NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA-' rating on the following bonds, issued by the city of Tacoma, WA (the city) on behalf of Tacoma Power, a department of the city:
--$171.4 million Electric System Revenue Bonds series 2005A and 2010B&C;
--$339.4 million Electric System Revenue Refunding Bonds series 2005B and 2013A&B.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by and payable solely from electric system net revenues.
KEY RATING DRIVERS
SOLID POWER SUPPLY RESOURCES: Tacoma Power is a vertically integrated electric system that draws on a resource mix balanced between low-cost owned hydro resources and purchased power mainly from Bonneville Power Administration (BPA). Capacity is sufficient to meet projected load growth through at least 2025.
FUTURE METRICS REFLECT REPAYMENT: Financial metrics have generally strengthened in recent years, as rate increases bolstered cash flow and increased the utility's very strong liquidity position. Tacoma Power plans to draw on reserves to repay a portion of its outstanding debt, which will reduce cash on hand but the resulting decrease in annual debt service should improve coverage. Overall, metrics should remain sufficient for the rating category.
COMPETITIVE RETAIL ELECTRIC RATES: Rates are inline with regional municipal utilities and below those of neighboring investor owned utilities. Competitive rates, combined with a history of timely rate approvals, indicate some rate flexibility. Favorably, the utility established a rate stabilization fund (RSF), which can be used to smooth future rate increases, if needed.
DIVERSE CUSTOMERS, SOFT ECONOMY: The service area has a diverse economy supported by a range of industry sectors. Residential sales make up a healthy 38% of retail revenue and there is minimal customer concentration. However, the city was noticeably affected by the recession and recovery has been sluggish, with economic indicators persistently lagging both the state and nation.
WHOLESALE SALES VARIABILITY: Tacoma Power is a net seller into the wholesale power market in most years. These nonfirm, short-term sales are subject to hydrological conditions and market prices, which creates variability in revenues. Favorably, implemented and anticipated retail rate increases help to insulate Tacoma Power from future wholesale sales fluctuations.
RATING SENSITIVITIES
MANAGEMENT OF REVENUE STREAMS: Given Tacoma Power's reliance on more volatile wholesale sales and uncertain telecommunication revenues, it is important for the utility to manage these operations together with electric rates in a way that maintains stable financial performance. Increasing financial support of the telecommunications division by the electric system, to the detriment of financial metrics, could pressure the rating.
CREDIT PROFILE
Tacoma Power is a division of the city's Department of Public Utilities. The utility operates the city's vertically integrated electrical generation and distribution facilities and its telecommunications division, the Click! Network (Click). Tacoma Power is one of the largest publicly owned utilities in the Pacific Northwest, serving approximately 172,531 customers in a service area that is approximately 180 square miles and serves the greater Tacoma area
The city is located approximately 30 miles south of Seattle in the Puget Sound region. The area has a diverse economy, with industry sectors that include the military, healthcare, manufacturing and wholesale distribution, along with the Port of Tacoma, which is considered an economic engine for the region.
Fitch notes that the city was perceptibly affected by the national economic downturn, as evidenced by service area economic indicators that persistently lag both the state and the nation. Favorably, there has been a positive trend in employment since mid-2014 indicating regional job creation. The utility has not seen an increase in bad debt expense or a lag in collections. Tacoma Power's reasonably well-diversified customer base somewhat mitigates its service area.
The city's GO debt rating was downgraded in July 2012 from 'AA' Stable Outlook to 'A+' with a Negative Outlook and revised to a Positive Outlook in June 2013. Tacoma Power is somewhat insulated from the city's fiscal difficulties, as the utility is not required to make transfers to the city's general fund. Instead, the utility is charged a gross earnings tax by the city, which is legally restricted to 6% of electric revenues and 8% of telecommunications revenues.
SOLID POWER SUPPLY RESOURCES
Fitch views Tacoma Power's resource mix as a predominant credit strength. All of Tacoma Power's resources are carbon free and the utility has a healthy balance of purchased power and owned generation. The majority of Tacoma Power's resources are hydroelectric based, with 43% of its 2014 resource portfolio provided by its four hydroelectric generating projects and 53% provided by a long-term power purchase contract with BPA, the regional federal power marketing agency.
Tacoma Power is a net seller into the wholesale electricity market under most water conditions. Wholesale revenues for any year are based on market prices, loads and water availability for generation, which creates volatility in the utility's overall revenues. Tacoma Power has implemented a series of rate increases to make the utility less dependent on its wholesale sales and strengthen its retail revenue base.
TELECOMMUNICATIONS EXPOSURE
Fitch views Click as increasing the business risk profile of Tacoma Power due to the competitive nature of the telecommunications industry. Click is not self-supporting and requires upwards of $6 million annually from the electric system. Competition from larger telecommunication companies could continue to erode the Click customer base and revenues.
Management has presented a proposal to its board and city council to enter into a lease agreement with Wave Broadband for 40 years. The agreement would give Wave Broadband control of running the Click network, while allowing Tacoma Power to continue owning the assets. Approval (or denial) of the proposal is expected in the coming months. The ability to make Click self-supporting without electric system intervention, be it through a lease agreement or other means, would be viewed positively.
STABLE FINANCIAL PERFORMANCE
Financial metrics have been strong and stable, after recovering from a low point in 2010. Debt service coverage (DSC) increased from 2.08x in 2010 to 2.40x in 2014, which compares favorably to the 'AA-' median of 2.38x. Management's implementation of a series of rate increases has helped to insulate metrics from wholesale sale fluctuations and also allowed the utility to bolster its liquidity position. Liquidity is very strong, with unrestricted funds equal to 335 days cash on hand (DCOH).
Tacoma Power is planning to repay its 2005B bonds this year with a mix of cash and excess bond reserves. The refunding should substantially decrease debt service in 2015 through 2020, from an average of $55 million per annum to $30 million per annum. The utility's most recent financial forecast suggests stronger DSC than past projections, given the decrease in debt service. DSC is projected to be above 3.0x starting in 2016 through the forecast period. DCOH will decrease to an average of 166 DCOH as funds are used to repay debt, but should remain acceptable for the rating category. Liquidity will be enhanced by a revolving line of credit for working capital needs.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Public Power Peer Study -- June 2014' (June 13, 2014);
--'U.S. Public Power Peer Study Addendum - February 2015' (Feb. 9, 2015);
--'Revenue Supported Rating Criteria' (June 16, 2014);
--'U.S. Public Power Rating Criteria' (March 18, 2014);
--'2015 Outlook: U.S. Public Power and Electric Cooperative Sector' (Dec. 10, 2014).
Applicable Criteria and Related Research:
U.S. Public Power Peer Study Addendum -- February 2014
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735601
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841
2015 Outlook: U.S. Public Power and Electric Cooperative Sector (Steady as She Goes)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=831228
U.S. Public Power Peer Study -- June 2014
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749789
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983788
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.