|[July 01, 2014]
Fitch Affirms Gainesville Regional Utilities Bonds (FL) at 'AA-' & CP at 'F1+'; Outlook Stable
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
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
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 availabilty (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
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
Rating U.S. Public Finance Short-Term Debt
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