Key West utility's hurricane damage report leads S&P to remove CreditWatch

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BRADENTON, Fla. – An update by Key West Utility Board officials on post-hurricane conditions in the Florida Keys led S&P Global Ratings to remove the utility from CreditWatch.

Analysts said they could not contact utility officials following Hurricane Irma, and per S&P policy placed the utility’s A-minus rating on watch with negative implication pending the receipt of information.

“We have taken the rating off CreditWatch and returned the outlook to stable,” analyst Jeff Panger said Thursday. “We spoke with the issuer and got information on the extent of damages.”

Panger also said that S&P discussed with officials the status of restoration efforts, the impact of vendor payments on the system’s liquidity, and the fact that they believe most damages will be covered by the Federal Emergency Management Agency.

The utility board, which operates as Keys Energy Services, has about $47.8 million of outstanding revenue bonds.

Keys Energy, according to S&P, estimates that the system suffered about $32 million of damage when Irma made landfall in the Lower Keys Sept. 10, slamming Cudjoe Key as a Category 4 storm with 130 mph sustained winds. Cudjoe is about 20 miles northeast of Key West, and is within the utility’s service area.

Because of the nature of hurricanes, whose winds are typically strongest on the right side of the storm, Key West itself was largely spared the worst damage. However, the middle and upper Keys experienced most of the damage from the highest winds and flooding.

Jack Wetzler, chief financial officer for the Key West Utility Board, had said he missed inquiries from S&P analysts after the storm. Once the utility was placed on CreditWatch, officials said they organized a conference call with analysts to discuss damages.

Wetzler also said the utility planned to make a $10.2 million bond payment due Oct. 1 ahead of schedule, and instituted a new procedure to pro-actively contact rating agencies following hurricanes in the future.

S&P said that the Key West Utility Board has received preliminary approval for a $50 million line of credit from Bank of America, which should allow the utility board to make all vendor payments on time without tapping unrestricted cash and investments.

The line of credit is scheduled for the utility board to approve on Oct. 11, S&P said.

The system’s on-hand liquidity includes $7.1 million in operating reserves and $2 million in emergency reserves, totaling a combined 42 days of operating expenses. The board also has $7.2 million in a renewal and replacement fund that is restricted but available to meet operating and capital needs.

“The stable outlook reflects our assumption that Key West Utility Board's damage from Hurricane Irma has not been significant enough to materially impact coverage of fixed costs and liquidity, given its ample liquidity and line of credit to meet recovery costs until FEMA reimburses the utility,” S&P said.

Moody's Investors Service rates the utility board A1 rating with a stable outlook, and said in a report Tuesday the utility is managing repairs “reasonably well.”

Customer revenue loss will impact 2017 cash flow as outages have ranged from 2 to 14 days, said analyst Dan Aschenbach.

“Mitigating the revenue loss are lower generation-related expenses and the utility's strong liquidity,” he said. “Keys Energy Services has strong internal liquidity and has begun work to establish an external line of credit, which will be subordinate to senior debt.”

Aschenbach said Keys Energy Services has hired a FEMA reimbursement firm to start the federal reimbursement process.

“The combination of internal and external liquidity, FEMA reimbursements and future rate changes, if necessary, will help maintain the utility's credit profile,” he said.

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Energy industry Public finance Revenue bonds Ratings Florida