Fitch Rates Pend Oreille's (WA) Box Canyon Bonds 'A-'; Outlook Stable.
The bonds are expected to price on Oct. 2, 2012, and close on Oct. 17, 2012. Proceeds will provide funding for the purchase and installation of turbine generators and plant upgrades at the Box Canyon project.
In addition, Fitch affirms the 'A-' rating on the following revenue bonds:
--$4.72 million electric revenue refunding bonds series 2005A; --$4.27 million electric revenue refunding bonds series 2005B; --$19.8 million electric system revenue refunding bonds series 2010; --$19 million Box Canyon production system revenue bonds 2009A; --$49 million Box Canyon production system revenue bonds 2009B; --$34.1 million Box Canyon production system revenue bonds 2010.
The Rating Outlook is Stable.
The Box Canyon production system bonds are secured by a lien on the revenues of the project. The District's electric system is obligated to pay for all system costs including debt service, regardless of the project's operational performance.
Corresponding Box Canyon costs are treated as an operating expense of the District and therefore payable prior to payment of debt service on outstanding electric system bonds. Electric system bonds are secured by the District's gross revenues of the electric system.
KEY RATING DRIVERS
SMALL HYDRO-BASED INTEGRATED UTILITY: Pend Oreille serves a predominantly stable residential customer base in northeast Washington State. The District meets its load requirements through rights to the Boundary Hydroelectric Project, its ownership of the Box Canyon Project, and Bonneville Power Administration (BPA) purchases.
LOW-COST RESOURCES: The District manages a cost effective power supply. Fiscal 2011 blended power cost was $21.7 per megawatt hour (MWh), driven by Boundary's $4.6/MWh production cost. These resources are competitive with low-cost BPA power supplied throughout the region ($25.4/MWh).
SINGLE-CUSTOMER CONCENTRATION: Ponderay Newsprint Company (PNC) is a large industrial customer that accounts for 63% and 60% of the District's energy sales and revenue, respectively. The PNC load is met with the entirety of contracted BPA power and any surplus District resources. Risk associated with BPA power costs are largely borne by PNC, mitigating the District's exposure.
STABLE FINANCIAL PERFORMANCE: The District has maintained a trend of stable financial metrics over the last several years including debt service coverage generally exceeding 2.0x, liquidity in excess of 100 days cash on hand, and modest leverage of 4.6x debt-to-funds available for debt service (FADS). On a consolidated basis, including Box Canyon debt and debt service obligations, coverage was closer to 1.51x, but still in line with peer rated utilities
COMPETITIVE RETAIL RATES: The District's general service customer rates benefit from very low-cost power supply at 5.6 cents/kWh in 2011, among the lowest in the nation. Electric rates will see minimal impact from changes outside of the District's control as long as PNC remains a customer.
WHAT COULD TRIGGER A RATING ACTION
LOSS OF PNC: The loss of the single largest industrial customer is an ongoing but manageable concern, as it would leave the District with excess power and subject to short-term volatility risk until the excess power could be remarketed or contracted over the long term.
SHIFT IN FINANCIAL PERFORMANCE: Fitch expects the District to continue to increase rates and manage financial performance to a level consistent with the 'A-' rating category, particularly as power costs increase due to the Box Canyon capital program.
The District's power supply is cost-effective and primarily hydro based. Power is derived from the Boundary Hydroelectric Project, Box Canyon Project, and BPA, three low-cost hydroelectric sources with a 2011 blended power supply cost of $21.7/MWh. Load factors are stable, averaging 85% since 2008, a healthy indicator of constant power usage and key to maintaining low unit costs.
Utilities owning hydroelectric generation are exposed to varying hydrological conditions and ecological risks, which could result in additional costs associated with the purchase of supplemental power in a low hydrological year or with environmental standard compliance. The District's healthy liquidity and low cost structure are sufficient to absorb such an impact.
Box Canyon Project
The Box Canyon production system is a separate production system located on the Pend Oreille River and owned and operated by the District for over 50 years. This facility is a run-of-the-river project with four turbines with combined generation capacity of 72 MW. Construction of the system was completed in 1955 and is currently undergoing substantial upgrades as required conditions of the FERC relicensing. The upgrades are also expected to increase capacity by 18 MW. Cost of production for 2012 is estimated at $37/MWh and projected to rise to $42/MWh after upgrades and plant modernization.
The Box Canyon project is a resource obligation of the District. Similar in structure to a take-or-pay agreement, the electric system purchases all power and energy available from the project and pays production costs including debt service on the Box Canyon bonds, regardless of system availability. The corresponding production and debt service expenses are paid as an operating expense of the electric system. It is Fitch's view that bondholders are adequately protected given that the underlying support for this project is the District's demonstrated ability to meet these obligations, and strong utility fundamentals.
Steady Financial Performance
The District's 2011 financial metrics are relatively strong. On a stand-alone basis, electric system debt service coverage, equity-to-capitalization, and debt-to-FADS were 2.39x, 62.2% and 4.6x, respectively. Two rate increases of 12% and 15% in 2009 and 2011 have minimized variability in financial metrics.
Metrics for the Box Canyon project alone are weak at around 1.0x debt service coverage and 13.7x debt-to-FADS, but the electric system's unconditional obligation to purchase power offsets related concerns. Factoring in the Box Canyon debt of $104 million and associated debt service produces consolidated metrics that are weaker, but still consistent with the rating: 1.51x debt service coverage, 56.6% equity-to-capitalization, and debt-to-FADS of 9.2x.
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
Applicable Criteria and Related Research: --'Revenue-Supported Rating Criteria' (June 12, 2012); --'U.S. Public Power Rating Criteria' (Jan. 11, 2012).
Applicable Criteria and Related Research: Revenue-Supported Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015 U.S. Public Power Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=665815
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|Date:||Sep 24, 2012|
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