BRADENTON, Fla. — Vero Beach, Fla., voters reiterated their desire for the city get out of the municipal utility business in a referendum this month.
They want the lower-cost electricity that investor-owned Florida Power & Light can offer.
But the change — in the works since at least 2009 when some residents discovered FPL could provide cheaper electricity — is complex because of the city’s participation in bond-financed projects by the Florida Municipal Power Agency, among other things.
Despite Vero Beach’s long endeavor to opt out of the electric business, Fitch Ratings said the agency does not see such efforts as a trend, partly because of the obstacles the transactions face.
Vero Beach is the county seat in Indian River County. The 13.1-square mile city is about 80 miles north of West Palm Beach on Florida’s east coast with a population just over 15,000 residents.
The electric system services about 34,000 customers with some 60% of its sales from outside the city limits.
Last week, the referendum asking voters to approve terms of a purchase and sale agreement passed by nearly 64%.
City voters had also said they wanted service from FPL in several previous elections.
Here’s why. In a presentation last week, the same day city residents voted, FPL told its investors that the deal would save Vero Beach’s customers $23 million a year and result in a 28% reduction on their bills.
“FPL’s electric rates have historically been lower than Vero Beach electric utility’s rates and the disparity is growing,” FPL said in documents accompanying the presentation.
Terms of the sale place its value at $179 million, which includes $115 million in cash and other financial assumptions by FPL such as a $14.4 million pension liability and nearly $20 million in costs related to the city’s electric system.
The city had $7.3 million of 2008 revenue notes outstanding through 2021, and $60.3 million of Series 2003A revenue bonds outstanding through 2023, according to its 2011 audit, the latest available.
In concert with the sale to FPL, the utility debt would be defeased.
Though Vero Beach residents voted to support the sale of the city’s utility system, Fitch said it does not anticipate a material increase in municipalities trying to purchase an investor-owned utility or a growing number of municipally owned utilities being sold.
The agency cited Boulder, Colo., which is considering the formation of a municipal utility to purchase assets of Xcel Energy, and Vero Beach’s pending sale to Florida Power & Light.
“These proposed transactions are not part of a growing trend in our view but rather a consequence of the specific needs and objectives of the respective municipalities and its ratepayers,” said Fitch analyst Dennis Pidherny.
“Municipalities will likely face many obstacles in either selling or purchasing electric utility assets that impede such transactions and [that] should continue to limit the number of successful transactions.”
Some of those barriers include agreeing on a price and obtaining political and voter approval, according to Pidherny.
The deals can also face numerous regulatory approvals.
Additionally, in order for Vero Beach to consummate its sale to FPL, the city must also fulfill its obligations as a member of the Florida Municipal Power Agency, which issued bonds in connection with the St. Lucie nuclear plant, and the Stanton and Stanton Unit 2 coal-fired generation plants.
Vero Beach plans to transfer its entitlement shares from the FMPA projects to the Orlando Utilities Commission.
The OUC plans to sell the power from the Stanton and Stanton II projects for three years to FPL.
The Stanton project had about $54 million of outstanding tax-exempt bonds as of Feb. 28, and the Stanton II project had $166 million outstanding, the agency said.
City officials have said publicly that the deal is structured to comply with the Internal Revenue Service’s private-use restrictions on facilities financed with tax-exempt bonds.
Still, the arrangement raises questions about compliance and whether it could cause FMPA’s bonds to lose their tax exempt status, according to agency assistant general manager Mark McCain.
Since FMPA is the entity at risk if private-use restrictions are violated, McCain said FMPA and Vero Beach attorneys have agreed that the ultimate answer is to secure a private-letter ruling from the IRS.
The letter has not yet been requested because a number of issues need to be finalized, including contractual obligations that Vero Beach has through FMPA power supply projects as well as finalizing details about the entire transaction and obligations between Vero Beach, FPL and OUC, he said.
“FMPA believes this will take some time,” McCain said. “How long is difficult to say.”
The amount of debt attributable to Vero Beach’s participation in the power agency was not immediately available. City officials could not be contacted for this story.
“Throughout this process, FMPA’s number one priority will be to protect the security of our contracts for bondholders, followed closely by protecting FMPA’s remaining power supply project participants, and then, we will do what we can under the contracts to accommodate Vero Beach,” McCain said.
Last August, Fitch downgraded Vero Beach’s Series 2003A electric system revenue bonds to A-plus from AA-minus, citing a weakened trend in financial performance.
The rating outlook is stable. The bonds are insured by Assured Guaranty Municipal Corp.
Fitch said debt service coverage fell to 1.9 times in fiscal 2011 from an average of 3.5 times over the previous four fiscal years.
Liquidity dropped to 93 days of cash on hand after reaching a high point in 2010 of 106 days of cash.
The electric system makes an annual transfer to the city’s general fund, which amounted to $5.6 million or 28% of general fund revenues in fiscal 2011.
“While no definitive timeline regarding the sale of the system to Florida Power & Light has been determined, officials indicated that a deal could be finalized by 2014,” Fitch wrote.
It added that it continues to monitor the sale, as well as the system’s ability to preserve its financial position “during this uncertain period.”
Moody’s Investors Service affirmed its A1 rating on the 2003A bonds in October and noted that the system was seeing improved financial operations from various factors, including recent rate increases.
Moody’s, in its review of the pending sale to FPL, said the “transaction’s intricacies and involvement of multiple parties — some of whom may have conflicting interests — heightens execution risks,” and the city could remain exposed to ongoing costs or suits alleged by other affected parties after the sale.
In addition to needing approval from FMPA, the deal must be reviewed by the Federal Energy Regulatory Commission and the Florida Public Service Commission, Moody’s said.
FERC could refer the sale to the Department of Justice for antitrust review. The FPSC will review the sale terms to ensure that FPL ratepayers do not overpay for the city’s utility assets.
