Moody's Investors Service said it has downgraded to Baa1 from A1 the rating on the city of St. George, Utah Electric Revenue Bonds with approximately $60.9 million of rated debt outstanding.
The rating outlook is negative.
The multi-notch downgrade to Baa1 is primarily based on the city's demonstrated unwillingness to raise its electric rates in a timely manner to adequately recover its rising power supply costs to ensure its financial metrics remained healthy while revenues rapidly declined due to the loss of one-time new user connection fees after the recession.
As a result, the electric enterprise's financial metrics materially weakened with net revenue debt service coverage falling below 1.0 times in fiscal 2010 and fiscal 2011. Liquidity also materially narrowed given the use of excess bond proceeds and cash reserves to pay debt service during these years.
Days cash on hand was a minimal 10 days at the end of fiscal 2012 (ended June 30). Given a weak indentured rate covenant, the system did not violate its bond covenants during this time. However, the conscious decision to continue to deplete the electric system's available liquidity to avoid raising electric rates for multiple years is a material credit negative and a primary driver of the three notch downgrade.
The Baa1 rating incorporates the enterprise's monopoly control over the provision of electric services in its stable and primarily residential service area that includes the city of St. George (GO rated Aa2).
While the system has unlimited local control over its rate setting process it has not utilized this flexibility and it does not have an automatic fuel and purchased power cost adjuster, thus the system remains inherently exposed to the volatility of the power markets for it has decided to limit its ability to automatically recover these costs from its customers like the majority of other public power utilities.
The rating also factors the system's relatively diversified power supply resource portfolio that has helped yielded competitive retail rates. Yet, these competitive rates have come at the cost of the electric system's financial health. Favorably, the electric enterprise has the ability to cash flow borrow from the city's pooled liquidity, which partially mitigates the very weak liquidity at the enterprise level.
The city has no obligation to support the electric enterprise in times of financial duress. The rating reflects the 8% rate increase implemented in fiscal 2012, and the recognition that volatile growth related revenues cannot support ongoing operations.