Rating Update: Moody's Affirms A3 rating on the City of Rochelle's (IL) Electric
System Revenue Bonds; Outlook Stable
Global Credit Research - 22 Dec 2014
$12.4 million of rated debt affected
ROCHELLE (CITY OF) IL ELECTRIC ENTERPRISE
Electric Distribution and Generation
NEW YORK, December 22, 2014 --Moody's Investors Service has affirmed the A3 rating on the City of Rochelle's (Rochelle Electric) $12.4 million outstanding Electric System Revenue Bonds. The outlook is stable.
The A3 rating reflects the electric system's small and concentrated customer base with below average socioeconomic indicators and industrial/commercial load dominance. This concentration is balanced against a historical willingness to maintain strong and stable financial performance with steady rate increases. The rating further considers the utility's participation in Prairie State Project, which provides long-term favorable economics yet involves substantial off-balance sheet leverage ($133.3 million) given its take-or-pay contracts with the joint
action agency Northern Illinois Municipal Power Agency (A2/stable).
The stable outlook reflects Moody's view that Rochelle Electric will continue to demonstrate its willingness to maintain a satisfactory liquidity profile and adequate financial margins to mitigate significant customer and power resource concentration.
What Could Change the Rating - UP:
The rating could be upgraded if there were notable diversification of the customer base, revenue mix, and power supply resources, while maintaining strong financial performance.
What Could Change the Rating - DOWN:
The rating could be downgraded if financial metrics deteriorate resulting in the fixed obligation charge coverage ratio remains below 1.15 times or if days cash on hand falls below 90 days on a sustained basis. The rating could also be impacted by the loss of a large customer that negatively impacts Rochelle Electric's energy load and revenue profile.
The bonds are secured by the net revenues of the city's electric system. The rate covenant requires net revenues to cover senior lien debt service by at least 1.2 times. The additional bonds test is 1.25 times annual debt service. There is a cash funded debt service reserve fund sized at maximum annual debt service (MADS) or $1.55 million. The flow of funds is an open loop structure with the annual revenue transfer to the city capped at 5% of total electric system revenue per bond ordinance.
INTEREST RATE DERIVATIVES: None
* Rate-setting authority lies ultimately with City Council and is not subject to review or appeal by any other
* Power cost adjustment mechanism allows for full power cost recovery without a base rate increase
* Low on balance sheet leverage
* Customer concentration with the top 10 customers accounting for 50% of FY 2014 operating revenue and the
largest customer, CHS' ethanol plant, accounting for 16% of operating revenue
* Concentrated power supply profile with Prairie State accounting for 51% of energy and capacity needs
* Significant off balance sheet debt ($129.5 million) associated with Rochelle Electric's 30 MW of generation
ownership in the Prairie State Project through NIMPA
DETAILED CREDIT DISCUSSION
Rochelle Electric's service area is primarily residential (84% of customers) with below average socioeconomic indicators, while revenues are primarily from commercial and industrial customers (78% of revenues). The top ten customers are predominantly industrial and account for a considerable 50% of total revenues, with the top customer, CHS' ethanol plant, accounting for 16% of total revenues. This customer concentration is partially mitigated by the diversity of the top customers which span multiple industries. The system had load growth of 2.6% in FY 2014, and management expects growth of 2-3% in FYs 2015 to 2017, due to increased investment from several industrial customers which have either recently expanded or plan to expand their presence in Rochelle Electric's service territory.
The Prairie State plant is the system's primary base-load generation resource, providing 51% of the utility's energy needs. The remaining power supply needs are sourced from spot market purchases, a 6 MW 5x16 power contract
with Constellation Energy, and a 2 MW power contract with Rochelle Energy Center. Despite construction delays, construction cost overruns and a longer than standard shakedown period, Prairie State showed improvement in
operating performance in the latter half of 2014. Newly appointed Prairie State management and the uncovering of several performance issues could result in a better performance record and improvement to a capacity factor in the 80% range in 2015. Moody's believes that the value of Prairie State as a long term asset remains favorable as a source of long-term reliable power for the participants. Direct debt levels remain modest with a direct debt ratio of 15%, yet the system has significant off-balance sheet debt of $129.5 million through NIMPA. Moody's accounts for this off-balance sheet debt in calculating the fixed obligation charge coverage ratio, which subtracts the debt component of Rochelle Electric's annual payment to NIMPA from Rochelle Electric's operating expenses and adds it to debt service instead, thus yielding a lower coverage ratio. This adjustment provides for better comparability across of all municipal utilities, regardless of if generation assets are financed on-balance sheet or off-balance sheet through JPAs. Rochelle Electric's fixed obligation charge coverage ratio dropped to 1.45 times in FY 2012, as NIMPA's debt began to amortize. With full amortization in FY 2013 and FY 2014, the fixed obligation charge coverage ratio decreased again to 1.16 times and 1.10 times, respectively. For FY 2015, we anticipate that the fixed obligation charge coverage ratio may rise
slightly to 1.22 times. Going forward, Rochelle Electric's annual portion due of the NIMPA bonds will be level at $9 million and the fixed obligation charge coverage ratio will continue to be pressured if rates are not adequately adjusted. While the City Council historically has demonstrated a willingness to raise rates, Moody's notes the potential for continued weak coverage levels without sufficient rate increases, given the significant fixed obligations.
System: Transmission, distribution and generation
Generation ownership in Prairie State Project: 30 MW
Total System Sales, 2014: 316,364 MWh
Top 10 Largest Customers as a percentage of total revenue, 2014: 49.5%
Senior lien revenue bonds outstanding (as of 12/2014):
Series 2005 and Series 2008: $11.285 million (A3/Stable)
Series 2014: $6 million (NR)
Rochelle share of NIMPA debt outstanding (as of 12/31/2013 audit): $129.5 million (25% of $517.87 million)METHODOLOGY SCORECARD FACTORS
Factor 1 - Cost Recovery Framework Within Service Territory: A
Factor 2 - Willingness to Recover Costs with Sound Financial Metrics: A
Factor 3 - Management of Generation Risks: Baa
Factor 4 - Rate Competitiveness: Aa
Factor 5a - Adjusted Days Liquidity on Hand (3-Year Average): 121 days (A)
Factor 5b - Debt Ratio (3-Year Average): 18.4% (Aaa)
Factor 5c - Fixed Charge Obligation Coverage Ratio (3-Year Average): 1.24x (Baa)
Grid Indicated Rating: A2
Notching: -1.0 notch for customer concentration
Scorecard Indicated Rating: A3
Note: The grid is a reference tool that can be used to approximate credit profiles in the industry in most cases.
However, the grid is a summary that does not include every rating consideration. Please see U.S. Public Power
Electric Utilities with Generation Ownership Exposure for information about the limitations inherent to grids.