Fitch Affirms Gainesville (FL) Commercial Paper Notes at 'F1+'

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings affirms the city of Gainesville, Florida's $62 million of commercial paper notes, Series 2010C, issued for the Gainesville Regional Utilities (GRU), at 'F1+.' GRU is authorized to have up to $85 million of commercial paper outstanding under this program.

Fitch is not reviewing GRU's other outstanding debt ratings at this time. A full review of GRU's long-term debt obligations is expected to be completed by year end.

SECURITY

The 'F1+' commercial paper rating is based on the internal liquidity of GRU, supported by bank lines of credit.

KEY RATING DRIVERS

Ample Liquidity: The 'F1+' rating on the CP program reflects ample internal liquidity, including monies in a Rate Stabilization Fund and Utility Plant Improvement Fund; in addition to a long-term credit agreement with Bayerische Landesbank which expires Oct. 1, 2013. This liquidity exceeds Fitch's requirement for 'F1+' credits.

Solid Financial Position: GRU has consistently demonstrated debt service coverage (DSC) ratios around 2.0 times(x) (per the bond resolution); in line with Fitch's median ratio for 'AA' rated retail systems. GRU's financial forecast assumes a continuation of this trend.

Financial Risk Management Program: GRU utilizes a comprehensive financial risk management program to identify financial risks, establish a framework for setting reserve fund levels and evaluate other strategies to manage these risks. Incorporated in these policies are GRU's commitment to provide general fund transfers to the city of Gainesville (currently approximating $35 million annually) and maintenance of the utility's 'AA' bond rating.

Debt Management Strategy: GRU attempts to achieve the optimal capital structure using a combination of fixed-and variable-rate debt to better match assets and liabilities and achieve the lowest possible interest rate costs. GRU's current policy targets a mixture of roughly 75% fixed/synthetic fixed and 25% unhedged variable-rate debt. This compares with a 60% fixed and 40% variable-rate debt strategy, previously. Fixed and synthetically fixed debt currently account for 92% of total debt, with variable debt at 8%. Unhedged commercial paper accounts for 4% of total debt.

CREDIT PROFILE

GRU provides a diverse mix of utility services -- electric, natural gas, water, wastewater and telecom -- to its residential, commercial and industrial customers. The electric utility accounts for approximately 75% of the combined utility system's revenues. The water, wastewater and gas systems have similar service territories to the electric utility. Each system is designed to be self sufficient. No new major generation is likely to be required until 2023, and a large part of any future utility system capital requirements is expected to be funded from internal cash.

The city is the home of the University of Florida (not a GRU customer), and has a total population of approximately 125,000 residents. Employment includes health care, higher education and light industry. Recent system sales have declined due to mild weather and the recession and the energy forecast is for modest annual growth of 1.0% or less. Fitch rates Gainesville's budget and appropriate non-ad valorem capital improvement revenue bonds 'AA-'.

The utility owns and operates several generating stations, with coal and natural gas making up the largest generation fuels. The utility has been active in developing renewable resource projects. GRU, with the approval of the City Commission, has negotiated a long-term contract to secure the output from a 100 megawatt (Mw) biomass fueled power plant. Construction of the plant is schedule to be completed by the end of 2013. GRU is in the process of negotiating the sale of available energy until the capacity is needed by GRU. Some local concerns have been raised regarding the need for the resource and its cost of power; but the issues appear to be manageable, relative to the size of GRU's generation portfolio.

While the city's general fund is dependent upon transfers from the utility system (accounting for about 36% of total general fund revenues), both the city and GRU have historically followed an objective transfer formula based on usage. Electric rates are somewhat above other public power utilities in Florida. Future rate requirements appear to be moderate.

Financial Performance

GRU's financial performance has improved in recent years, with aggregate debt service coverage for the fiscal year ended Sept. 30, 2010 at 2.28x. Fitch's debt service coverage calculation, which treats general fund transfers as an operating expense, was below this figure.

Commercial paper outstanding now totals $62 million. Typically, maturities do not extend beyond 90 days and GRU's policy is to periodically fund out the commercial paper, which is used mostly for construction purposes, with longer-term debt.

Days cash on hand for fiscal year 2010 was close to 140 days. Based on unaudited third quarter fiscal year 2011 financials, the Rate Stabilization Fund stood at $66 million and the Utility Plant Improvement Fund was at $36.4 million. Management's plan is to utilize $10 million from the Rate Stabilization Fund in fiscal year 2012.

GRU utilizes a policy for reserve funds that is formula driven by its primary indicators of risk. Reserve levels proposed for any given year will be based on the budgeted numbers for that fiscal year and incorporate a 97.5% confidence level for non-fuel revenues. For example, internal analyses performed in fiscal-year 2010 called for a fiscal-year 2011 estimated cash at risk reserve requirement of approximately $72 million. This was in addition to available commercial paper lines of $48 million.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from CreditScope.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 20, 2011);

--'U.S. Public Power Rating Criteria' (March 28, 2011).

For information on Build America Bonds, visit 'www.fitchratings.com/BABs.'

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=613065

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