NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'F1+' rating on the city of Gainesville, Florida $85 million utilities system commercial paper (CP) notes program series C issued for the Gainesville Regional Utilities (GRU).
The CP notes are secured by an interest in the net revenues of GRU that is subordinate to the security interest securing senior lien indebtedness.
KEY RATING DRIVERS
SUFFICIENT LIQUIDITY AND STRONG LONG-TERM RATING: The 'F1+' rating on the CP note program broadly reflects GRU's sufficient liquidity sources, including an $85 million revolving credit facility provided by Bayerische Landesbank (IDR's rated 'A+'/'F1+' by Fitch), as well as the utility system's strong 'AA-' long-term rating.
SOLID COMBINED UTILITY SYSTEM: GRU is a combined utility system providing retail electric, gas, water, wastewater, and telecom services to the city of Gainesville, FL (implied general obligation rating of 'AA') and surrounding areas.
WEAKER METRICS EXPECTED: GRU's long-term rating reflects projected debt service coverage that, while remaining healthy, will weaken from historical levels of over 2.0x to levels consistent with the 'AA-' category (1.7x to 1.8x). Coverage adjusting for sizable transfers to the city's general fund (10.3% of revenue in 2012) will fall to 1.21x-1.29x.
RELUCTANCE TO INCREASE RATES: The utility's reluctance to implement electric rate increases sufficient to cover higher operating costs from the Gainesville Regional Energy Center (GREC), a 100 MW biomass facility due on-line by 2014, is driving weaker forecasted coverage. GRU's electric rates are higher than average compared to the state's other municipal systems.
STRONG REGIONAL DEMOGRAPHICS: The GRU service area exhibits economic indicators including population growth, per capita income and unemployment rates that consistently compare favorably with state and national averages, and is the home of the University of Florida (50,000 students). Employment is well diversified.
TIGHTER LIQUIDITY: Available liquidity exceeds GRU's potential needs by a comfortable margin (above 2.0x). Although not expected by Fitch, any sustained compression in this ratio could ultimately lead to negative rating action.
FAILURE TO MANAGE INCREASING COSTS: GRU's inability to manage the increased costs related to GREC would exert additional downward pressure on the long-term rating, thereby weakening support for the short-term rating.
DIVERSE COMBINED UTILITY SYSTEM
GRU provides retail electric, gas, water, wastewater and telecomm service to its residential, commercial and industrial customers. The electric system is the largest of the combined systems -accounting for 73.4% of utility revenues - and provides retail electric service to consumers in the city and the surrounding unincorporated area. The water, wastewater, and gas systems serve territories similar to the electric system.
The systems are stable, do not exhibit customer concentration, have rate flexibility, and do not have significant environmental or supply issues on the horizon. Each system is self-supporting by own-source revenues, and GRU's five-year capital improvement plan appears manageable.
AMPLE LIQUIDITY SOURCES
GRU's liquidity sources include a Bayerische Landesbank $85 million revolving credit agreement that expires in November 2015. The facility, coupled with GRU's unrestricted cash and investments ($137 million at March 31, 2013), provides coverage of over 1.25x the maximum size of the CP notes program. Together with GRU's 'AA-' long-term rating, this amount of liquidity is sufficient for the 'F1+' rating.
For more information on GRU's 'AA-' long-term credit rating, see Fitch's report dated July 2, 2012.
Additional information is available at 'www.fitchratings.com'.
This rating action was informed by the sources of information identified in Fitch's U.S. Public Power Rating Criteria, Criteria for Assigning Short-Term Ratings Based on Internal Liquidity, and Revenue-Supported Rating Criteria.
Applicable Criteria and Related Research:
--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity', June 13, 2013;
--'Revenue-Supported Rating Criteria', June 3, 2013;
--'U.S. Public Power Rating Criteria', Dec. 18, 2012.