Moody’s Investors Service yesterday published a Ratings Report, in which Moody’s improved Burlington Electric Department’s credit rating outlook to Baa2 positive from Baa2 stable. This boost comes only seven months after Moody’s improved BED’s outlook from negative to stable. The Moody’s report includes the following summary explaining the outlook improvement: “The outlook change to positive from stable reflects our belief that the department will continue to reduce its exposure to the power supply market through long term contracts and diversify the power supply portfolio through the acquisition of the Winooski hydro facility. The outlook change also reflects our expectation of stable or improving debt service coverage ratios and other financial metrics.”
“This is very impressive news and shows a continuation of a positive trend,” said Mayor Miro Weinberger. “This upgrade is consistent with the outlook improvements Moody’s recently announced for the Airport and the City. It is satisfying to see that the Administration’s and City Council’s sustained focus on restoring Burlington’s finances is securing steady gains.”
“Mayor Weinberger and BED’s leadership team and Commission deserve credit for keeping a sharp focus on improving the utility's financial position,” said Neale Lunderville, BED interim general manager. “Improvements like this will help BED secure lower interest rates and reduce pressure on electric rates. Strong financial management is part of BED’s continued commitment to the customers we serve.”
The report also summarizes the Baa2 rating rationale: “The Baa2 rating reflects the department’s strength as the exclusive provider of electric service to the city as well as its stable customer base which includes the University of Vermont. The Baa2 also reflects rates which are regulated by the state public service board (PSB), exposing the department to regulatory lag risk, which is unusual for public power utilities that generally benefit from local rate setting authority. The PSB has approved all department rate requests for the last two decades, evidencing a supportive regulatory regime. The rating also reflects the department's improved power supply diversity and debt service coverage ratios (DSCR) in recent years.”
FULL MOODY'S STATEMENT:
Moody's assigns Baa2 to City of Burlington's (VT) Electric Revenue Bonds; outlook changed to positive from stable
Global Credit Research - 22 Jul 2014
Approximately $33 million of debt securities affected
BURLINGTON (CITY OF) VT ELECTRIC ENTERPRISE
Electric Distribution and Generation
VT
Moody's Rating
ISSUE RATING
Electric System Revenue Bonds, 2014 Series A Baa2
Sale Amount $12,000,000
Expected Sale Date 07/29/14
Rating Description Revenue: Other
Electric System Revenue Refunding Bonds, 2014 Series B Baa2
Sale Amount $6,010,000
Expected Sale Date 07/29/14
Rating Description Revenue: Other
Moody's Outlook POS
Opinion
NEW YORK, July 22, 2014 -- Moody's Investors Service has assigned a Baa2 rating to the City of Burlington's
(VT) Electric System Revenue Bonds, 2014 Series A and Series B. Moody's has also affirmed the Baa2 on
outstanding debt and changed the outlook to positive from stable, affecting $33 million of debt. The Burlington
Electric Department (BED) also has $45 million of outstanding general obligation bonds secured by the City of
Burlington's (VT) general obligation pledge (GO rated Baa3, stable).
RATING RATIONALE
The Baa2 rating reflects the department's strength as the exclusive provider of electric service to the city as well
as its stable customer base which includes the University of Vermont. The Baa2 also reflects rates which are
regulated by the state public service board (PSB), exposing the department to regulatory lag risk, which is unusual
for public power utilities that generally benefit from local rate setting authority. The PSB has approved all
department rate requests for the last two decades, evidencing a supportive regulatory regime. The rating also
reflects the department's improved power supply diversity and debt service coverage ratios (DSCR) in recent
years. The department's liquidity, while improving, is still weak with approximately 50 days cash on hand.
Outlook
The outlook change to positive from stable reflects our belief that the department will continue to reduce its
exposure to the power supply market through long term contracts and diversify the power supply portfolio through
the acquisition of the Winooski hydro facility. The outlook change also reflects our expectation of stable or
improving debt service coverage ratios and other financial metrics.
What Could Change the Rating - UP
The rating could face upward pressure if the department improves its liquidity position, maintains or improves its
coverage ratios, and successfully manages its power supply contract risk.
What Could Change the Rating - DOWN
In light of the positive outlook, limited near term prospects exists for the rating to be lowered. The rating could face
downward pressure if the debt service coverage ratio falls below the 1.25x rate covenant, if the department has
difficulty managing the newly acquired hydro facility, or if liquidity weakens.
Strengths:
- Improving financials including net revenues, debt ratio, and stabilized DSCR
- Reduced exposure to wholesale power market through long term contracts
- History of full rate increase request approvals from state oversight
- Budgeting no short term market contracts for purchased power by 2016
Challenges:
- Weak liquidity compared to similarly rated peers
- Local economy has weak medium term economic forecast
- BED's short term contracts for power supply expire in the near term, exposing the utility to very modest market risk
DETAILED CREDIT DISCUSSION
LEGAL SECURITY: The bonds are secured by the net revenues of the electric system. There is a 1.25 times rate
covenant and the debt service reserve requirement is equal to maximum annual debt service on the senior
revenue bonds.
The department also has approximately $43 million of general obligation (GO) bonds that are expected to be repaid
from electric department operating revenues. The rate covenant on the consolidated debt outstanding is 1.00
times. Per the General Bond Resolution, the claim on the revenues of the department by the revenue bondholders
is prior to any claim of the GO bondholders.
INTEREST RATE DERIVATIVES AND VARIABLE RATE DEBT: None
2014A BONDS FINANCE THE WINOOSKI ONE HYDRO PLANT
The Series 2014A bonds are being issued to finance $12 million of the total $16 million project cost of acquiring the
Winooski One hydro plant, which is located on the Winooski River between the Cities of Burlington and Winooski,
Vermont. The hydro plant first opened in 1993 and the development plans offered BED the option to acquire the
project after 20 years of operation, which is being exercised. The plant will bolster management's efforts to secure
stable and predictable long term supply and diversify their power sources. The 7.4 MW facility will provide 8-9% of
annual system load and will be qualified to sell Renewable Energy Credits in New England.
RECENT DEVELOPMENTS
The department's financial position and its power supply management stabilized in 2013 with the addition of
several long term power supply contracts that diversify the fuel mix while also increasing cost predictability. While
the department's 50% ownership of the McNeil wood-fired plant provides 39% of its load capacity, the rest of the
department's energy requirements are satisfied through the New England power market. In order to mitigate the
exposure to increases in ISO NE costs for transmitting purchased power, management has fixed price contracts
in place for nearly 100% of its capacity needs through 2017. The department is also replacing its short term
bilateral contracts with long term contracts. In 2015, the department's short term purchases through bilateral
contracts are expected to be 4%, notably down from a high of 44% in 2010. The department's new medium to longterm
contracts are with Vermont Wind for 16MW of capacity until 2021; Georgia Mountain Wind for 10MW of
supply until 2037; Nextera Hydro for 5MW of capacity until 2017; and New York Power Authority for 2.6 MW until
2017.
The department's revenue derived from the sale of Class I Renewable Energy Credits (REC) in Connecticut and
Massachusetts has also increased to an expected $8.8 million in 2014. REC sales are contracted at fixed prices
for more than 50% of production through 2016. In order to minimize the exposure in the renewable energy credit
market, BED's budget assumptions for open positions are conservatively half of the present market prices. For the
next three years, the department's cost variance will be related to the operation of its McNeil plant and the plant's
production levels, REC sales, and variable demand under its power supply contracts.
Given the stability of the department's power supply, the DSCR in 2013 on a net revenue post city transfer basis
was a strong 2.21 times for senior revenue bonds and 1.61 times for consolidated bonds (includes subordinate
general obligation bonds). This was a notable improvement from a consolidated DSCR of 1.26 times in 2012.
Based on the power supply forecast until 2017, we expect the department to maintain financial metrics on par with
2013 results in the medium term. The department also continues to increase its liquidity position, which is relatively
weak compared to its peer group and suppressed by its rate regulatory body. The department's days cash on
hand in 2013 was approximately 50 days. To help their liquidity, the department has a $5 million bank line of credit
with a local Vermont bank that has no outstanding draws.
Budgeted fiscal 2014 net income of $0.39m was substantially lower than in the previous year, $7.3m, but year to
date performance has been over budget at $3.4m as of May. BED is budgeting a net income of $3.5m in fiscal
2015 and a slight increase in liquidity to 55 days cash on hand, excluding the LOC.
The largest of BEDs capital plans is the purchase and integration of the Winooski One hydro facility. Other major
projects include a solar installation at a Burlington Airport parking garage, gas turbine control systems,
undergrounding of power lines on the downtown waterfront, and other capital projects such as continuation of the
smart meter deployment and smart grid infrastructure. These projects will be cash funded or funded through
General Obligation bond proceeds and are expected to cost $7.6 million.
KEY STATISTICS:
Type of System: Electric generation and distribution
Total Debt Service Coverage Ratio, net revenue basis post city transfer, FY 2013 (3-YR AVG): 1.61x (1.45x)
Days Cash on hand, FY 2013 (3-YR AVG): 50 days (43 days)
Debt Ratio, FY 2013 (3-YR AVG): 50% (61%)
METHODOLOGY SCORECARD FACTORS:
Factor 1 - Cost Recovery Framework Within Service Territory (25% weight): A
Factor 2 - Willingness to Recover Costs and Maintain Sound Financial Metrics (25% weight): Baa
Factor 3 - Management of Generation Risk (10% weight): A
Factor 4 - Rate Competitiveness (10% weight): A
Factor 5 - Financial Strength (3 year historical averages) - (a) Liquidity (10% weight): 50 days (Baa)
Factor 5 - Financial Strength (3 year historical averages) - (b) Debt Ratio (10% weight): 60% (A)
Factor 5 - Financial Strength (3 year historical averages) - (c) Coverage (10% weight): 1.45 times (Baa)
Scorecard Indicated Rating: A3
ISSUER CONTACT: Neale Lunderville, Interim General Manager, 802.865.7406
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.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating
outlook or rating review.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal
entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for
each credit rating.