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Rating Action:

Moody's Affirms A1 rating on the City of Batavia's Electric System Revenue Bonds; Outlook is stable

20 Dec 2012

A1 rating affirmation impacts $25.9 million of outstanding rated debt

New York, December 20, 2012 --

Moody's Investors Service has affirmed the A1 rating on the City of Batavia's Electric System Revenue Bonds with approximately $25.9 million outstanding. The rating outlook is stable.

RATING RATIONALE:

The A1 rating reflects the electric system's small, yet stable and growing customer base that is primarily residential with above average socioeconomic indicators. The majority of power sales are to industrial and commercial customers and the rating incorporates the significant customer concentration with the top 10, primarily industrial, customers accounting for 32% of 2011 operating revenues. The rating also considers the electric system's willingness to raise rates to maintain historically strong financial margins while building internal liquidity to balance the new exposure to generation ownership. The rating also factors the electric system's large off balance sheet leverage ($244.3 million) given its take-or-pay contracts with the Northern Illinois Municipal Power Agency (NIMPA, rated A2/stable), a joint action agency that issued revenue bonds on behalf of its three members to purchase a partial ownership share of the Prairie State Project. These NIMPA bonds begin to fully amortize in 2013 and margins may be pressured if rates are not adequately adjusted.

The rating further considers the long-term favorable economics of the Prairie State Project.

OUTLOOK

The stable outlook reflects the assumption that Batavia will continue to adjust its rates to maintain satisfactory financial margins and liquidity to mitigate the risks of owning generation through a joint action 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 financial performance deteriorates with fixed obligation coverage falling below 1.5 times and liquidity falling below 90 days on a sustained basis. The rating could also be impacted by the loss of a large customer that negatively impacts the power supply economics moving forward.

STRENGTHS

• Above average fixed obligation charge coverage ratio averaging 4.0 times over the past three years while maintaining strong liquidity averaging 101 days cash on hand for the last three years

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

• Chicago suburb with above average income and wealth levels

• New load growth post the recession continues

• Rate-setting authority lies ultimately with the Batavia City Council and is not subject to review or appeal by any other governmental authority

• Prairie State Project has several unique advantages supporting its long-term economic value, including prepaid and favorably priced coal supply; location of coal reserve and mine near coal-fired generation facility, which eliminates rail transportation risk; and advanced environmental controls, which meet current federal and state standards for pollution control

CHALLENGES

• Customer concentration with the top 10 customers accounting for about one-third of annual operating revenues and the largest customer, Suncast Corporation, accounts for 10% to 12% of annual revenues

• Significant off balance sheet liability of about $244.3 million associated with the 55 MW of generation ownership in the Prairie State Project through NIMPA

• Concentrated power generation profile with Prairie State accounting for the majority of capacity and energy needs

• Maintaining financial metrics at or near current levels given the Prairie State bonds debt service costs rapidly increase over the next two years as the debt begins to fully amortize

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was U.S. Public Power Electric Utilities With Generation Ownership Exposure published in November 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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John Medina
Asst Vice President - Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Chee Mee Hu
MD - Project Finance
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Affirms A1 rating on the City of Batavia's Electric System Revenue Bonds; Outlook is stable
No Related Data.
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