City commission refuses to discuss S&P’s downgrade of GRU’s credit rating
May 8, 2021
BY JENNIFER CABRERA
S&P Global Ratings issued a Rating Action on May 3, lowering Gainesville Regional Utility’s (GRU) credit rating on its combined utility revenue debt from ‘AA-‘ to ‘A,’ a 2-notch downgrade. At the same time, they lowered the rating on the variable-rate demand obligation series 2007A from ‘AA-/A-1+’ to ‘A/A-1’ and the rating on GRU’s commercial paper from ‘A-1+’ to ‘A-1.’
According to S&P, “The downgrade reflects GRU’s very high rates and leverage, the product of investment in renewable resources that have proven to be uncompetitive. To maintain financial metrics and ensure full cost recovery, additional rate increases are expected over the next several years, which we believe will exacerbate GRU’s already limited financial flexibility. Presenting additional challenges is the recently adopted goal of reaching 100% renewable generation by 2045. In our view, there is heightened risk that achieving this goal will entail additional rate increases or debt. Furthermore, there is heightened risk of ratepayer backlash—which could turn what is now a vocal minority in opposition, into a vocal majority—with implications for financial metrics and strategic planning.”
Among the credit risks listed by S&P is this statement: “Although GRU’s power supply is diverse, with a significant level of renewables, it is the product of investment in uncompetitive resources, including biomass and solar feed-in tariff.”
After receiving the Rating Action, GRU General Manager Ed Bielarski sent an email to the Gainesville City Commission stating, “This two-notch downgrade is the first of its kind for GRU and is the fifth bond rating downgrade since 2010… this downgrade is the result of decisions that adversely impact GRU and created financial inflexibility.” Bielarski said those decisions are the Power Purchase Agreement for the biomass plant, the solar feed-in tariff, the “significant” General Fund Transfer (GFT), and “an uncertain approach to… 100% of energy from renewables by 2045.”
Bielarski went on to inform the city commission that “Although a downgrade to ‘A’ sounds fairly innocuous, it is 5 notches away from the loss of investment grade status.” Bielarski reminded the commissioners that he requested a significant reduction of the GFT in FY 2020, FY 2021, and FY 2022, but the GFT was simply frozen in FY 2020 and FY 2021 and only reduced by $2 million for FY 2022, “not the $11 million GRU had recommended.”
Bielarski referred to a presentation he made in one-on-one meetings with commissioners in February 2021, which included a 7% increase in electric rates for FY2022 and 2% increases in the following 2 years. The slide points out that this doesn’t include costs to become 100% renewable.
Bielarski says he has “consistently battled with the UAB [Utility Advisory Board] concerning their approach to energy policy that has little or no regard for the financial health of the utility” and concludes, “This two-notch downgrade by S&P is a signal from knowledgeable industry experts that GRU is now beyond the crossroads… Although some commissioners may find this communication to be too strong, I will assure you it is necessary in order for me to support the careers, livelihoods, and legacy of my top-flight financial staff, who don’t deserve to be tarnished with such an historic two-notch downgrade.”
On Thursday morning, May 6, Bielarski sent an email to city commissioners stating that GRU estimates the two-notch downgrade “will result in an additional $32 million in bond costs for the utility.”
At the May 6 Gainesville City Commission meeting just a few hours later, Nathan Skop tried to get the City Commission to discuss the downgrade during public comment on a motion to adopt the agenda: “I think we need to have an intelligent discussion. I can sit here and belabor the point, which, if you force me to do, I will do so during public comment if you’re not willing to add this agenda item. But your priorities, commissioners, are misplaced. For the last three commission meetings, two of which have been General Policy meetings, both GRU and myself asked you guys to make a substantial reduction to the GFT to avoid a debt downgrade.”
Mayor Lauren Poe interrupted Skop, stating the the item was not on the agenda and Skop could talk about it during general public comment. Skop said the commission should make it a priority to add the item, and Poe responded, “The motion on the floor is to adopt the agenda… You can speak to the motion.”
Skop then asked, “Let me rephrase the question, Mayor Poe… Why do you feel it’s not important for this commission to discuss this unprecedented two-notch downgrade in the wake of what just happened? Why is not your number one priority ensuring the financial health of GRU customers?”
Poe said, “Your time is expired,” and no commissioner offered to amend the motion to add the agenda item.
During general public comment, Skop brought up the issue again: “Since you guys denied a reasonable request and can’t seem to recognize that as a wake-up call and have an intelligent discussion about what you should do and how that could have been avoided, I’m going to be the adult in the room and basically state that this debt downgrade could have been avoided had the Mayor and Gainesville City Commission taken immediate action to avoid the debt downgrade before it happened by making a substantial reduction to the GFT over the past month when they clearly had multiple opportunities to do so, but chose not to do so.
“S&P was less than enamored with the $2 million [reduction in] GFT put forward by Commissioner Ward. Mayor Poe, you were the swing vote on that. The root cause of the current two-notch debt downgrade is the ongoing financial mismanagement of GRU at the hands of the Mayor and Gainesville City Commission, the unnecessary expansion of City government, and the ongoing spending addiction of the Mayor and Gainesville City Commission, who continue spending more and more money, every single meeting, that you don’t have. GRU customers cannot afford to sit by and watch the Mayor and Gainesville City Commission destroy what little is left of what was once the City’s most valuable asset.”
None of the commissioners or the Mayor responded in any way to Skop’s comments, and they moved on with the rest of the meeting.
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