NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the city of Gainesville, Florida $947.95 million utility system revenue bonds at 'AA-' and $85 million commercial paper (CP) notes, series C, at 'F1+'. The bonds and CP notes have been issued for Gainesville Regional Utilities (GRU).
The Rating Outlook is Stable.
The revenue bonds are secured by a first lien on net revenues of the combined electric, gas, water, wastewater and telecom system (collectively, the systems).
The commercial paper notes are secured by an interest in GRU's net revenues that is subordinate to senior-lien indebtedness.
KEY RATING DRIVERS
COMBINED UTILITY SYSTEM: GRU is a combined utility system providing retail electric, gas, water, wastewater, and telecom services to the city of Gainesville, FL and surrounding areas. The electric utility is the largest system, accounting for about 60% of total revenues. The various systems are financially stable and do not exhibit customer concentration.
STRONG REGIONAL DEMOGRAPHICS: The systems provide utility services to and around the University of Florida (50,000 students), which helps to anchor the GRU service area. The service territory has a history of positive economic indicators, including steady population growth, new business development and per capita income and unemployment rates that compare favorably with state and national averages.
CHALLENGING BIOMASS CONTRACT: GRU's commitment to purchase the capacity and output of the costly Gainesville Regional Energy Center (GREC), a 102.5 megawatt (MW) biomass facility under a 30-year purchase power agreement, has put downward pressure on the utility's financial ratios, produced substantial excess capacity and contributed to a downgrade of the bonds to 'AA-' from 'AA' in 2012. Recently enacted cost reductions, level general fund transfers and the city commission's willingness to raise electric rates in excess of prior forecasts are helping to lessen credit concerns and better support financial results.
FINANCIAL PROJECTIONS IMPROVING: At the time of Fitch's last major review, GRU's debt service coverage (DSC) was projected to decline from historical levels of over 2.0 times (x), down to 1.7x-1.8x, with coverage adjusted for general fund transfers falling to around 1.25x. Recent projections are more positive, helped by expanded cost saving programs, including staff reductions, and more aggressive near term rate adjustments, which should drive DSC ratios back above 2.0x. Financial liquidity remains good.
AMPLE LIQUIDITY: The 'F1+' rating on the CP program reflects ample internal liquidity, including monies in a rate stabilization fund and utility plant improvement fund, as well as available borrowing agreements.
A RETURN TO HISTORIC METRICS: Solid evidence of a return to stronger financial metrics would be viewed favorably, and could allow consideration of a higher rating.
INSUFFICIENT RATE ADJUSTMENTS: A less supportive rate policy by the city commission could adversely affect the rating or Outlook.
GRU provides retail electric, gas, water, wastewater and telecom service to nearly 260,000 combined customers across five utility systems. The city of Gainesville, FL (non-ad valorem bonds rated 'AA-' by Fitch) is home to the University of Florida, one of the largest universities in the nation. Gainesville's economy has weathered the economic downturn reasonably well, and wealth, employment and housing data compare favorably with state averages.
The city of Gainesville's general fund is highly dependent upon transfers from the utility system, which accounts for 35% of total general fund revenues. The city and GRU recently updated this policy to allow for greater certainty for both the city and GRU. For fiscal year 2015, transfers are expected to approximate $35.1 million, which is generally in line with recent transfer levels.
ELECTRIC SYSTEM AND GREC
GRU maintains access to a diversified portfolio of power supply resources that includes coal, natural-gas and waste wood capacity, totaling about 635 MW. Peak demand for 2013 was 416 MW. For fiscal year 2014, system fuel diversity is forecasted to break down roughly as follows: coal (35%), natural gas (24.5%), biomass (36.8%), solar (2.1%) and landfill gas (1.6%). Calendar year 2014 will be the first full year of the biomass plant's operation (commercial operation was Dec. 17, 2013). GRU estimates that its existing portfolio of resources is sufficient to meet forecasted demand through 2027, based on a load growth estimate of 0.9% per year over the next 10 years.
GRU has agreed to purchase all of the capacity and output from GREC, which was developed by a private consortium, pursuant to a long-term power purchase contract. Under the terms of the agreement, GRU is generally required to make fixed payments at $79.15/MWH, based on the project's availability (estimated at around 90%). This results in about 62.3% of costs being fixed. If GREC is unavailable to generate and produce power, GRU is not obligated to pay fixed project costs.
Costs related to actual power supplied, based on GRU's discretionary dispatch, will be charged based on variable production costs, including fuel. Exposure to fuel costs is expected to be manageable given the availability of wood waste within 75 miles of the project and the use of long-term procurement contracts. Variable energy charges should approximate $38.87/MWH. Adding in property taxes and other associated costs the total cost of energy produced by the project is estimated at a significant $126.90/MWH. When computed on a total dollar cost basis, the annual cost for GREC (assuming 90% availability and capacity factors) is estimated at around $102.5 million. The plant is currently running closer to a mid to low 70% capacity factor, which brings the total actual cost closer to a range of $95 million-$97 million.
GRU views the plant's marginal production cost as being competitive with the coal and gas generation in the utility's fleet, and as a hedge against potential carbon and renewable portfolio standard costs.
CAPITAL NEEDS MANAGEABLE
GRU has developed a multi-year capital improvement program (CIP) for the period 2013 to 2020 that identifies approximately $562.8 million of capital expenditures. The CIP estimates that the majority of improvements will involve various renewals, replacements, and upgrades to the electric system (52.4% of the total CIP), including environmental compliance spending. Wastewater projects account for the next largest component of the CIP (19.6%) followed by water projects (12.6%), telecom (7.8%), and then gas system projects and other (7.6%). The largest portion of the CIP will be funded from existing cash balances and cash flow from operations, with only 13.4% expected to be funded from additional future bond financing.
RECENT ACTIONS SHOULD BENEFIT FINANCIALS
GRU's historical financial performance has been strong and relatively stable, as evidenced by Fitch-calculated DSC consistently above 2.0x. Funds available for debt service (FADS) have grown over this period, commensurate with higher debt service requirements, reflecting the steady and reasonable rate increases implemented by GRU. After general fund transfers, DSC ratios were lower, but remained solid and consistently over 1.5x.
Beginning in fiscal 2014, the full effect of the GREC-related costs was expected to negatively impact GRU's targeted DSC, driving these ratios down to levels approximating 1.7x to 1.8x, and 1.21x to 1.28x, after general fund transfers. Failure to realize certain projected cost reductions would have resulted in even lower coverage. In addition, system-based reserve funds were expected to be drawn down to help make up for any financial shortfall.
More recently, the implementation of a system-wide cost reduction program, debt refinancing and the city commission's willingness to support much larger, near-term electric rate adjustments should allow financial ratios to improve to more normal and healthier levels. In addition, these initiatives should ameliorate the need to aggressively draw down system cash reserves as was originally anticipated. These collective actions are viewed favorably by Fitch.
AMPLE LIQUIDITY SUPPORTS CP PROGRAM
GRU undertakes a risk management study for each of its utilities and sizes the cash reserves needed to support the levels of risk identified by the risk indicators. GRU has identified target reserves of $76.2 million for fiscal 2014. Total fund reserve balances are currently well above targeted levels and are forecast to remain robust through 2020 ($104 million-$140 million).
The utility maintains two CP programs totaling $110 million; with $85 million of authorized tax-exempt CP ($62 million regularly outstanding) and $25 million of authorized taxable CP ($0 presently outstanding). A credit facility totaling $85 million and extending through Nov. 30, 2015 with Bayerische Landesbank (rated 'A+/F1+' by Fitch), together with GRU's available cash and investments, provides support for the tax-exempt CP.
Additional information is available at 'www.fitchratings.com'.
The rating action was informed by information identified in Fitch's U.S. Public Power Rating Criteria and Revenue-Supported Rating Criteria.
Applicable Criteria and Related Research:
--'U.S. Public Power Peer Study -- June 2014' (June 13, 2014);
--'U.S. Public Power Peer Study Addendum - June 2014' (June 13, 2014);
--'U.S. Public Power Rating Criteria' (March 18, 2014);
--'2014 Outlook: U.S. Public Power and Electric Cooperative Sector' (Dec. 12, 2013);
--'Rating U.S. Public Finance Short-Term Debt' (Dec. 9, 2013).
Applicable Criteria and Related Research:
U.S. Public Power Peer Study -- June 2014
U.S. Public Power Peer Study Addendum
U.S. Public Power Rating Criteria
2014 Outlook: U.S. Public Power and Electric Cooperative Sector (Calm Under Pressure)
Rating U.S. Public Finance Short-Term Debt