DEBT SERVICE TO BE PAID THROUGH AGREEMENT WITH THE UNIVERSITY OF NEBRASKA
Nebraska Utility Corporation
Higher Education
NE
Moody's Rating
ISSUE | RATING |
|---|
Series 2010 Facilities Revenue Refunding Bonds | Aa1 |
Sale Amount | $16,960,000 |
|---|
Expected Sale Date | 11/09/10 |
|---|
Rating Description | Public Higher Education |
|---|
|
Moody's Outlook Stable
Opinion
NEW YORK, Nov 5, 2010 -- Moody's Investors Service has assigned an Aa1 rating, with a stable outlook, to
the Nebraska Utility Corporation's (NU Corp.) $16.96 million of fixed-rate
Series 2010 Revenue Refunding Bonds. This report largely focuses on the legal
security for NU Corp.'s Series 2010 bonds. For more detail on the University of
Nebraska's Aa1 long-term rating and overall credit profile, please refer to our
last report published on May 11, 2010.
RATINGS RATIONALE
USE OF PROCEEDS: Refunding of outstanding Series 2001 NU Corp. bonds (all except
for principal payments to be made in January 2011) and funding of a debt service
reserve fund totaling $1 million (compared to $1.83 million of projected annual
debt service on the Series 2010 bonds in FY 2012). The original bond issuance in
2001 was used to finance chiller improvements and energy conservation
projects on the University of Nebraska-Lincoln campus.
LEGAL SECURITY: NU Corp. is a Nebraska not-for-profit corporation that was
created by the Board of Regents of the University of Nebraska (the University's
highest long-term rating is Aa1 with a stable outlook) and the City of Lincoln
(general obligation rating of Aaa with a stable outlook), acting on behalf of
Lincoln Electric System ("LES", a city-owned utility rated Aa2).
After the refunding, the Series 2010 bonds will be the only outstanding debt of
NU Corp. NU Corp. is governed by a 5 member board, including 3 members from the
University of Nebraska and two members from LES. NU Corp. is consolidated within
the University of Nebraska's audited financial statements.
The bonds are secured by payments made pursuant to an energy and utility service
agreement between the Board of Regents of the University and NU Corp. Per a rate
covenant in the agreement, rates paid by the University must cover annual debt
service by at least 1.1 times and can be adjusted throughout the year with
approval of the NU Corp. board. Debt service coverage in FY 2009 on the
outstanding bonds was 1.87 times and is projected to exceed 2.4 times in
FY 2010. Debt service coverage dipped to 1.26 times in FY 2008 largely due to an
increase in natural gas costs but was still adequate and met the covenant.
The energy and utility services agreement, which was signed in 2001, extends for
20 years or until all debt has been paid. The University's payments under the
agreement, including payments to cover debt service, are absolute,
unconditional, and irrevocable, and the obligation to make payments remains in
full force even if the services are not provided. If the University chooses to
terminate the agreement for any reason, the University is required to pay NU
Corp. sufficient funds to pay for all principal and interest on
outstanding remaining debt. The University's must make all payments under
the agreement from any legally available funds including the University
Cash Fund which management reports totaled $397 million in mid October 2010.
Further, should the University choose to terminate the agreement, the University
cannot for a six month timeframe replace or substitute the facilities provided
by the NU Corp. for energy provision or purchase energy services from another
entity. We believe the facilities and services provided by NU Corp. are
essential to the operation of the University of Nebraska-Lincoln, and the
University has very strong incentive to continue making payments under the
agreement.
DEBT-RELATED INTEREST RATE DERIVATIVES: None
STRENGTHS:
*Essentiality of the project and services provided by NU Corp. and very strong
structural provisions of the energy and utility services agreement, requiring
the University of Nebraska to make payments to adequately cover debt service
while the agreement is in place and pay an amount sufficient to cover
outstanding debt if the agreement is ever terminated.
*Shared governance and administration of NU Corp. by the University of Nebraska
(highest University rating of Aa1) and Lincoln Electric System (rated Aa2).
*Strong credit profile of the University of Nebraska, supported by its position
as the dominant statewide provider of four-year public higher education.
Payments to cover debt service are payable from any legally available funds of
the University including the University Cash Fund which totaled $397 million in
mid October. The University maintains a healthy financial resource base
($2.2 billion in FY 2009 and estimated at $2.6 billion in FY 2010 based on draft
unaudited 2010 figures) and consistently positive operating performance.
CHALLENGES:
*The University's credit challenges include flat demographic projections for the
state and projections for slowed enrollment growth, uncertainty about level of
future state funding, increasingly leveraged balance sheet and future capital
needs which will likely require additional borrowing.
Outlook
The outlook for the bonds is stable reflecting the University's stable outlook,
essentiality of the project and services provided, and strong provisions within
the energy and utility services agreement.
WHAT COULD CHANGE THE RATING - UP
Improvement in the University's credit rating coupled with strong
University Cash Fund balances
WHAT COULD CHANGE THE RATING - DOWN
Deterioration of the University's credit profile and rating; decline in debt
service coverage below the rate covenant
KEY INDICATORS FOR THE UNIVERSITY OF NEBRASKA (Fall 2009 enrollment data and FY
2009 audited financial data)
--Figures in parentheses represent draft unaudited FY 2010 financial estimates
Full-Time Equivalent (FTE) Enrollment: 41,611 FTE students (42,497 FTE in fall
2010)
Freshmen Selectivity: 70%
Freshmen Matriculation: 56%
Total Financial Resources: $2.2 billion ($2.6 billion estimated for FY 2010)
Direct Debt at Fiscal Year End: $652.3 million ($707.9 million)
Expendable Financial Resources-to- Debt: 1.8 times (1.8 times estimated for FY
2010)
Annual Operating Margin: 4.2% (4.4% estimated for FY 2010)
CONTACTS:
University of Nebraska: David Lechner, Vice President for Business and Finance,
402-472-2191
Nebraska Utility Corporation: John Stilley, Finance Manager, 402-473-3343
Underwriter: Scott Keene, 402-467-6948
The last rating action on NU Corp.'s outstanding Series 2001 debt was on May 11,
2010 when the Aa1 rating was affirmed.
The principal methodology used in this rating was Public College and
Universities published in November 2006.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, public 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
Kimberly S. Tuby
Analyst
Public Finance Group
Moody's Investors Service
Eva Bogaty
Backup Analyst
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 Aa1 RATING TO NEBRASKA UTILITY CORPORATION'S $16.96 MILLION SERIES 2010 REVENUE REFUNDING BONDS; OUTLOOK IS STABLE
