New Issue: Moody's assigns A1 to Grays Harbor County Public Utility District 1 (WA) electric revenue bonds

Transcription

1 New Issue: Moody's assigns A1 to Grays Harbor County Public Utility District 1 (WA) electric revenue bonds Global Credit Research - 28 Oct 2013 Approximately $136 million of debt affected GRAYS HARBOR COUNTY PUBLIC UTILITY DISTRICT 1, WA Electric Distribution and Generation WA Moody's Rating ISSUE RATING Electric Revenue and Refunding Bonds, Series 2013 A1 Sale Amount $34,915,000 Expected Sale Date 11/06/13 Rating Description Revenue: Government Enterprise Moody's Outlook NOO Opinion NEW YORK, October 28, Moody's Investors Service has assigned an A1 rating to Grays Harbor County Public Utility District 1, Washington's Electric Revenue and Refunding Bonds, Series At this time, Moody's affirms the A1 rating on the district's parity debt outstanding in the estimated amount of $101.2 million, postrefunding. The bonds are secured by the electric system's net revenues. Proceeds will finance various capital improvements and refund a portion of outstanding parity bonds issued in 2005 and SUMMARY RATING RATIONALE The A1 rating reflects the district's rural service area along the coast, a manageable debt burden, and satisfactory legal provisions. Operating performance historically was adequate but is forecast to improve in the medium term due partly to revised management practices that include transitioning to annual rate increases over the medium term. STRENGTHS - Preference customer of federal Bonneville Power Administration, OR (Aa1 issuer rating with stable outlook) for vast majority of power supply - Projected improvement in debt service coverage supported by board's renewed willingness to implement regular rate increases - Recent trend of regular rate increases projected to continue CHALLENGES - Power supply susceptible to hydrological conditions - Exposure to volatile market prices for resale of excess power, which have been weak in recent years DETAILED CREDIT DISCUSSION RURAL SERVICE AREA BELOW PUGET SOUND

2 The district was formed in 1938 with voter approval and serves nearly all of Grays Harbor County (Aa3 issuer rating with stable outlook), which is located below the southern tip of Puget Sound and adjacent to the Pacific Ocean. The local economy features significant timber activity and related wood products manufacturing, along with fishing and food processing industries. The unemployment rate for the county was 11.7% as of July 2013 and well above both the state and nation. Median family income was modest at 79% of U.S. levels ($49,756) as of the 2011 American Community Survey. The district's estimated service population is modest at 71,545 residents, and customer accounts totaled 41,690 with the vast majority being residential users (34,669 accounts) as of The customer base is moderately concentrated with the ten largest retail customer sales representing 13.5% of retail sales as of FY2012. The largest users include Cosmo Specialty Fibers (5.6% of retail sales), a pulp mill, and the state's Department of Corrections (1.2%), with the remainder comprising various commercial users. SYSTEM IS DEPENDENT ON HYDRO POWER SUPPLIED FROM BPA The enterprise's power supply is heavily concentrated in hydraulic resources, leaving operations susceptible to hydrology risk. The utility's power supply is purchased from the federal Bonneville Power Administration (BPA), which generates hydro power in the Pacific Northwest for publicly owned utilities. BPA provided 85.5% of the system's power supply in FY2012 through a slice/block contract in place through September 2028 with a reliance on cost-based Tier 1 power. The remainder of the system's supply was derived from market purchases (7.6%), a share of output from the Frederickson natural gas project (3.8%), and a share of output from the Nine Canyons Wind Project (3%). Management notes that the district is in compliance with the state's standards requiring at least 3% of supply be from renewable energy sources through The district has excess power available under most hydrological conditions. In particular, the district sold over 1.6 million MWh of power in FY2012, of which 40% was resale activity. However, recent declines in market prices reduced revenues from resale by over 75% over the period FY008-12, thus growing the system's average net cost of power resources over the period. Of note, the district uses The Energy Authority, like some peers, as a consultant and marketer of forward sales for excess power. IMPROVING OPERATING POSITION SUPPORTED BY RECENT RATE INCREASES The district's operating performance was adequate in recent years, despite pressures from declining resale revenues and overall growth in wholesale power costs. While the district's net revenues declined over the period, the magnitude was diminished by reductions to expenses. Management is committed to implementing annual rate increases over the medium term that will bolster operating revenues, improve debt service coverage, and improve liquidity for near term capital needs. The district reduced rates by 3% in both fiscal years 2004 and 2006 and did not begin regularly raising rates until 2010, which was partially attributed to previously robust resale revenues when market prices for excess power were more favorable. More recently the district adopted rate hikes of 7-8% in fiscal years 2010, 2011, and For the medium term, management is planning for 6.75% rate increases in FY2014, then ramping down from 3.75% to 2.5%% through FY2017. Officials note that regular rate increases will allow the district to absorb biannual rate adjustments passed through from BPA, the most recent of which was 9% in FY2013. In spite of recent rate hikes, the district's monthly electric bills as of June 2013 were within the range of peers across customer classes for other public power systems and private sector providers in Washington. The district's liquidity appears sufficient, but is modest compared to many similarly rated peers nationally. Cash on hand averaged 92 days of operating expenses for the last five years, including 87 days in FY2012. Management is working to grow cash reserves to $30 million (equivalent to 132 days of FY2012 operating expenses), including a long-established rate stabilization fund of $11 million. The district also has a $10 million line of credit available through Key Bank but is intended for use only in the case of significant, unexpected events. SATISFACTORY DEBT SERVICE COVERAGE PROJECTED TO IMPROVE Debt service coverage fluctuated in recent years and was overall satisfactory, averaging 1.61 times annual debt service for FY Coverage levels were in-line with peers in the state, which typically also receive most of their power supply from BPA. Under conservative budget assumptions, coverage was expected to be a thin 1.28 times debt service in FY2013, but current estimates indicate that coverage will be significantly stronger at approximately 1.7 times with stronger hydro conditions than conservatively planned. Management is targeting coverage of at least 1.75 times debt service, and projections indicate this target will be

3 reached as soon as Current forecasts indicate that coverage will average 1.8 times debt service for FY with support from planned rate increases. Peak debt service of $10.3 million occurs this year (2013) and is covered by 1.7 times the current estimate for FY2013 estimated net revenues. Future debt service peaks at a modestly lower $10 million in 2031 and coverage is 1.75 times estimated FY2013 net revenues. MANAGEABLE DEBT BURDEN The enterprise had a moderate debt ratio of 47.1% as of FY2012, and management cited there are no near term borrowing needs. Management expects that additional revenues from recently adopted and planned rate increases will provide sufficient funds for foreseeable capital needs. SATISFACTORY LEGAL PROVISIONS Legal provisions are satisfactory and typical of many peers in the region. The rate covenant is 1.25 times annual debt service. The additional bonds test is 1.25 times peak debt service, inclusive of any proposed bonds. The debt service reserve is sized at the standard lesser-of test and funded with cash. WHAT COULD MAKE THE RATING GO UP - Significantly stronger debt service coverage than projected - Consistently more robust liquidity WHAT COULD MAKE THE RATING GO DOWN - Unwillingness to implement prudent rate increases - Significantly reduced liquidity - Weakened debt service coverage - Issuance of substantial parity debt KEY STATISTICS FY2012 estimated service population: 71,545 residents / 41,690 customers (34,669 residential) 2011 Median family income, Grays Harbor County: 79% of U.S. ($49,756) per American Community Survey FY2012 cash on hand: 87 days of operations FY2012 operating ratio: 79.9% FY2012 debt ratio: 47.1% Peak debt service coverage: 1.28 times FY2012 net revenues / 1.7 times FY2013 projected net revenues FY2012 other postemployment benefits liability (OPEB): $26.8 million unfunded accrued liability PRINCIPAL METHODOLOGY The principal methodology used in this rating was U.S. Public Power Electric Utilities published in April Please see the Credit Policy page on for a copy of this methodology. REGULATORY DISCLOSURES For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in

4 relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review. Please see for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating. Please see the ratings tab on the issuer/entity page on for additional regulatory disclosures for each credit rating. Analysts Patrick Liberatore Lead Analyst Public Finance Group Moody's Investors Service Matthew A. Jones Additional Contact Public Finance Group Moody's Investors Service Contacts Journalists: (212) Research Clients: (212) Moody's Investors Service, Inc. 250 Greenwich Street New York, NY USA 2013 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'S PUBLICATIONS") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY'S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY'S OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND MOODY'S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND

5 CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY'S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY'S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable, including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall MOODY'S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY'S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY'S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained herein must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER. MIS, a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS's ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at under the heading "Shareholder Relations Corporate Governance Director and Shareholder Affiliation Policy." For Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY'S affiliate, Moody's Investors Service Pty Limited ABN AFSL and/or Moody's Analytics Australia Pty Ltd ABN AFSL (as applicable). This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are

6 accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act MOODY'S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail clients. It would be dangerous for retail clients to make any investment decision based on MOODY'S credit rating. If in doubt you should contact your financial or other professional adviser.