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Rating Update:

MOODY'S AFFIRMS BATAVIA (CITY OF) ELECTRIC ENTERPRISE'S, IL A1 RATING ON $26.6 MILLION OF OUTSTANDING ELECTRIC REVENUE BONDS; OUTLOOK IS STABLE

19 Nov 2010

Electric Utilities
IL

Opinion

NEW YORK, Nov 19, 2010 -- Moody's Investors Service has affirmed Batavia (City of) Electric Enterprise's A1 rating with a stable outlook, affecting approximately $26.6 million Electric System Revenue Bonds.

RATING RATIONALE:

The A1 rating reflects the stability of the enterprise due to a stable service area, a purchased power cost adjustment that allows for full recovery of power costs, and a primarily residential customer base with above average income and wealth levels. The rating also accounts for the significant customer concentration with the top 10, primarily industrial, customers accounting for about 34% of annual revenues. The rating also incorporates the moderate size of the primarily distribution and transmission system that owns a portion (55 MW) of the Prairie State coal-fired plant through the Northern Illinois Municipal Power Agency, IL (NIMPA), a joint power agency, thus taking on responsibility for 45% of the $529.8 million of debt issued by NIMPA to purchase this power, as well as any future related debt issues or capital costs. This has significantly raised the issuer's off balance sheet leverage as opposed to the moderate leverage position when only considering on balance sheet liabilities.

OUTLOOK

The stable outlook reflects Moody's belief that Batavia will continue to benefit from a strong management team that has demonstrated effective resource planning while maintaining strong financial metrics, necessary to mitigate the risks of owning generation through a joint power agency.

What Could Change the Rating - UP:

The rating is well positioned in its current rating category.

What Could Change the Rating - DOWN:

The rating could be downgraded if there is deterioration in the financial performance with DSCR remaining below 2.0x and liquidity below the targeted level of 90 days with no recovery prospects. The rating could also be impacted by a loss of a large customer that negatively impacts the power supply economics moving forward.

LEGAL SECURITY: The bonds are secured by the net revenues of the electric enterprise system. The indenture requires net revenues to cover senior lien debt service by at least 1.25 times and subordinate lien by at least 1.1 time. The additional bonds test is 1.25 times maximum annual debt service (MADS), and a cash funded debt service reserve fund is also sized at MADS. Favorably, rate-setting authority lies ultimately with the Batavia City Council and is not subject to review or appeal by any other governmental authority. The flow of funds is an open loop structure with the average transfer to the city sized at about 2.5% of net revenues, which is capped at 4% by bond ordinance.

INTEREST RATE DERIVATIVES: None

STRENGTHS

*Strong debt service coverage history above 2.4 times that is projected to climb to an even stronger 4.0 times in the near term and satisfactory liquidity averaging 100 days cash on hand for the last three years

*Purchased power adjustment allows for full cost recovery of power costs

*Strong management team with solid planning for future load and power needs

*New large industrial customer expected to raise peak load by 16 MW to about 106 MW or a 20% increase in 2011, yet the power is being procured through a separate contract for the user

*Chicago suburb with above average income and wealth levels

CHALLENGES:

*Prairie State's $1 billion cost overrun has increased the all-in cost of electricity by $2.25 per MWh for Batavia

*Market price exposure for purchased power remains on ongoing challenge as a Prairie State will provide about half of the system's power needs with the rest coming from spot market and power purchase agreements

*Potential increased capital costs related to ownership in Prairie State Project

*Customer concentration with top 10 accounting for about 35% of 2009 revenues and the top customer, Suncast Corporation, accounting for 12% of 2009 revenues

*Significant off balance sheet debt of about $242.7 million associated with the 55 MW of generation ownership in the Prairie State project through NIMPA

RECENT DEVELOPMENTS:

As with most utilities, the moderate summer coupled with the recession lead to lower load demand in 2009. Batavia's load decreased by 4% in 2009, but has since increased by about 2.6% in 2010 given the more normal warmer summer. Batavia estimates general capital projects of about $9.6 million to be cash funded over the next three years, as no new debt is anticipated. Batavia's customer base has remained steady with some of the larger industrial customers experiencing layoffs related to the recent recession, but generally reporting a recovery and some expansions. Specifically, Aldi grocers is currently constructing a new seven story headquarters in Batavia, to be completed by 2011, and Rubicon Technology is building a new manufacturing plant for its sapphire wafers for the LED (light-emitting diode) industry. Rubicon Technology is expected to add about 16 MW to the systems peak demand of 90 MW as of 2010, which it has hovered around for at least the last five years. The Rubicon Technology load is separate from the remaining retail load with direct market purchases for its energy and Batavia recovering its costs of servicing the load through a distribution charge. Batavia's energy sales are diverse with 39% industrial, 39% commercial, and 22% residential and rates continue to be competitive as compared to the local investor owned utility.

The Prairie State project has gone about $1 billion over budget, prompting additional debt issuance by the owners, of which Batavia owns approximately 55 MW of the 1600 MW coal-fired power plant through the Northern Illinois Municipal Power Agency (NIMPA), a joint power agency. NIMPA owns 7.6% or 120 MW of the project and is thus responsible for its proportion of the substantial $1 billion Prairie State Project cost overrun. This demonstrates the additional risks associated with owning generation as compared to solely purchasing power via power purchase agreements or on the open market, as Batavia has done in the past. Despite the cost overrun, the impact on Batavia's cost of power is estimated at about $2.25 per MWh, thus the power is expected to still be competitively priced for the region and will provide a stable base load source of power for Batavia. Especially, given the long-term positive project economics that are expected to keep costs low and stable over time as the coal is pre-purchased and the plant is adjacent to the mine.

The increased Prairie State costs are primarily related to lower than anticipated labor productivity that is now expected to be mitigated under the newly signed fixed-price EPC contract with Bechtel that caps the owners' construction cost risk. The new contract has a guaranteed fixed price of approximately $4.0 billion, as well as certain project performance guarantees. It also has guaranteed substantial completion dates of December 6, 2011 for Unit 1 (original Target Substantial Completion date of August 2011) and August 1, 2012 for Unit 2 (original Target Substantial Completion date of May 2012). The contract includes liquidated damages similar to those in other recent coal-fired generation construction projects, as well as new maximum warranty exposures, performance guarantees, penalties, and incentives, and higher overall limits of liability. Contract reopeners primarily relate to owner requested change orders and events of force majeure. With the project design 95% complete, construction 54% complete as of September 2010, and the vast majority of large equipment purchased, few major change orders are anticipated. The two coal-fired 800 MW units are now expected to be online about three to four months after originally anticipated with Unit 1 now expected to be online in early December 2011 and Unit 2 in early August 2012. The natural gas line to the plant was completed in early 2010 and the transmission line is expected to be completed this fall.

KEY INDICATORS

Issuer Type: Transmission and distribution with generation ownership in a joint power agency

Generation ownership in Prairie State Project: 55 MW

Number of system customers, Fiscal 2009: 10,763

Customer demand, Fiscal 2009: 400,416 MWh

Peak demand, Fiscal 2009: 89 MW

Average system rate, Fiscal 2009: 8.6 c/kWh

Largest customer as a percentage of Fiscal 2009 billing: 11.6%

Top 10 customers as a percentage of Fiscal 2009 billing: 34.4%

Operating ratio, Fiscal 2009: 91.5%

Debt ratio, Fiscal 2009: 33.7%

Debt Service Coverage Ratio, Fiscal 2009: 2.4 times

Days cash on hand, Fiscal 2009: 85

Revenue debt outstanding: $26.7 million

JPA debt outstanding: $242.7 million (estimated post-sale)

Scheduled completion of Prairie State:

Unit One, December 2011

Unit Two, May 2012

ISSUER CONTACT: Bob Rogde, Electric Superintendent, 630-454-2357

REGULATORY DISCLOSURES

The principal methodology used in this rating was U.S. Public Power Electric Utilities published in April 2008.

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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Analysts

John Medina
Analyst
Public Finance Group
Moody's Investors Service

Edward Damutz
Backup Analyst
Public Finance Group
Moody's Investors Service

Chee Mee Hu
Director
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


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MOODY'S AFFIRMS BATAVIA (CITY OF) ELECTRIC ENTERPRISE'S, IL A1 RATING ON $26.6 MILLION OF OUTSTANDING ELECTRIC REVENUE BONDS; OUTLOOK IS STABLE
No Related Data.
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