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MOODY'S ASSIGNS A1 RATING TO KISSIMMEE UTILITY AUTHORITY'S (FL) ELECTRIC SYSTEM REFUNDING REVENUE BONDS, SERIES 2011

09 Jun 2011

MOODY'S PLACES SUBORDINATED SERIES 2003 AND SERIES 2005 UNDER WATCHLIST FOR POSSIBLE UPGRADE IN CONJUNCTION WITH ASCENSION OF BONDS TO PARITY LIEN STATUS

Electric Utilities
FL

Moody's Rating

ISSUE

RATING

Electric System Refunding Revenue Bonds, Series 2011

A1

  Sale Amount

$37,445,000

  Expected Sale Date

06/14/11

  Rating Description

Electric Revenue Bonds

 

Opinion

NEW YORK, Jun 9, 2011 -- Moody's Investors Service has assigned an A1 rating to Kissimmee Utility Authority's (KUA) $37.45 million Electric System Refunding Revenue Bonds, Series 2011. At the same time Moody's has affirmed the A1 rating on the Series 2003 "prior" bonds and placed on watchlist, for upgrade, the A2 ratings on the Subordinated Series 2003 and Series 2005 bonds based on the ascension of the subordinated bonds to parity status with the prior lien Series 2003 and current Series 2011 bonds. The A1 rating will affect $157.4 million post-delivery electric revenue bonds. The bonds are secured KUA's electric system's net revenues. Bond proceeds will refund all outstanding Series 2001 A&B prior bonds which makes the current subordinate resolution the operative one (the senior lien resolution had been closed). The refunding achieves an estimated $2.9 million net present value savings (7.438% of refunded par) within the same maturity schedule. Although the somewhat weaker legal resolution becomes the controlling resolution and overall coverage is effectively more modest, Moody's believes that the utility's strong fundamentals and management, as well as the system's solid liquidity positions KUA at the assigned rating level.

SUMMARY RATING RATIONALE

The Authority's A1 rating is based on the utility's consistently favorable operating performance, regionally-competitive cost structure and the above-average debt ratio with rapidly-maturing bonds (all debt retired by 2018) and no additional borrowing requirements. The generally modest debt service coverage is balanced against the system's solid liquidity and competitive rate structure.

STRENGTHS

- Strong and stable management team

- Solid liquidity position

- Established service area with favorable growth prospects

CHALLENGES

- High debt levels

- Struggling economy

DETAILED CREDIT DISCUSSION

ADEQUATE LEGAL PROTECTIONS

Legal protections for the prior bonds included a fully funded (in cash) debt service reserve (separate for the Series 2003 and current Series 2011 bonds). The subordinate resolution did not require a debt service reserve fund and currently there is none on the Subordinate Series 2003 and Series 2005 bonds. Other legal provisions for the senior and subordinate lien bonds are similar in that the both have a 110% rate covenant and additional bonds test. The senior resolution had been closed and the subordinate lien resolution, which provides more flexibility for issuance of variable rate debt and swaps, will become the operative resolution at closing.

SYSTEM CAPACITY BENEFITS FROM PARTICIPATION IN FMPA'S "ALL-REQUIREMENTS" PROJECT

KUA services 66,500 customers (about 146,000 people) in an 85 square mile service area (including 12.55 sq. mi. in the City of Kissimmee) in central Florida. KUA has a 30-year territorial agreement with Progress Energy (to February 2022) and a 50-year territorial agreement with the City of St. Cloud (to June 2035). Approximately 44% of its customers reside in the City of Kissimmee, and 56% are outside the city limits. Although the area economy has struggled in the past few years due to the economic dislocation, improvement in the Orlando area in the last several months indicates some returning stability. The system had experienced average customer and energy sales growth of 3.6% and 2.6%, respectively through 2008, with slight growth in fiscal 2007 and 2008. Since then, KUA has experienced a slight customer decline (0.5% total) from 2008 to 2010, and a 2.7% drop in energy sales in fiscal 2009 was almost fully recovered in fiscal 2010. Fiscal 2011 sales and customers are anticipated to show some improvement. Customers are diverse, with the top ten customers accounting for about 12.9% of total system consumption, including 5.8% represented by the school system and the county. The utility offers its large demand (GSLD) customers a 5% discount in the GSLD tariff for 15 years pursuant to signed contracts.

In October 2002 KUA became a member of Florida Municipal Power Agency's (FMPA) "All-Requirements" Project (ARP; rated A1). As a result, KUA agreed, under a power sales contract, to purchase all its energy requirements from FMPA; under a capacity and energy sales contract, KUA assigned all of the output from its generating facilities to FMPA along with its long-term power and fuel entitlement contracts and scheduling of output from its generating facilities. The agreement effectively pools the resources of KUA with the 14 other members of ARP to achieve economies of scale and efficiencies of operation resulting in lower costs for participants. KUA's participation in FMPA's ARP has produced cost benefit to KUA due, in part, to recent gas price declines. KUA continues to operate its facilities and set rates. KUA has negotiated an amendment, under the Capacity and Energy Sales Agreement (CEA) with FMPA, whereby FMPA would pay KUA a fixed capacity credit for KUA-owned generating assets (tied to the assets' useful life) in exchange for FMPA obtaining operational control and a KUA waiver of its rights to exercise its contract rate of delivery associated with KUA's Cane Island units (Units 1,2, and 3). Also, under the CEA, KUA has assigned its interest in Stanton Energy Center (SEC) Unit A to FMPA as an ARP source. Finally, KUA executed a Memorandum of Understanding with FMPA to construct Cane Island Unit 4, a $470 million 300 MW generating facility scheduled for commercial operation at the end of June 2011 (on time and under budget).

KUA's owned resources include its Cane Island (four units) plants, ownership interests in SEC Units 1 and 2 as well as Unit A (operated by Orlando Utilities Commission), Key West Units 2 to 4, Treasure Coast Energy Center Unit 1 and Indian River CT units A to D. KUA owns 50% of Cane Island Units 1, 2, 3 and common facilities associated with these units, as well as SEC Units 1 and 2 and Unit A, and Indian River CT units A to D. The Stanton units, Treasure Coast and Cane Island 3 & 4 units are generally used for base load and are dispatched by FMPA consistently. KUA's demand was 315.4 MW in 2010, with a high of 327 MW in 2007. FMPA had an overall 1,692 MW in All-Requirement total energy resources in fiscal 2010 (1,873 in fiscal 2011 with inclusion of Cane Island #4The Stanton units, Treasure Coast and Cane Island 3 & 4 units are generally used for base load and are dispatched by FMPA consistently. KUA's demand was 315.4 MW in 2010, with a high of 327 MW in 2007. FMPA had an overall 1,692 MW in All-Requirement total energy resources in fiscal 2010 (1,873 in fiscal 2011 with inclusion of Cane Island #4).

FMPA has scaled back its natural gas fuel hedging program (despite its policy allowing for up to 75% of estimated usage) going out for shorter periods and storing gas in more favorable pricing environments and selling gas in less favorable environments. KUA, though its participation in FMPA's ARP, is subject to legislation related to reduction of greenhouse gas emissions (GHG) and the state's Clean Air Interstate Rule (CAIR) related to the lowering of mono-nitrogen oxides (NOx) and sulphur dioxide (SO2). It is uncertain at this time the ultimate impact on FMPA and KUA as several court cases related to environmental issues are still being resolved. KUA has a 0.6754% undivided ownership in Crystal River Unit No. 3 (CR3) nuclear plant and a 0.8282% entitlement share (through FMPA) in the nuclear fueled St. Lucie Unit No.2 generating plant for which it sets aside funds for decommissioning. The CR3 facility has been out of service for longer than the scheduled outage period and a restart date is uncertain at this time. KUA is liable for $5.7 million in decommissioning costs of which $4.96 million had been set-aside at the end of fiscal 2010.

FINANCIAL PERFORMANCE HIGHLIGHTED BY FAVORABLE WORKING CAPITAL AND ADEQUATE DEBT SERVICE COVERAGE

The utility has operated well financially, maintaining consistently modest but favorable total debt service coverage between 1.5 times (current Board policy level) to 1.7 times over the past seven years (including debt service on commercial paper notes). The Board's debt service policy level will be reduced to 1.25 times (from 1.5 times) at the end of the month. Debt service coverage after General Fund transfers (which legally comes after debt service) is a very narrow 1.1 times in fiscal 2010. Operating ratios have remained above average at 81.7% in fiscal 2010. Fiscal 2011 operations, due to some new commercial projects being completed, are expected to at least achieve policy coverage levels. Purchased power costs have moderated beginning in fiscal 2010 due to more favorable gas pricing obtained by FMPA. Officials have adopted a number of fiscal policies including: maintaining unrestricted cash at a minimum of one-and-a-half months of fixed O&M; maintain minimum debt service coverage levels on all debt (1.5 currently to 1.25); maintain a minimum of $5 million and a maximum of $30 million in a Rate Stabilization Fund; and finally, maintain a $5 million minimum in a Reserve for Future Capital Outlay. At the end of fiscal 2010 the system had $45.6 million of unrestricted cash and investments equivalent to 102.9 days of cash-on-hand, although the Board's more modest policy of one-and-a-half months equates to $4.2 million. In addition, the system has another $33.5 million in restricted Rate Stabilization funds (equivalent to 75.7 days of cash), which may be used for any purpose, and $19.6 million in senior lien debt service reserves meant to retire debt prior to their maturity.

Electric base rates were not increased between 1986 to 1997 and actually declined four times over that period. Increases of 2.5% in October 1997 and 1.45% annually in October 1999, 2000 and 2001 were implemented. The most recent increase was implemented July 1, 2005 (4.8%), including the fuel portion of the cost of power adjustment (COPA) into the base rate. In fiscal 2008 the utility moved four cents of fuel costs to the base rate. Aside from base rates, KUA passes along increased power costs to its customers under the COPA. KUA's residential rates are among the lowest in the state and non-residential rates are also competitive. About 44% of operating revenues are derived from commercial accounts, while outside city customers account for 57% of fiscal 2010 revenue. The system transfers funds annually to the city's operating fund based on $6.24 per 1,000 KWh, which amounted to a transfer of $8.5 million in FY 2010.

KUA's retirement plan is a single employer defined benefit pension plan that has an unfunded actuarial liability of $17.9 million which is 72.1% funded at October 1, 2010. Officials are contributing 100% of the annual required contribution ($2.1 million in fiscal 2010). The unfunded liability pursuant to GASB 45 (OPEB) is $1.8 million with a fiscal 2010 ARC of $165,618 and a contribution of $62,562.

ABOVE-AVERAGE DEBT RATIOS WITH RAPID MATURITY SCHEDULE; NO BORROWING EXPECTATIONS

The utility will have $157.4 million in post-sale outstanding revenue bonds as well as another $43.2 million in commercial paper, that all mature within under 8 years (October 1, 2118) . No additional debt is anticipated.

Variable rate exposure for the utility, as represented by the subordinate lien commercial paper program, is 21.5%. The system's commercial paper program is with JP Morgan Chase and it has just been renewed for a three-year period through August 5, 2014. There is a three-year term out provision in the event the notes cannot be remarketed, with interest equal to the Base Rate (greater of Fed Funds Rate plus 2%; Prime Rate plus 1.5%; or 8.5%) plus 2%. The rating trigger relates to any KUA debt that is downgraded below investment grade by rating agencies rating the system's bonds (including Moody's).

About 75% of outstanding debt is generation-related. The debt ratio is high at 77.3% in fiscal 2010, but should moderate in light of limited borrowing requirements and rapid debt repayment. The utility has a five-year $92.7 million capital program, including $29.2 million in rollover projects, with system needs related to transmission and distribution system upgrades and maintaining the Cane Island units for FMPA. There is no additional borrowing anticipated in the program.

WHAT COULD MAKE THE RATING GO UP:

- Improved debt service coverage levels

- Reduction in high debt ratio

WHAT COULD MAKE THE RATING GO DOWN:

- Reduction in already modest debt service coverage levels

- Erosion of solid liquidity position

STATISTICS:

Type System: Electric generation and transmission system; member of FMPA's ARP

System 2010 Peak Demand: 315.4 MW

Avg. Cost of Power, KUA/ 2010 Moody's Median:

System Rates (September 2010),

Residential (1,000 KWh/mo.) $120.05

Commercial (300 KW demand and 120,000 KWH/mo.) $13,310.14

FY 2010 Operations,

Operating ratio: 81.7%

Debt ratio: 77.3%

Debt service coverage (all debt) : 1.47 times (1.1 times including transfers)

Bonds Outstanding (Post-Delivery): $157.4 million

Commercial Paper (Subordinate): $43.2 million

Payout, 8 years (all obligations): 100.0%

The principal methodology used in this rating was 0PrincipalMethodologyName0 published in 0Date0.

REGULATORY DISCLOSURES

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 assigning 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.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

John Incorvaia
Analyst
Public Finance Group
Moody's Investors Service

Dan Aschenbach
Backup Analyst
Public Finance Group
Moody's Investors Service

Julie Beglin
Senior Credit Officer
Public Finance Group
Moody's Investors Service

Contacts

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


Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS A1 RATING TO KISSIMMEE UTILITY AUTHORITY'S (FL) ELECTRIC SYSTEM REFUNDING REVENUE BONDS, SERIES 2011
No Related Data.
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