Moody's Investors Service has assigned an issuer rating of Aa1 to the Hingham Municipal Lighting Plant (HMLP), Massachusetts.
This issuer rating has a three-year duration and is intended to be used as an assessment of the utility's financial strength. as the lighting plant has no revenue bonds outstanding. The rating assigned incorporates the utility's monopoly market position permitted under Massachusetts statute, unregulated rate setting authority, and sound operations. The rating also incorporates the strong legal and financial relationship between the utility and the Town of Hingham (GO rated Aaa/stable outlook), particularly in the unlikely worst case event of a non-payment on a contract by the Lighting Plant.
*Massachusetts law guarantees the utility's exclusive access to customers inside its service area, provided that it does not sell electricity outside its service area, which is coterminous with the Town of Hingham
*The utility has sound mechanisms to recover costs through its rates. It has unregulated rate setting authority, the ability to pass electricity costs to customers on a quarterly basis, or more frequently if needed, through a Purchased Power Cost Adjustment, and can discontinue service and place a municipal tax lien on properties for nonpayment of electric bills
*Adequate liquidity including specific reserves for depreciation and rate stabilization to maintain competitive rates
*Massachusetts law prohibits Hingham Municipal Lighting Plant from declaring bankruptcy. The utility must use its rate setting authority to meet all obligations, including power purchase contracts
*Competitive rates compared to regional investor owned utilities
*The potential for a late payment to an electricity supplier in the event there are delays implementing significant rate increases needed pursuant to an uneconomic contract. The utility has had a strong record of contract compliance and has strong credit characteristics
*The utility could face political pressure to increase the amount of its payment in lieu of taxes PILOT to the town
*Pressure to require municipal utilities to provide customer choice may occur if rates do not remain competitive to regional investor owned utilities, as no municipal utilities have opted into the consumer choice
ISSUER RATING ASSESSES COUNTER PARTY RISK AND OPERATIONS
The manager of the utility has the authority to enter into power purchase contracts pursuant to Chapter 164, Section 56, of the Massachusetts General Laws. Additionally, Massachusetts law prohibits the utility from declaring bankruptcy. The utility must set its retail rates sufficient to meet all obligations, including power purchase contracts.
While a power contract is the legal obligation of the utility, Moody's believes a power supplier could seek legal restitution with the Town for non-payment on a contract with the Lighting Plant. The potential for a supplier to access the Town's liquidity and taxing authority is incorporated in the rating, although this legal strategy has not been tested in Massachusetts. There is a close financial and legal relationship between the Town and the utility.
All policy decisions are made by the elected Municipal Lighting Commission, which has the authority to approve budgets, including the size of the PILOT paid to the Town, as well as rate setting. All budgets and rates must receive majority approval from the commission to be enacted. Base rates are filed with the Massachusetts Department of Telecommunications and Energy and are subject to Chapter 164, Section 58, which limits Hingham's profit to no more than 8% of its gross assets after repayment of operating expenses and debt obligations. The utility's rates are otherwise unregulated by state or federal authorities.
Favorably, the utilities rates in FY09 compared favorably to regional investor owned utilities. In addition, the service territory benefits from above average socioeconomic indicators, demonstrating an ability to absorb future rate increases.
HMLP's power supply contracts are diverse, with roughly 36% from nuclear power, 50% from fossil fuels, 10% from alternative sources and roughly 4% allocated to spot market purchase. Expiration dates on HMLP's contracts are staggered, providing flexibility in renewing or replacing the power suppliers.
In FY 2009, the utility had adequate operating reserves, supported by sound balances in the rate stabilization ($1.7 million) and depreciation funds ($3.5 million). Operations in 2010 are projected to be positive, generating a surplus of at least $750,000 net of transfers and PILOT payments.
KEY OPERATING INDICATORS
Type of System: Electric Generation and Distribution
Town of Hingham GO Rating: Aaa/stable outlook
System Capacity: 122 MW
System Peak: 53 MW
2009 Customers: 9,912
Commercial: 1,140 (12%)
Residential: 8,772 (88%)
2009 Revenues from Sale of Electricity: $27.6 million
Commercial: $13.7 million (49%)
Residential: $12.4 million (45%)
John G. Tzimorangas, General Manager (781) 749-0134
The principal methodology used in assigning the rating was Moody's "U.S.
Public Power Electric Utilities," published in April, 2008, and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.
LAST RATING ACTION
The last rating action with respect to the Hingham Municipal Light Plant was on April 22, 2010 when Hingham Municipal Light Plant's (MA) rating was withdrawn.
Susan Kendall, Analyst, Public Finance Group, Moody's Investors Service Conor McEachern, Backup Analyst, Public Finance Group, Moody's Investors Service Geordie Thompson, Senior Credit Officer, Public Finance Group, Moody's Investors Service CONTACTS:
Journalists: (212) 553-0376 Research Clients: (212) 553-1653
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New York, NY 10007