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Rating Action:

Moody's assigns Aa2 to Colorado Springs (City of) CO Combined Utility Enterprise's $227.8 million Utilities 2018 System Refunding and Improvement Revenue Bonds; outlook stable

13 Jun 2018

New York, June 13, 2018 -- Moody's Investors Service has assigned an Aa2 rating to the Colorado Springs (City of) CO Combined Utility Enterprises proposed $227.8 million senior lien Utilities System Refunding Revenue Bonds (Series 2018A-1 to Series 2018A-3), and Utilities System Improvement Revenue Bonds (Series 2018A-4). The rating outlook is stable.

RATINGS RATIONALE

The assignment of the Aa2 senior lien rating to the Colorado Springs (City of) CO Combined Utility Enterprises (CSU) Utilities System Refunding and Improvement Revenue Bonds reflects 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.

The credit profile also reflects our expectation of strong service area economic growth evidenced by steady population growth, the demonstrated ability to manage significant capital projects, the maintenance of competitive rates and an adequate liquidity profile. CSU's $916 million five-year capital plan although sizable, has greater capital budgeting flexibility, and is expected to be 80% cash funded. CSU's variable rate debt exposure will be further reduced with the Series 2018A-1 to Series 2018A-4 bonds. Going forward we expect continued strong fiscal stewardship with stable credit metrics and liquidity through active debt management and balancing of resource usage with rate competitiveness

RATING OUTLOOK

The stable outlook reflects our expectations that stable debt service coverage ratios and sound liquidity will continue in the FY 2018-2019 time frame, with recently effected water and electric base rate increases in January 2018 and electric and gas cost adjustments in May 2018.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Deleveraging and maintenance of strong financial metrics in excess of historical averages of > 2.0x, coupled with significant economic growth could positively affect the rating

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Significant increases in cost and leverage to meet environmental compliance requirements such as greenhouse gas regulations resulting in a significant decrease in competitiveness

- Failure or inability to implement rate increases to maintain sound financial metrics similar to recent historical averages

- Growing transfers to the city in the form of surplus or additional payments (storm water) that could hinder liquidity, coverage ratios or rate competitiveness

LEGAL SECURITY

Similar to the outstanding revenue bonds, the Series 2018 A bonds are secured by the net revenues of the combined CSU system. The rate covenant requires net revenues to cover debt service by at least 1.3x and Build America Bond interest subsidy payments are considered pledged revenues. The additional bonds test requires net pledged revenues to be at least 1.30x for the year preceding the new issuance, including the debt service of the new issuance. The debt service reserve is funded at average annual interest (no principal), which we consider to be a credit weakness. The debt service reserve required for Series 2018A bonds will be surety funded of approximately $8.2 million. Approximately $11.7 million of the debt service reserve on outstanding bonds is already provided by reserve fund surety policies with Assured Guaranty Municipal Corp. (A2 stable) and $11.5 million with National Public Finance Guarantee Corporation (Baa2 stable). The total reserve requirement as of FY 2017 was $52 million, of which approximately 44.6% was surety funded.

USE OF PROCEEDS

The issuance is targeted to reduce existing variable rate exposure as well as to fund upcoming capital projects. Approximately $126.2 million will refund the 2006A and 2007B variable rate bonds and swaps (Series 2018 A-1), $39.4 million will refund outstanding commercial paper (Series 2018 A-2), $4.8 million will refund the 2008B bonds (Series 2018 A-3), and $57.4 million in new money will support a number of general capital improvements to the utility system (Series 2018 A-4). The issuance is expected to result in a portfolio of approximately 76.4% in fixed rate bonds, 17.5% in hedged variable rate bonds, and 6.1% in unhedged variable rate bonds for a total of approximately $2.3 billion in total debt outstanding. The estimated net present value savings post issuance will be approximately $1 million or 14.7% from the Series 2018 A-3 bonds.

PROFILE

Colorado Springs Utilities (CSU) operates a diverse mix of services pursuant to a city charter- a combined utility with water, electric, gas, wastewater and street light systems, all owned by the city. The service areas of the systems include the City of Colorado Springs, population approximately 446,000, (Aa2). Some of the CSU system serves Manitou Springs, many of the suburban residential areas and the four military installations surrounding the city.

METHODOLOGY

The principal methodology used in these ratings was US Public Power Electric Utilities With Generation Ownership Exposure published in November 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jennifer Chang
Lead Analyst
Project Finance
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Michael Mulvaney
MANAGING DIRECTOR
Project Finance
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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