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
STRONG REGIONAL DEMOGRAPHICS: The systems provide utility services to and around the
CHALLENGING BIOMASS CONTRACT: GRU's commitment to purchase the capacity and output of the costly
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
The city of
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
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
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
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
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
The utility maintains two CP programs totaling
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.
--'U.S. Public Power Peer Study --
--'U.S. Public Power Peer Study Addendum -
--'U.S. Public Power Rating Criteria' (
--'2014 Outlook: U.S. Public Power and Electric Cooperative Sector' (
--'Rating U.S. Public Finance Short-Term Debt' (
U.S. Public Power Peer Study --
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
Source: Fitch Ratings
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