NEW YORK - Fitch Ratings said it has assigned a AA-minus rating to the city of Gainesville, Fla.'s approximately $43.185 million utilities system revenue bonds, 2012 series A issued for the Gainesville Regional Utilities (GRU), and downgraded the ratings on GRU's $932.12 million utilities system revenue bonds to AA-minus from AA.
Fitch has also affirmed the F1-plus rating on GRU's $62 million of outstanding commercial paper notes.
GRU expects to issue the bonds via negotiated sale the week of July 9, 2012. Proceeds will be used to refund outstanding 2003 series A and 2005 series A bonds, and to pay the cost of issuance.
The rating outlook on all bonds is stable.
The bonds are secured by a first lien on net revenues of the combined electric, gas, water, wastewater and telecom system (collectively, the systems). GRU will not fund a debt service reserve fund for the 2012 bond financing.
GRU is a combined utility system providing retail electric, gas, water, wastewater, and telecom services to the city of Gainesville (non-ad valorem bonds rated AA-minus by Fitch) and surrounding areas. The systems are stable, do not exhibit customer concentration and do not have any significant environmental or adequacy of supply challenges over the near term.
The downgrade reflects numerous challenges that have emerged as a result of GRU's agreement to purchase energy from the Gainesville Renewable Energy Center (GREC), a 100MW biomass facility due on-line by 2014. GRU's resources are already well in excess of peak demand and the total cost of energy produced by the unit will be high ($130/MWh).
GRU's projected performance suggests a reluctance to implement electric rate increases sufficient to cover the entirety of GREC-related costs. GRU is pursuing cost mitigation initiatives, but any shortfall will likely reduce net margins. GRU's electric rates are already higher than average compared to the state's other municipal systems.
GRU's projected debt service coverage (DSC) will remain healthy, but is expected to weaken from historical levels of over 2.0x to 1.7x-1.8x as a result of increasing operating costs and tempered rate increases. Adjusting for sizable transfers to the city general fund (9.3% of revenue in 2011) DSC will fall to 1.21x to 1.29x.
The GRU service area is the home of the University of Florida (50,000 students) and has exhibited economic indicators including population growth, per capita income and unemployment rates that consistently compare favorably with state and national averages.
GRU's sufficiency of resources through 2032 has resulted in a capital plan that is manageable and will largely be funded with cash flow from operations through 2017, thereby limiting future debt requirements.