OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB+' rating on the following city of Sikeston, MO revenue bonds:

--\$96,735,000 electric system revenue refunding bonds 1996 and 2012 series.

The Rating Outlook is Negative.

SECURITY

The bonds are secured by a first lien on net revenues of the Sikeston Board of Municipal Utilities (BMU), including wholesale revenues from power sales contracts (PSCs) with four municipal offtakers.

KEY RATING DRIVERS

OUTLOOK REMAINS NEGATIVE: The continued Negative Rating Outlook for BMU reflects Fitch's view that additional retail rate increases will be required in 2016 to further stabilize financial results in light of expectations for continued softness in wholesale spot markets.

SIZABLE OFF-SYSTEM SALES: BMU sells about 88% of the capacity from its single, 235MW coal-fired generating facility in the wholesale market. Half of total capacity is sold pursuant to long-term, take-or-pay PSCs with four solid municipal offtakers and a considerable one-third of the total is sold on a spot basis, which is unusual for a municipal utility. Lower than expected energy sales and market prices have hampered wholesale margins.

RETAIL RATE INCREASE IMPLEMENTED: BMU increased retail rates by 14.3% during fiscal 2015, the first increase since rates were last raised in Oct. 2012 (17.4%). BMU is considering further retail rate action in fiscal 2016 in response to tighter wholesale margins. At half the state average, BMU's existing retail rates provide considerable headroom to generate additional revenues.

CONTINUED WEAK CASH FLOW: Debt service coverage is forecasted to remain below 1x in fiscal 2015, the second consecutive year, which is a violation of BMU's bond ordinance and fundamental credit concern driving the 'BBB+' rating. Forecasted coverage ratios improve to 1.1x by fiscal 2016, driven largely by a potential retail rate increase (15-16% is being considered).

CASH RESERVES PROVIDE SUPPORT: Although significantly depleted versus prior years, liquidity remains healthy with cash on hand expected to equal to 127 days (\$21 million) in fiscal 2015 providing adequate support for BMU's uneven cash flows. Lower than anticipated environmental capex boosted BMU's cash balances in previous years, which have been used to support transfers to the debt service fund to maintain rate covenant compliance.

GOOD MUNICIPAL OFFTAKERS: BMU's four municipal offtakers' good economic and financial metrics, including low debt levels and solid cash flow metrics, support its rating.

RATING SENSITIVITIES

INSUFFICIENT RATE ACTION: Failure of the Sikeston Board of Municipal Utilities (BMU) to implement additional retail rate increases to offset tightening spot margins and stabilize its debt service coverage ratio in fiscal 2016 to at least in line with the 1.1x rate covenant will result in downward rating action. Continued draws on BMU's currently healthy cash balances beyond fiscal 2015 would indicate an unwillingness to exercise the autonomous rate-setting authority that is a hallmark of municipal utility ratings.

ADDITIONAL CONTRACT SALES: The successful sale of BMU's un-contracted capacity that leads to more stable long-term cash flows, together with the maintenance of healthy cash balances, would support BMU's credit profile.

CREDIT PROFILE

COMPRESSED MARGINS PERSIST

Fitch revised its Rating Outlook for BMU to Negative from Stable in June 2014 reflecting soft wholesale market conditions and limited retail rate action which impaired BMU's ability to fully recover costs and maintain its rate covenant. Despite the implementation of a 14.3% retail rate increase in fiscal 2015, continued weak wholesale results coupled with a nine-week maintenance outage are expected to result in less than 1x debt service coverage for a second consecutive year (est. 0.89x).

Wholesale spot market sales that provide all of its net margins have yet to recover and are expected to cause BMU to violate its rate covenant again in fiscal 2015. Traditionally, BMU's sales of excess capacity in the spot market have allowed its retail system to produce negative net margins and consequently operate with the lowest rates in the state.

Non-compliance with the rate covenant to provide 1.10x annual debt service coverage from net revenues does not trigger an immediate event of default under the bond ordinance. As in fiscal 2010 and 2014, BMU will transfer into the revenue fund an amount sufficient to remedy the shortfall as allowed in the ordinance.

Continued draws on cash reserves to buttress covenant compliance has eroded BMU's liquidity. In particular, cash on hand is expected to decline to less than 130 days in fiscal 2015 versus 261 days in fiscal 2013. BMU's historically strong liquidity position reflects the use of far less expensive technology for compliance with the EPA's Mercury and Air Toxics Standards in April 2016.

Fitch expects that investment grade utilities will generate sufficient revenues to cover all operating expenses and debt service, and suitably higher ratios where cash flows are volatile. As such, the stabilization of BMU's credit profile in the coming years hinges on the city's willingness to take further retail rate action to offset lower wholesale results that are expected to remain weak for the foreseeable future. BMU's implementation of an additional retail rate increase in fiscal 2016 would be viewed favorably by Fitch.

Eliminating all wholesale margins would require a roughly 40% increase in retail rates. For context, such increase would still leave BMU as the third lowest provider in the state.

ASSET OPERATIONS

BMU's 235MW, coal-fired generating unit provides it with competitively priced power. The unit average heat rate was 10,451 Btu/kWh in 2014, consistent with industry standards for coal-fired plants. Following maintenance driven declines in 2012 and 2013, availability and capacity factors improved to 93% and 87%, respectively in fiscal 2014.

BMU expects that its participation in the Southwest Power Pool's Integrated Marketplace along with the potential to dispatch into the Midcontinent ISO will provide additional opportunities for margin enhancement.

UTILITY OVERVIEW

BMU provides electric, water, and sanitary sewer services to the city of Sikeston, MO. The electric utility, which has been in operation since 1931, directly serves 9,262 retail customers principally from a single, owned coal-fired resource. In addition, the utility makes sizable wholesale contract sales representing nearly one-half the capacity of its generating asset to four municipal offtakers -- the cities of Carthage, Columbia, Fulton, and West Plains -- pursuant to long-term, take-or-pay PSCs that extend to the later of June 1, 2022 (the year the city's electric revenue debt fully matures), or the useful life of the plant, with certain exceptions. The obligations of the municipal purchasers are several, not joint.

Approximately one-fifth of total capacity serves the city's retail base. The excess is sold on a wholesale basis.