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Fitch Affirms Coffeyville (KS) Sr. 2015-B Electric Rev Bonds at 'BBB+'; Outlook Stable.

New York: Fitch Ratings has affirmed the 'BBB+' rating assigned to the $46.9 million electric system revenue bonds series 2015-B issued by Coffeyville, KS (Coffeyville).

The Rating Outlook is Stable.

SECURITY

The 2015-B bonds are payable by a first lien on net revenues of the city's electric utility system.

KEY RATING DRIVERS

Small, Low-Cost Provider: Coffeyville owns and operates a small retail electric utility along the southeastern Kansas border. The utility purchases low-cost, full-requirements electric power and energy from the Grand River Dam Authority (GRDA; revenue bonds rated A+/Stable).

Reliance on GRDA Payments: GRDA purchases all capacity from the recently completed natural gas-fired facility that Coffeyville constructed and put into operation in January 2017. GRDA capacity payments for the new gas-fired facility are critical to Coffeyville's financial operations and its ability to comfortably service debt. The payments are designed to recover a minimum of related fixed costs.

Single Customer Concentration: Coffeyville Resources Nitrogen Fertilizer (CRN) is Coffeyville's largest customer, which represents approximately 65% of the utility's revenues and 77% of the utility's sales. The agreement between Coffeyville and CRN runs through July 2019 with a five-year extension option at escalated rates. Should CRN leave the system, Coffeyville could face financial strain.

Mixed Financial Position: GRDA capacity payments largely drive Coffeyville's sound projected cash flows through 2021. Liquidity declined slightly in fiscal 2017, but remains adequate for the rating category. Leverage is elevated but will gradually improve as the debt continues to amortize.

Limited Rate Flexibility: Coffeyville's ability to raise retail rates in response to reduced capacity payments, or the loss of its largest customer, may be limited by its relative size. However, Coffeyville's retail rates remain low relative to other utilities in the state.

RATING SENSITIVITIES

Preservation of Current Financial Profile: An unwillingness to raise rates necessary to maintain current financial metrics could cause downward rating pressure. Additionally, the loss of Coffeyville's largest customer, or reduced capacity payments as a result of poor performance at the new gas-fired power project, would be highly challenging for the utility to absorb and would likely lead to negative rating action.

Reliance on Grand River Dam Authority (GRDA) Payments: Given Coffeyville, KS's reliance on capacity payments from GRDA (A+/Stable) to meet debt service, the rating on the bonds is likely to remain capped by the GRDA rating.

CREDIT PROFILE

Coffeyville operates a small electric system serving 6,052 customers in southeastern Kansas along the Oklahoma border. A principally industrial economic base causes considerable customer concentration, and economic indicators generally lag the state and nation.

NEW PROJECT OPERATIONAL

The recently completed natural gas-fired plant, together with the extension of its GRDA power purchase and sale agreement, should allow Coffeyville to increase system reliability, relieve transmission congestion, and continue its low-cost operations. The new facility further develops Coffeyville's long-term power supply relationship with GRDA, whereby the city sells all capacity and output from its owned resources to GRDA and purchases its full energy requirements from GRDA.

The natural gas-fired project consists of three reciprocating engines totaling 56MW. Coffeyville retains the risks of plant outages through corresponding reductions in GRDA capacity payments. However, the city's experience owning gas-fired generating assets and the mature, low-complexity technology help mitigate this risk.

SATISFACTORY PROJECTED CASH FLOWS

GRDA capacity payments are critical to Coffeyville's financial wherewithal. Therefore, GRDA's credit quality will continue to influence Coffeyville's credit rating. The capacity payments are structured to cover annual fixed costs for the new facility upon commercial operation. Given Coffeyville's reliance on capacity payments from GRDA to meet debt service, the rating on the bonds is likely to remain capped by the GRDA rating.

Coffeyville's projected cash flows show satisfactory debt service coverage of at least 1.5x through fiscal 2021, which includes the debt amortization related to the new facility. Coverage ratios assume total annual GRDA capacity payments ranging from $5.7 million to $5.9 million and annual net margins on Coffeyville Resources of approximately $1.9 million-$2.2 million.

Projected financials suggest sufficient excess cash flow averaging approximately $3.5 million annually through 2021, which should help maintain liquidity at a level adequate for the rating category. Coffeyville's current liquidity provides modest cushion to absorb potential revenue losses. Fiscal 2017 total cash on hand was approximately 112 days (about $15 million), up from 37 days in fiscal 2012 ($5.5 million).

Coffeyville's leverage is currently elevated for the rating category, with adjusted debt to adjusted funds available for debt service (FADS) at 9.6x in fiscal 2017. Leverage should improve as the debt continues to amortize.

LIMITED RATE FLEXIBILITY

The complete loss of the full GRDA capacity payment and net margin from Coffeyville Resources, in a worst-case scenario, would result in less than 1x coverage of total debt service on a pro forma basis in each of the years 2018 to 2021. This underscores the importance of these sources to Coffeyville's overall financial operations.

Although Coffeyville's low rates and autonomous rate-setting ability suggest ample rate-raising flexibility, the city's limited financial position and rate base, and relatively small size create practical limitations to its ability to absorb the loss of the GRDA capacity payment or its largest customer. An unwillingness to raise rates in order to preserve Coffeyville's financial metrics could pressure the rating.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:1U4KS
Date:Nov 27, 2018
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