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Fitch Rates Batavia, Illinois Electric System Revs 'A-'

Posted on: Friday, 17 November 2006, 21:00 CST

Fitch assigns an 'A-' to the $25,655,000 City of Batavia, Illinois Electric System Revenue Bonds. The Rating Outlook is Stable. This is Fitch's initial review of the city's electric system (The Utility). Proceeds from the Series 2006 bonds will fund a portion two 138 kV substations and new transmission lines which will interconnect the utility's existing distribution network directly to the regional transmission grid. The 2006 bonds are expected to be competitively priced the week of November 29, 2006. Kaplan Financial Consulting is serving as financial advisor to the utility.

Located 45 miles west of Chicago, Batavia serves 10,600 electric customers and a population of about 25,000. The City has no outstanding electric system debt, and presently meets virtually all of its power and capacity needs through an 'all requirements' contract with Commonwealth Edison (ComEd, IDR 'BBB-', Negative Watch) which expires on May 31, 2007. Starting in fiscal year 2007, the Utility will for the first time directly oversee its power supply procurement and scheduling requirements. The Utility has engaged ISC, the public power consultancy that is associated with the Indiana Municipal Power Agency (rated 'A+' by Fitch), to assist through this transition. Although Fitch believes that ISC lends solid experience in the areas of scheduling, hedging and forecasting, there is added risk associated with the city's new role in managing its own power supply procurement. Fitch also recognizes that the Utility's revenues are predominantly contributed from the non-residential customer classes.

The utility is in the process of implementing its new power supply procurement plan, and expects to embark on a retail cost of service study in 2007. To provide its customers with future power cost stability, the utility's long-term strategy includes the acquisition of a 50 mw ownership interest in the Prairie State Energy Center, a new base-load coal-fired power station being developed by Peabody Energy that will be located in Washington County, IL. The utility's participation in Prairie State will be financed through its membership in the recently formed Joint Action Agency (JAA), Northern Illinois Municipal Power Agency (NIMPA). NIMPA is also associated with the Indiana Municipal Power Agency (IMPA, rated 'A+' by Fitch). Prairie State is anticipated to enter commercial operation in 2011, and is forecasted to provide 71% of the Utilty's energy requirements. Prior to the completion of the Prairie State project, the Utility expects to solicit annual contracts for fixed-price blocks of capacity and energy to meet its electric needs. This strategy will require the Utility to participate in the PJM Interconnection day-ahead and hourly power markets for load balancing purposes.

Key support for the 'A-' rating is derived from the utility's enhanced power cost recovery measures, including the recent approval of a purchase power tracking mechanism to fully recover purchase power and transmission costs, as well as any changes in costs associated with line losses, through a monthly true-up to customer bills. The rating also captures the Utility's historically competitive retail rates, and steady electric sales growth. Management's five-year financial forecast shows consistent debt service coverage (of approximately 1.33 times, adjusted for purchase power and the Utility's general fund transfer) and liquidity equivalent to 72-127 days operating expenses, levels that Fitch believes is adequate for the rating.

The Stable Rating Outlook reflects Fitch's expectation that recently enacted cost recovery policies, coupled with sufficient cash balances, should mitigate the utility's market exposure and help stabilize the systems overall financial position as the utility takes on these added responsibilities. A material shortfall in working capital, sustained construction cost overruns associated with the Prairie State project, eroded operating margins, or a loss of a major commercial or industrial load are events that Fitch believes could negatively impact the utility's credit profile.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Source: Business Wire

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