Fitch Ratings has affirmed the 'A' rating on Cowlitz Public Utility District No. 1, WA's $250 million electric and production system revenue bonds.
The Rating Outlook has been revised to Negative from Stable.
SECURITY
The electric system revenue bonds are secured by and payable from gross revenues of the electric distribution system. The bonds are payable after the payment of costs associated with operating and maintenance of the distribution system and payments associated with the resource obligations (including existing and future production system revenue bonds).
KEY RATING DRIVERS
DISTRIBUTION SYSTEM WITH DIVERSE RESOURCES: Cowlitz Public Utility District (District) is a distribution system located in southwest Washington that provides electric service to 48,194 customers. The District receives 82% of its power from the Bonneville Power Administration (BPA), and from other sources including its Swift No. 2 Hydroelectric Production System (Swift No. 2) and Grant Public Utility District (Grant PUD). The District also has ownership interests in several wind projects.
OUTLOOK REVISED TO NEGATIVE: The Outlook revision to Negative reflects the District's surplus power and weaker than projected financial performance resulting from lower than expected wind and surplus hydro sales derived from their BPA 'Slice' contract. Fitch expects to resolve the negative outlook once there is greater clarity on the stability of projected cash flows and metrics.
WEAK FINANCIAL METRICS: The District's construction of wind power pursuant to Washington's renewable portfolio standard and lower contributions from the sale of surplus wind and hydro in recent years have particularly impacted debt service coverage (DSC). Despite sizeable rate increases, fiscal 2011 and 2010 ended with 1.41 times (x) and 1.29x coverage respectively, which are below the 'A' category medians.
LOW-COST POWER: The District benefits from low cost power, anchored by its purchase power agreement with BPA, accounting for the majority of native load demand. Other inexpensive power is supplied by Grant PUD, but amounts available to the District on a firm contract basis have declined.
DEMONSTRATED RATE FLEXIBILITY: Management has demonstrated the ability and willingness to raise rates as necessary to offset the District's weaker financial performance without compromising competitiveness. Factoring in the 27% rate increase in 2011, retail rates are still among the lowest in the State.
CUSTOMER CONCENTRATION RISK: Industrial customer concentration is sizable with two large paper-related customers accounting for 43% of District's total operating revenues. The loss of any substantial load is largely mitigated by the nominal net margins generated by these two customers.
WHAT COULD TRIGGER A RATING ACTION
SHIFT IN FINANCIAL PERFORMANCE: Fitch expects the District to continue managing its financial performance, including rate increases, to a level consistent with the 'A' rating category even if power costs increase and weak wind surplus power sales persist.
CREDIT PROFILE
Declining Financial Metrics
The District reported strong financial performance for 2006-2009 as evidenced by strong margins that reached 8.9% and solid DSC of 3.08x (fiscal 2007). However the District's long position of wind and hydro power and lower wholesale market prices, due in part to California's policy amendment to limit out-of-state renewable power purchase, have led to a slow deterioration in the utility's financial metrics. This highlights the utility's substantial exposure to the wholesale market and reliance on non-native load to boost its revenue base. Debt service coverage fell to 1.41x in 2011. Management projects future coverage for the period 2012 - 2016 to range from 1.40x to 1.70x. The board targets 1.50x coverage.
Wind Power Surplus
The District's excess power position from wind resources is of concern despite its historical ability to sell the power at positive margins, and utilize the capacity to meet the state's 2016 renewable portfolio standards (RPS) target. The expected impact of weaker revenue from wind sales in 2012 was a major driver of the rate increase in 2011.
The rationale behind the wind investments centered on meeting RPS requirements and future retail load. The District was initially able to sell its surplus position to California utilities at prices above cost. However, with the California amendment to the renewable power law effectively limiting the importation of out-of-state renewable power, Cowlitz has to sell the surplus at prices that do not cover project costs.
Industrial Customer Concentration
Industrial customers account for less than 1% of total accounts, but are responsible for 59% of the District's generated revenue. The bulk of the District's industrial exposure comes from two large paper-related customers, Weyerhaeuser Company and Longview Fibre, which together represent 42.9% of total operating revenue. These two customers represent little net margin to the District because their contractually established rates are based on full recovery of direct costs, which would go away if these loads were lost. The loss of either customer could potentially impact employment in the service area.
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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