CHICAGO — Moody’s Investors Service lowered Springfield’s $634 million of senior-lien electric revenue bonds one notch to A1 and warned of further action due to a narrowing of its debt-service coverage ratios and liquidity position — neither of which has been helped by Illinois’ lateness in paying its bills.
Senior-lien debt service coverage fell to 1.11 times in fiscal 2009 and remained there in 2010. The utility also had cash on hand to cover just 32 days of operation.
“These coverage and liquidity levels are expected to improve slightly in the current fiscal year, but will remain relatively narrow on a net-revenue basis and are not in line with the Aa3 rating category,” Moody’s analysts wrote.
The credit has suffered in part because of the economic downturn’s impact on its service area and exposure to the state’s budget woes. “This economic profile has constrained the utility’s willingness to raise base rates to generate higher margins,” Moody’s wrote.
Although stressed, the regional economy benefits from the presence of two large hospitals, two universities and Springfield’s status as the state capital.
That status, however, leaves the utility vulnerable to Illinois, which accounts for about 11% of its revenues. The state closed out September owing more than $5 billion to vendors and has been paying its Springfield utility bills an average of 60 days late.
“This has raised the accounts receivable balance and presents a risk should the state’s fiscal condition worsen,” Moody’s warned.
Other challenges to the credit include current and future compliance with clean-air permit requirements and carbon regulation, given its primary reliance on coal-fired generation. Low wholesale costs are currently hurting the utility’s balance sheet as it had hoped to reap higher costs through the sale of its excess generation, although prices are expected to rise.
The utility’s senior-lien bonds are secured by net operating revenues of the system. Debt service coverage must remain at 1.25 times to permit additional issuance.
The utility has a $15 million bank line of credit with Illinois National Bank that runs through 2014, but it’s viewed as a credit-neutral factor since the bank could terminate it because the utility’s rating is below Aa3. The city does not currently carry an outstanding balance.
The A1 rating benefits from the city utility’s successful launch of the Dallman Unit 4 late last year as well as the low cost of power offered by the utility, which does not expect to raise base rates in the near term to offset its narrow fiscal margins.
The credit also is supported by the utility’s monopoly control of its service area with no retail competition expected in the foreseeable future. The local availability of coal and water sources limits transportation risks.
With no near-term issuance plans, the Springfield utility has freed up $20 million in cash to fund the installation of a scrubber to meet emission standards for one of its units by replacing 50% of a cash-funded debt service reserve with a surety bond provided by Berkshire Hathaway Assurance Corp.
