Fitch Rates the City Utilities of Springfield, MO's $615MM Public Utility Revs 'AA'.

NEW YORK -- Fitch Ratings assigns an 'AA' rating to City Utilities of Springfield's, MO (CU) $615 million public utility revenue bonds, series 2006. The series 2006 bonds are senior to the utility's outstanding $70.8 million electric system lease obligations. In addition, Fitch affirms the long-term 'AA' on the lease obligations. No rating differentiation is made for the two liens given the overall credit strength of the utility. The Rating Outlook is Stable. Proceeds of the series 2006A bonds will fund the construction of a new 300MW coal-fired unit, Southwest Power Station Unit II (Southwest II). The bonds are expected to be competitively bid the week of Sept. 11, 2006.

The 'AA' rating takes into account CU's plan to build additional base-load coal fired generation at the Southwest Power Station. Southwest II will offset system growth and replace expiration of several favorable power purchase agreements. As a result, CU will switch to 96%-owned and 4%-purchased power in 2011 from the current mix of 86%-owned and 14%-purchased. While this will also result in a major change in CU's financial profile, CU has positioned itself well financially to take on the additional debt and maintain solid equity levels, debt service coverage and liquidity. Management's strategy appears balanced with regard to construction risk and power market exposure prior to the unit coming on line. While CU's fixed costs will increase as a result of the issuance of the series 2006 bonds (for the construction of Southwest II), Fitch expects that the system's power costs will remain competitive for the region.

Key credit underpinnings reflect the utility's strong financial performance, low-cost and diverse generating portfolio, and very competitive retail rates. CU has historically generated predictable and stable operating margins, as fuel charges are directly passed through to electric customers (the gas system adjusts on a monthly basis). Additionally, CU maintains a policy to set base rates at levels to maintain pay-as-you-go funding of annual system renewals and replacements, which average about $35 million per year. In fiscal year 2005, CU posted strong debt service coverage of 4.88 times (x), solid cash liquidity equivalent to 118 days of operating expenses, and extremely low debt-to-funds available for debt service (FADS) of 1.5x. CU's retail rates have historically been among the lowest in the region and are very competitive when compared across the nation. Specifically, CU's average monthly residential bill was $55 in 2005, about 20% below the Missouri investor owned utility (IOU) average. Additional credit strengths include a favorable service area economy with 2.5% annual energy sales growth over the past 5 years and a diverse customer base.

Credit concerns are limited and center on the construction of the Southwest II generating station. Southwest II is expected to become commercially operational in late 2010 and will be the first coal-fired plant constructed by CU since its sister unit, Southwest Unit I, was completed in 1976. CU will manage the construction of the project with Stanley Consultants, Inc. serving as Owner's Engineer. For cost and timing reasons, management has decided against the use of a turnkey engineering procurement and construction (EPC) contract. Without a turnkey contract, unforeseen construction cost risks will be borne by CU. However, CU has factored potential labor and material cost overruns into its project budget, including a $46 million contingency reserve. While this reserve is small relative to the scope of the project, management can also allocate $83 million from other designated funds or draw upon a $25 million master lease credit line should construction costs further escalate. As such, Fitch believes that even a material increase in construction costs would not necessarily alter CU's credit risk profile, given the utility's timely cost recovery mechanisms and overall financial position. Moreover, a 20% escalation in project cost would modestly affect CU customers, adding $2.27 per month (in 2011 dollars) to the average residential customer's bill.

Constructively, it is Fitch's expectation that CU will be able to execute its capital plan while maintaining a reasonable 49% debt-to-capital ratio over time, and good debt service coverage of over 2x. CU has already received City Council approval for an 18.5% base rate increase (when Southwest II enters commercial operation in 2010) to fund costs associated with the project. Even with the planned rate increase, CU's rates should remain highly competitive when compared to the current rates of its neighboring utilities. It should be noted that many of these systems are also involved in large-scale construction projects at this time, and are expected to realize upwards rate pressure.

CU is a combined municipal utility that serves over 102,000 electric, 80,000 gas and 78,000 water customers in the Springfield metropolitan area. The utility is organized as two separate financial enterprises, the public utility (secured by electric, gas, telecom and transportation revenues) and the waterworks system (secured by water revenues). Public utility revenues are comprised by 65% electric, 34% gas and less than 1% telecom and transportation. In 2005, electric revenues were derived from 38% residential sales, 47.6% from commercial and interdepartmental sales, and 14.4% from industrial sales.

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