SAN FRANCISCO - (Business Wire) Fitch Ratings assigns an 'A-' rating to the approximately $42.5 million electric revenue bonds to be issued by the Klickitat County Public Utility District No. 1, WA (the district). The bonds will be issued in three series - 2009A, 2009B (bank qualified), and 2009C (taxable build America bonds) - although the amount allocated to each series will be established closer to the pricing. Fitch also assigns a 'A-' rating to the district's $89 million of outstanding parity debt consisting of electric revenue bonds, series 2006A and 2006B.
The Rating Outlook on all the bonds is Stable.
The bonds are secured by a net revenue pledge of the district's electric system and are expected to price in a negotiated sale the week of Nov. 16, 2009. Bond proceeds will be used to fund ongoing capital needs of the district, including investment in an expansion of a landfill gas generation facility (26 MW), fund a debt service reserve fund, and pay costs of issuance.
The 'A-' rating reflects:
--Healthy financial performance;
--Revenue variability resulting from hydroelectric generation and a heavy reliance on wholesale generation and transmission revenues;
--A long power supply position provided by competitively priced renewable generation resources that exceed native load requirements;
--A changing contract with Bonneville Power Administration (the district's primary power supplier; rated 'AA' by Fitch) that will introduce greater hydrological variability to operations; and
--Customer diversity and continued load growth in the current economic downturn.
Credit concerns relate to the long power supply position and wholesale transmission business that may introduce greater fluctuations in revenues over time and heightened counterparty risk. Key credit drivers in the next two years include successful completion of the Phase II expansion of the landfill gas project and achievement of merchant sales that are near current projections, and transition to the new Bonneville contract in October 2011.
Power used to serve retail customers is supplied by Bonneville Power Administration (87% in fiscal 2008), under the terms of a long term contract. Currently, the district purchases approximately 35 MW from Bonneville in a load-following contract that provides energy needed to serve KPUD's load on a real-time basis, in excess of energy generated by the McNary hydroelectric project. KPUD has signed a new power sales agreement with Bonneville that will begin in October 2011 and terminate in September 2028 that will move to the use of a combined block and slice arrangement. The Slice power sales agreement presents distinct financial risks and opportunities to the district in that it allows the district to share in the benefits and risks of actual hydrological conditions. The district plans to contract with The Energy Authority (TEA) for power management services that will be needed to shape the slice power supply on a real-time basis.
The district also owns three renewable generation resources, the McNary Hydroelectric project, the H.W. Hill landfill gas project, and the White Creek wind project. Given that it receives nearly all of its energy needed to serve customers from Bonnevile, the district's investments in renewable energy projects place the utility in a long capacity and energy position. The investment in these resources is a business strategy to take advantage of local renewable resources - a landfill gas opportunity at an extremely large landfill in the county and the investment in one of the numerous wind projects in the county - in order to take advantage of growing momentum and value of renewable energy in western markets. Although contracts are in place for a portion of these revenues and sensitivity financial projections performed by the district show tolerance for deterioration in market prices for these sales, this is an unusual risk profile for a small retail utility.
The district also operates a wholesale transmission business line. Although many utilities own and operate transmission lines to serve customers, the district is unique in that its transmission business also includes lines that have been constructed on behalf of load-serving entities to connect into regional high-voltage transmission lines owned by Bonneville. The incremental revenues from this business line have benefited ratepayers, but it is an incremental risk to this utility that does not usually exist at retail utilities. Management appears to be using cautious contract terms and robust collateral requirements to protect ratepayers from a counterparty default.
Financial performance is healthy for the rating category but appropriate for the risk profile. Debt service coverage exceeded 2.3x in fiscals 2008 and 2007. However, this will decline as the series 2009 debt service begins to amortize. In addition, the district's debt service burden is backloaded, and a large increase in debt service will occur in 2017 and 2020. Wholesale revenues account for 38% of revenues but are projected to account for over 50% once the landfill gas project expansion in completed in June 2010 and the conversion to the new Bonneville contract occurs. Short-term market sales fluctuate over time and district revenues will vary, prompting the need for healthier debt service coverage and liquidity levels than a utility with only retail revenues. Liquidity is strong at the end of fiscal 2008 with $16.7 million in unrestricted reserves, or 211 days operating cash.
Klickitat County Public Utility District No. 1 is a retail electric system located in south central Washington, providing service to 11,866 customers in a predominantly rural, 1,904 square mile territory. There is modest customer concentration with the largest five customers providing 23% of sales and 15.5% of revenues. The largest customers include two energy companies, two food packaging plants, and a lumber mill.
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Fitch Ratings
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or
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