NEW YORK - Moody's Investors Service said it has downgraded to A3 from A1 the city of Springfield, Ill.'s senior lien electric revenue bond rating, affecting approximately $622 million of outstanding senior lien debt and concluding the review for possible downgrade initiated on April 13. The rating outlook is negative. The utility is also known as City Water, Light & Power or CWLP.
The downgrade to A3 is primarily based on the city's demonstrated unwillingness to increase electric rates sufficient to maintain adequate financial metrics during its recent financial deterioration.
This resulted in a financial covenant violation and necessitated a $2.2 million draw on a revolving bank line of credit as of the end of FY 2012 (ended February 29).
In Moody's opinion, the violation of a rate covenant for an essential purpose enterprise is a serious negative credit factor.
The city finally approved a two year base rate increase coupled with some non-recurring expenses cuts just before the end of FY 2012, as CWLP's had not increased base rates since April of 2008.
The rate raising process at CWLP is somewhat onerous given the utility general manager and the city's mayor must both allow CWLP to appear before the city council to request a rate increase.
The previous mayor and interim mayor (replaced April 29, 2011) and the previous appointed general manager blocked the utility's requests for rate increases for the last three years.
It was not until the new mayor took office that CWLP was allowed to request a rate increase. This process is highly political and contrasts historical experience when the city advance approved rate increases to fund the debt issued to construct Dallman Unit 4.
Given the rate increases and expense cuts, financial margins are expected to modestly improve in the next two years, but they will remain narrow as there is limited future flexibility to reduce operating expenses, so actual financial metrics in FY 2013 are expected to be similar to those experienced FY 2010 and FY 2011.
Moody's is uncertain as to whether or not the utility's coverage or liquidity metrics will improve to levels on par with other A rated utilities in the near term.
The A3 rating further incorporates the institutional strength of the utility's customer base that provides long-term stability to the region, as well as the unknown environmental regulatory compliance costs CWLP will face as it just commissioned an environmental study.
Environmental compliance costs are not expected to be as high as for other coal dominated utilities given CWLP's coal units are already scrubbed for SO2 and NOx and Dallman 4 has mercury removal and a state-of-the-art cooling tower.