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, 2013 --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 2013. 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 2006. 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
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 2012. 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 2015. 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 2013. 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 FY2008-12. 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
reached as soon as 2014. Current forecasts indicate that coverage will average 1.8 times debt service for FY2014-17 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 2008. Please see the Credit Policy page on www.moodys.com 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
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