Fitch Ratings has affirmed the City of Tacoma, Washington's $586.7 million of outstanding electric system revenue bonds at 'AA-'.
The Rating Outlook is Stable.
The bonds are secured by and payable from net revenues of the electric system.
KEY RATING DRIVERS
Ample Capacity: Tacoma Power is a retail electric system that draws on power sources balanced between purchased power contracts (largely Bonneville Power Administration) and owned hydro-electric generating units. The current resource mix is sufficient to meet projected load growth without requiring any new power supply resources through 2028.
Competitive Retail Electric Rates: Tacoma Power's rates are in line with other Washington municipal utilities, which, together with a history of timely rate approval, indicate some rate and financial flexibility going forward. An expanded rate stabilization fund is a positive factor.
Conservative Debt Structure: All outstanding electric system revenue bonds are in fixed rate mode and the majority of amortization occurs prior to 2021, well ahead of the expected life of its hydro electric units and the end of the Bonneville Power Administration (BPA) slice contract.
Wholesale Sales and Hydrological Conditions: Tacoma Power is a net seller into the wholesale power market in most years. These non-firm sales are subject to variability in hydrological conditions and wholesale electricity prices. Better than average water conditions in fiscal 2011 have added to electric sales, but power prices have been below forecast. Anticipated retail rate increases will help insulate Tacoma Power from future wholesale sales fluctuations.
Telecommunication Exposure: In addition to the electric system, Tacoma Power operates a telecommunications division (Click! Network) consisting of retail cable television, wholesale broadband and wholesale cable internet. The telecommunications division operations are self-supporting and cash flow positive. However, the competitive nature of telecommunications provides an additional level of concern.
One of the largest publicly owned utilities in the Pacific Northwest in terms of customers served and energy sold, Tacoma Power serves approximately 169,112 customers. The majority of Tacoma Power's resources are hydroelectric based, with 44% of its 2011 resource portfolio provided by its four hydroelectric generating projects and 51% provided by a long-term power purchase contract with BPA, the regional federal power marketing agency.
Tacoma Power entered into a new contract with BPA that began in 2011 and will extend through 2028. The new contract contains a variable supply component, known as the slice product, which results in Tacoma Power taking on the financial and operating fluctuations based on hydrological variability of the BPA system. Under average water conditions, the new contract is expected to provide approximately 57% of Tacoma Power's total supply.
Revenues are primarily derived from its residential and commercial customers, accounting for 39% and 35% of energy sales, respectively. Overall customer growth has been relatively stable, averaging between 1%-3% per year, with a slight 0.2% decrease in 2011. Tacoma Power's 10 largest customers account for a moderate 17.6% of retail revenues.
Annual rate increases of 5.8% in fiscals 2011 and 2012 helped compensate for lower wholesale revenues and increasing costs from BPA. Management anticipates additional rate increases of 4.5% in fiscals 2013 and 2014. Rates are conservatively set at a level to provide cash balances equivalent to at least 90 days of current budgeted expenditures, which include operating expense, principal and interest payments, transfers to the City of Tacoma and current fund capital expenditures.
Financial metrics are projected to remain stable. Fitch-calculated debt service coverage was 2.44 times (x) in fiscal 2011, or 1.97x excluding transfers to the rate stabilization fund. Management projects debt service coverage (DSC) will average 1.86x through 2016 and unrestricted cash balances will remain above $200 million.
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 Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria, this action was informed by information from CreditScope.
Applicable Criteria and Related Research:
--'Tacoma, Washington', Oct. 11, 2011;
--'U.S. Public Power Peer Study Addendum: January 2012', Jan. 30, 2012;
--'U.S. Public Power Rating Criteria', Jan. 11, 2012;
--'Revenue-Supported Rating Criteria', June 20, 2011;
--'U.S. Public Power Peer Study - June 2011', June 20, 2011.
Applicable Criteria and Related Research:
U.S Public Power Peer Study Addendum: January 2012
U.S. Public Power Rating Criteria
Revenue-Supported Rating Criteria
U.S. Public Power Peer Study ??? June 2011
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