Moody’s gives Burlington Electric first 'A' rating in over six years

-A A +A

Moody’s gives Burlington Electric first 'A' rating in over six years

Tue, 12/20/2016 - 1:03pm -- tim

McNeil generating station, Burlington. BED photo.

Vermont Business Magazine Moody’s Investors Service has upgraded the Burlington Electric Department’s credit rating to A3 with a stable outlook from Baa1 with a stable outlook, representing the first time in more than six years that Burlington Electric has earned an “A” rating. Moody’s cited Burlington Electric’s forward-looking financial policies, diverse and renewable power supply, competitive rates, and strong and focused management as important factors for the increase. Further, Moody’s listed continued financial success by the City of Burlington as a factor that could contribute to future Burlington Electric upgrades, an apparent reference to its having awarded the City a two-step increase in March 2016 that restored the City’s credit rating to an “A” for the first time since 2012.

Moody's had downgraded its credit ratings of BED and Burliington International Airport in October 2010 in the wake of the Great Recession. BTV's bond rating has also rebounded.

Summary Rating Rationale

Moody's Investors Service has upgraded the rating on the outstanding $27.6 million Burlington electric revenue bonds to A3 from Baa1. The outlook is stable. Burlington also has $46.8 million of general obligation bonds (A3 stable) issued for electric utility purposes, which are expected to be repaid from electric department net revenues.

The rating upgrade considers the material improvement in liquidity and debt service coverage over the past two fiscal years and forward-looking financial policies aimed at maintaining sound financial metrics. Also recognized is the utility’s competitive rates, diverse power supply mix that is significantly renewable and the strengthening of the Burlington economy.

Burlington Electric Department (BED) serves Burlington, which has a diverse local economy anchored by the institutional presence of a major university and medical center, in addition to serving as the commercial center for a large geographic area. While BED is subject to Vermont Public Service Board (PSB) regulation, new rates may be collected 45 days after the filing and the PSB must consider bond covenants and sufficiency of revenues to support voted bonded authorizations.

Moreover, BED’s rate setting record has been credit supportive and timely, with full recovery of requested costs since 2004, which Moody's views as a key credit strength. The rating further considers the utility's conservative general fund transfer policy, representing roughly 3.5% of FY16 operating revenues.

The Moody’s report lists the following credit strengths:

  • “Diverse and substantially renewable power supply resource mix, which mitigates industry challenges such as market price disruptions and carbon regulation;”
  • “Strong improvement in liquidity and debt service coverage over the past two fiscal years and forward-looking financial policies aimed at maintaining sound financial metrics;”
  • “BED’s service area economy is relatively robust, with above national average socioeconomics, driven largely by higher education, technology and health care;” and
  • “Strong and focused management working on industry transition, including ensuring utility fixed cost recovery through rate structure changes.”

Credit Challenges

While BED's rate-setting framework is regulated by the PSB, the utility's rate setting record reflects full cost recovery and the ability to increase rates within 45 days after filing, with later true-up
Like most municipal electric utilities, a transition to more distributive generation such as roof top solar, represents new challenges
McNeil wood fueled generation facility plays a dominant role within BED’s generation mix, but has had strong operating performance and adequate fuel supply
Customer dominance, with the University of Vermont and regional medical center representing more than 20% of BED’s FY16 revenues
No rate increase since 2009

Rating Outlook

The rating outlook is stable given our expectation for stability in the local economy, no changes in electric rates, and financial metrics that hold steady around current levels.

Factors that Could Lead to an Upgrade

Longer-term trend of adjusted debt service coverage greater than 1.75x and adjusted days liquidity greater than 100 days on a sustained basis
Given the links to the City of Burlington, continued and sustained improvement in the city’s financial position

Factors that Could Lead to a Downgrade

Debt service coverage less than 1.50x and adjusted days liquidity less than 50 days, on a sustained basis
Unsupportive PSB regarding cost recovery

“This credit rating upgrade validates Burlington Electric’s continuing efforts to lead through energy innovation by sourcing its power from renewable generation and by focusing on measureable financial results that consider the changing utility landscape,” said Mayor Miro Weinberger in a statement. “The upgrade, like the one just over a year ago, will further lower Burlington Electric’s future borrowing costs and, once again, demonstrates that the commitment of the community, the City Council, and the Administration to strengthen Burlington’s financial reputation is working and continues to generate real savings for Burlington residents, institutions, and businesses. Congratulations to the entire Burlington Electric team for their excellent work.”

“Strong financial management is part of Burlington Electric’s continued commitment to the customers we serve,” said Neale Lunderville, Burlington Electric Department General Manager. “As the Moody’s upgrade confirms, our continuous focus on improving our financial foundation and on adapting to a changing energy market allow our team to lead the green energy revolution.”

“It takes a great team – from our customers to Burlington Electric frontline staff to City Hall – to achieve a Moody’s upgrade,” Lunderville added. “I want to offer special praise to our Burlington Electric power supply and finance teams, as well as to our Burlington Electric Commission, for their unwavering focus on improving our finances, and to the entire Burlington Electric family for delivering exceptional service to our customers.”

The recent history of Burlington Electric’s credit ratings and outlooks follows:

Date

Action

Rating

Outlook

12/19/16

Upgrade from Baa1

A3

Stable

11/9/15

Upgrade from Baa2

Baa1

Stable

7/22/14

Affirm

Baa2

Positive

12/20/13

Affirm

Baa2

Stable

10/22/12

Affirm

Baa2

Negative

10/06/11

Affirm

Baa2

Negative

10/13/10

Downgrade from A3

Baa2

Stable

3/17/04

Affirmed

A3

Stable

*Moody’s Investors Service Burlington Electric Credit Opinion attached.

Steady Improvement in Adjusted Debt Service Coverage

Source: Moody’s Investors Service, Burlington Electric Financial Statements

Key Indicators


Source: Moody’s Investors Service, Burlington Electric Financial Statements

Source: City of Burlington December 20, 2016