Fitch Ratings has assigned an 'A-' rating to Pend Oreille Public Utility District No. 1, Washington's (the district) approximately $70 million in Box Canyon Production System revenue bonds, aeries 2009A and 2009B (Taxable Build America Bonds-Direct Payment). Bond proceeds will fund capital expenditures to upgrade the Box Canyon hydroelectric generating project. In addition, Fitch affirms the 'A-' rating on the outstanding $20.5 million in outstanding electric revenue bonds. The Rating Outlook is Stable.
The 'A-' rating reflects the district's low-cost power resources, solid financial performance, and sound management team. Credit concerns include the small customer base and limited economy as well as the change in risk profile that would result from a loss of its major customer, Ponderay Newsprint Corporation (PNC, not rated by Fitch), which accounts for 73% of the district's sales. The district receives power predominately from three sources: 1) Boundary hydro project; 2) Box Canyon hydro project; and 3) A slice and block sales agreement with Bonneville Power Administration (BPA). The district's general service customers are served primarily by Boundary (approximate power cost of 0.5 cent/kwh) and maintain some of the lowest rates in the state. PNC is served through a cost reimbursement contract, whereby its pays for the power that they take (predominately Box Canyon and BPA) minus (plus) the income (loss) associated with excess power resales.
While the current agreement with PNC limits the district's exposure to several risk factors, including excess power sales and critical water conditions, the rating considers that the loss of PNC would transfer those risks back to the district. Fitch believes the short-term risk associated with a loss of PNC, missed payment and excess power sale into a potentially low price wholesale electricity market is mitigated by a $10 million line of credit maintained by PNC for the benefit of the district as a part of the power sales agreement for any liquidated damages. The greater credit concern regarding the potential loss of sales to PNC is longer term in nature, as the district's supply position could be more than 50% long at that time. Until the district could develop and execute a power supply plan to redeploy the surplus power at a reasonable price, the district would be bearing the risk of an exceptionally long and merchant power supply position. This is of particular concern as the district's leverage (on a combined system basis) is rising with the sizeable capital expenditures planned at Box Canyon over next five years.
Favorably, the district's combined financial metrics (including the distribution, production and water systems) are above average for the rating. Unreserved cash balances are equal to 181 days operating expenses, debt service coverage at 3.3 times (x), and equity-to-capitalization at 73%, although it will be notably declining with the increased debt associated with Box Canyon's re-licensing and retrofitting over the next five years.
The district provides electric and water service to approximately 8,681 customers in very rural portion of northeastern Washington State (7.6 customers per line mile), including one large industrial customer, PNC, which accounts for 73% of retail sales and 63% of revenues. Sales growth has held steady over the last five years and economic indicators are below average illustrated by unemployment of 13%.
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Contacts:
Fitch Ratings, New York
Drake Richey, 212-908-0325
Lina
Santoro, 212-908-0522
or
Cindy Stoller, 212-908-0526 (Media
Relations)
cindy.stoller@fitchratings.com