Fitch Ratings has assigned a 'AA-' rating to the following bonds issued by the city of Fort Collins, CO.

Approximately $60 million electric utility enterprise revenue bonds, series 2023.

Bond proceeds will be used for electric and telecommunication system additions and improvements.

In addition, Fitch has affirmed the 'AA-' rating on the following electric utility enterprise revenue bonds:

$84.9 million electric utility enterprise tax-exempt revenue bonds, series 2018A;

$43.4 million electric utility enterprise taxable revenue bonds, series 2018B.

Fitch has assessed the standalone credit profile (SCP) at 'aa-'. The SCP represents the credit profile of the utility system on a standalone basis irrespective of its relationship with the credit quality of the city of Fort Collins.

The Rating Outlook is Stable.

RATING ACTIONS

Entity / Debt

Rating

Prior

Fort Collins (CO) [Electric]

Fort Collins (CO) /Electric System Revenues/1 LT

LT

AA-

Affirmed

AA-

Page

of 1

VIEW ADDITIONAL RATING DETAILS

The 'AA-' rating and 'aa-' SCP reflect Fort Collins' strong revenue defensibility and very low operating risk that continue to support a very strong financial profile for the system. Revenue defensibility is supported by strong electric utility fundamentals, including very high electric rate affordability, strong customer growth trends, and the independent ability to raise rates but is limited by the fund's competitive broadband service business, representing 7% of telecommunication and electric fund revenues in 2022. The city's very low operating cost burden reflects long-term purchases of relatively economic power supply from Platte River Power Authority (PRPA), and its stable and diverse resource mix.

The very strong financial profile reflects Fort Collins' very low leverage ratio, as measured by the net adjusted debt to adjusted funds available for debt service (FADS), which has improved to 6.9x in 2022 from 10.0x following the utility's 2018 issuance to fund the fiber optic infrastructure in support of the city's broadband internet service. The improved leverage ratio reflects prior rate adjustments and the system's improved financial performance over the past few years. Fitch expects additional expected rate adjustments to support the additional debt which will allow the leverage ratio to remain close to current levels and supportive of the rating over the next several years.

SECURITY

The bonds are secured by net revenues of the Fort Collins electric distribution system and the fiber optic system.

KEY RATING DRIVERS

Revenue Defensibility - 'a'

Strong Electric Utility and Service Territory; Emerging Broadband Business

Revenue defensibility is strong. A significant portion of total revenue is provided by electric distribution services exhibiting monopolistic characteristics in a service area exhibiting favorable income and unemployment trends. The utility has the independent legal ability to increase electric rates without external approval, and electric rates fall consistently below the state average and are highly affordable. The utility's retail electric customer base has realized a strong five-year 1.6% CAGR through fiscal 2022 and the unemployment rate declined to just 2.6% in 2022, which is 72% of the national average. However, revenue defensibility is somewhat limited by a material portion of revenue derived from the utility's competitive broadband business.

The revenue base exhibits some customer concentration, as the 10 largest electric customer's account for 25% of total fiscal 2022 electric revenue. However, a university, city and county government, the school district and medical organizations account for the most significant revenue concentration and represent a stabilizing influence with lower expected positive correlation to cyclical macroeconomic trends.

Operating Risk - 'aa'

Very Low Operating Cost Burden

Fort Collins has maintained a very low electric operating cost burden below 10 cents/kWh over the past five years reflecting its economic and stable power supply from PRPA. Fort Collins signed a long-term all requirements power supply contract with PRPA through 2050. The system's neutral operating cost flexibility mirrors that of PRPA, whose diversified power supply includes coal, natural gas, hydropower, wind and solar resources.

Fort Collins' electric system falls under state requirements to reach a minimum of 80% renewable electricity by 2030. It meets these requirements through the tracking of all renewable electricity sources, both locally installed on the distribution system and delivered to PRPA under their standard tariff. PRPA, working with its members, is transitioning to a carbon free portfolio by 2030 while maintaining a commitment to system reliability, risk management and regulatory compliance. The cooperative views the resource transition timing as dependent on availability of improved technologies and liquid secondary energy markets. PRPA has announced plans to replace its three coal facilities with new dispatchable capacity, distributed generation and battery storage.

Fort Collins' life-cycle investment needs are moderate based on a 12-year average age of plant.

Financial Profile - 'aa'

Financial Profile Stable through Base and Stress Case

Fort Collins' improved 2022 leverage ratio of 6.9 x reflects the city's implementation of annual rate increases, largely to support its renewable portfolio goals. Liquidity is neutral to the assessment at 128 days.

The utility's financial profile remains strong in Fitch's base and stress five-year scenarios, consistent with the current rating. The base and stress case reflect the city's planned annual rate increases of 5% through 2025, followed by 6.8% in 2026 and 2027, in support of the city's carbon reduction goals. Fitch's 'aa' financial profile assessment assumes a level of broadband revenue growth and electric rate support consistent or above that reflected in Fitch's analysis.

Asymmetric Additional Risk Considerations

No asymmetric additional risk considerations affected this rating determination.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Failure to implement planned rate increases necessary to support the utility's healthy financial profile, as evidenced by a decline in operating margin and leverage ratio at or above 8.0x;

Weakening of the system's operating risk profile as a result of an operating cost burden consistently in excess of 10.5 cents/kWh;

Changes in the broadband business that could undermine stability of the utility's revenue base or profitability.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

A sustained leverage ratio under 5.0x in the Fitch base and stress case scenarios;

Maintenance of broadband revenues below 5% of total operating revenues.

PROFILE

Fort Collins operates a distribution-only retail electric and telecommunications utility as an enterprise fund of the city. Located at the foothills of the Rocky Mountains, approximately 65 miles north of Denver, the city is the fourth largest in Colorado, with a 2022 population of approximately 169,250. The Mulberry annexation is expected to be completed over several phases and add approximately five square miles to the city. The electric utility serves approximately 78,450 retail electric customers. Electric customer load is satisfied through an all requirements long-term contract with PRPA.

Fort Collins launched the Connexion brand in 2018 and started providing community-supported high-speed internet services in 2019. The telecommunications system service area is limited to the city's boundaries with the exception of a few properties just outside of the city. The city reports that construction is 100% complete for the main build out. However, Connexion is actively working to enable service in many areas with multiple dwelling units. Electric revenues are pledged to support debt service from the city's 2018 electric utility enterprise bonds issued to fund the fiber optic infrastructure supporting the city's broadband service.

Fitch considers the utility to be a related entity of the city of Fort Collins, CO for rating purposes given the city's oversight of the system, including the authority to establish rates. The credit quality of the city does not currently constrain the Electric and Telecommunications Fund bond rating. However, as a result of being a related entity, the issue ratings could become constrained by a material decline in the general credit quality of the city.

Sources of Information

In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

Additional information is available on www.fitchratings.com

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