Fitch Affirms Providence, RI's TIF Revenue Bonds at 'BBB+'; Outlook Stable
NEW YORK -- March 15, 2013
Fitch Ratings affirms the following city of Providence, RI (the city) tax
increment financing (TIF) revenue bonds:
--$12.6 million outstanding special obligation tax increment refunding bonds,
series E, at 'BBB+'.
The Rating Outlook is Stable.
The bonds are special obligations of the city secured solely by a lien on and
pledge of net tax increment revenues generated within the TIF district
comprised of a single taxpayer, the Manchester Street Station power plant (the
plant) owned by Dominion Resources. Legal provisions also include a debt
service reserve fund cash funded at 10% of par.
Pursuant to the bond indenture, the city mayor will seek appropriation of any
required replenishment of the debt service reserve fund. The moral obligation
does not inform the TIF rating given Fitch's lower ('BBB'; Outlook Negative)
general obligation rating on the city and a reserve fund requirement less than
annual debt service (equal to 49% of fiscal 2013 debt service).
KEY RATING DRIVERS
SINGLE INVESTMENT-GRADE TAXPAYER: Strong history of tax increment payments by
investment grade property owner and single taxpayer, Dominion Resources
(senior unsecured debt rated 'BBB+' by Fitch).
TAX PAYMENT AGREEMENT SUPPORTS AMPLE COVERAGE: The 2011 consent judgment
ordered by the state superior court defines future tax payments by Dominion
that provide ample debt service coverage through bond maturity, assuming no
major operating interruptions, mitigating revenue risk associated with future
REVENUES INSULATED FROM BANKRUPTCY: Tax increment revenues supporting the
bonds are not subject to disruption or diversion in the event of a bankruptcy
filing by the city in accordance with the definition of special revenues under
Chapter 9 of the bankruptcy code.
BOND TERM IS SHORT: Bond amortization is rapid with final maturity in 2016.
The city has no plans to issue additional debt under this security and is
currently constrained in doing so under the additional bonds test.
CHANGE IN DOMINION'S RATING: Maintenance of Dominion's credit quality and
continuation of tax payments is a key rating factor.
CLOSING OF OPERATING UNITS: The shutdown of Dominion's operating units could
jeopardize full debt service coverage on the bonds and result in a downward
SINGLE INVESTMENT-GRADE TAXPAYER
The TIF district includes one piece of property owned by Dominion and is home
to the 495-megawatt combined cycle natural gas fired Manchester Street
Station. The plant and associated facilities were constructed in 1995. In
addition to local power production, Dominion relies on the plant as a backup
to supply Dominion's Millstone nuclear plant power sales contract needs for
replacement power in case Millstone has a prolonged outage.
TAX PAYMENT AGREEMENT SUPPORTS AMPLE COVERAGE
Tax increment payments continue to provide sufficient coverage of maximum
annual debt service (MADS) on the bonds. The city and Dominion, pursuant to a
consent judgment issued by the superior court of the state of Rhode Island,
have agreed to future special tax assessment amounts of $5.2 million for
fiscal year 2012 through final maturity of the bonds in fiscal 2016. Coverage
on MADs of $3.74 million is 1.34 times from the defined special assessments.
The consent judgment states that the city shall neither increase the tax
assessments nor assess any additional property tax as a result of any
improvement to Dominion's property unless such improvement exceeds $25 million
and increases the nameplate capacity of the power plant by at least 20%. Fitch
notes as a credit risk, language in the consent judgment requiring a reduction
in assessments if one or more of three identified operating units are shut
down for a period of 12 months or more. The consent judgment calls for a $1
million reduction in taxes due for each non-operating unit for the following
fiscal year after shutdown.
RESERVE FUND MITIGATES POTENTIAL LOSS OF ONE OR TWO UNITS
Fitch-designed stress tests demonstrate sufficient debt service coverage, and
avoidance of default, even with the prolonged loss of two operating units,
from a combination of reduced tax assessments and use of debt service reserve
funds. Stress tests assuming the loss of all three operating units and a $3
million reduction in tax assessments would result in a payment default
assuming the city does not go beyond its legal pledge and appropriate
sufficient funds to cover the shortfall.
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 Tax-Supported
Rating Criteria, this action was additionally informed by information from
Creditscope, S&P/Case-Shiller Home Price Index, IHS Global Insight, National
Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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