The bonds are expected to price the
week of Nov. 14, 2016.
SECURITY
The bonds are payable from net revenues of the combined electric and
water system on parity with outstanding utility system revenue bonds
(senior lien).
KEY RATING DRIVERS
COMBINED UTILITY SYSTEM: The BPU provides retail electric and water
services in a largely overlapping service area. The electric system
provided approximately 83.6% of the combined utility system's operating
revenues in 2015.
STABLE FINANCIAL PERFORMANCE: Financial metrics remained stable and in
line with rating category medians with Fitch-calculated debt service
coverage and coverage of full obligations at 2.08x and 1.37x,
respectively. Liquidity levels continue to gradually increase, rising to
83 days cash on hand at the end of 2015 from 51 days at the end of 2013.
Financial performance is projected to weaken modestly in 2016 but remain
satisfactory for the rating.
FLEXIBLE RATE STRUCTURE: BPU's rate structure is viewed as a credit
positive, with an energy cost charge that is adjusted on a quarterly
basis and an environmental surcharge that is reset annually to cover
debt service costs related to the utility's environmental compliance
projects. The utility expects to increase base rates by 4% annually in
2017 and 2018, the first base rate increase since a series of increases
that terminated in 2013.
TRANSITIONING POWER SUPPLY: The utility is undertaking a significant
transition in its power supply, moving away from older coal-fired plants
and toward a greater reliance on natural gas-fired and renewable
resources. The transition is largely driven by environmental regulations
requiring additional pollution controls on the system's coal-fired power
plants along with the improving economics of wind resources.
WEAK SERVICE AREA: The 'A+' rating takes into account the service area's
below-average income levels, large commercial and industrial customer
base, and relatively flat sales growth. Rating concerns are mitigated by
improving economic trends and an only moderately concentrated customer
base.
RATING SENSITIVITIES
MAINTENANCE OF FINANCIAL METRICS: The rating reflects the Kansas City
Board of Public Utilities' demonstrated ability and willingness to raise
rates and modify its rate structure to maintain financial metrics
commensurate with 'A+' rated public power utilities. An unexpected
reversal from this practice, particularly given the system's significant
capital needs, could likely pressure financial performance and could
lead to negative rating action.
CREDIT PROFILE
BPU is a combined electric and water utility system serving
approximately 64,000 electric and 51,000 water customers. The utility's
electric system is an integrated system consisting of generation,
transmission, and distribution assets.
BPU's utility system derives approximately 83.6% of its revenues from
the electric system, with the balance coming from water sales.
Commercial and industrial customers account for about 63.8% of electric
volumes sold; residential customers account for approximately 22.1%.
TRANSITIONING POWER SUPPLY
As a utility that derived 88% of its 2013 energy from older vintage
coal-fired units, BPU is exposed to environmental regulations
promulgated by the U.S. Environmental Protection Agency (EPA), including
Mercury and Air Toxic Standards (MATS). Following a strategic review,
BPU is executing a plan aimed at meeting air quality standards and
reducing dependence on coal and transitioning towards greater use of
natural-gas fired and renewable resources.
The first step was completed in December 2012 with the acquisition of a
17% ownership interest (110 MW) in the Dogwood Generating Facility, an
efficient combined cycle gas-fired power plant. The second phase in
BPU's compliance plan was completed in April 2015 with the permanent
conversion of its Quindaro units one and two to natural gas from coal.
The next step and cornerstone of the project is the installation of
environmental upgrades at the 257 MW Nearman Station to bring the plant
into compliance with air quality standards by 2017. The installation of
the pollution control equipment began in August and is expected to be
complete by mid-November 2016. Current estimates reflect a total cost of
$235 million compared to the budgeted cost of $250 million.
BPU has also entered into and plans to continue pursuing purchase power
agreements (PPAs) for renewable energy due to both the environmental
benefits and the improved economics of the resource. Currently
contracted resources for renewable capacity, including federal
hydroelectric projects, amount to approximately 13.4% of BPU's total
capacity. The amount is expected to increase to approximately 31.1% in
2017.
The increase is largely driven by BPU's 20-year PPA for 200 MW of wind
from a Kansas-based wind farm that is expected to be operational in
mid-2017. By 2018, management projects to receive approximately 38% and
45% of its power supply from wind and coal resources, respectively, a
significant shift from 73% coal and 5% wind in 2015.
RATE INCREASES PLANNED
BPU plans to propose a 4% average rate increase for both 2017 and 2018
in November, which will be followed by a rate hearing in January. The
board is expected to take action in February 2017 with the rate
increases effective March 1 of 2017 and 2018.
STABLE FINANCIAL PERFORMANCE
BPU's debt service coverage levels are stable, with Fitch-calculated
coverage of 2.08x in 2015. After adjusting for the system's relatively
high payment in lieu of taxes (PILOT) amount and purchased power
expenses, Fitch-calculated coverage of full obligations is comparable
with similarly rated entities at 1.37x. Financial projections for 2016
show Fitch-calculated debt service coverage levels modestly lower but
still satisfactory for the rating. Rate increases planned for 2017 and
2018 are expected to return coverage to recent levels.
BPU's financial performance has remained relatively stable since 2010,
following a period of volatility during the recession, particularly in
2008 and 2009 when BPU's commercial and industrial volumes were
adversely affected and PILOT payments to the Unified Government were
increased. Key credit and liquidity measures from 2013-2015 are
generally consistent with the 'A+' rating.
Liquidity levels increased to 83 days cash on hand at the end of 2015, a
significant improvement from just 19 at the end of 2008.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/site/re/864007
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013711
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013711
Endorsement Policy
https://www.fitchratings.com/regulatory
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