NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to the following Snohomish County (WA) Public Utility District No. 1 (the district) bonds:
--$40.7 million generation system revenue bonds series 2015.
The bonds are scheduled to price Sept. 22, 2015.
Proceeds of the generation system revenue bonds will be used to (i) fund a portion of the district's capital plan, including costs of acquiring, designing and completing construction of the Calligan Creek Project and the Hancock Creek project and (ii) pay cost of issuance.
The Rating Outlook is Stable.
SECURITY
The generation system revenue bonds are payable from and secured solely by generation system revenue, subject to the prior payments of operating expenses of the generation system. Generation system revenues consist almost entirely of payments made by the electric system.
KEY RATING DRIVERS
STRONG FINANCIAL PRACTICES: The district has financial policies designed to achieve debt service coverage (DSC) of at least 1.75x on electric system bonds, maintain significant financial reserves, and adjust rates in a timely manner. In addition, the district conservatively targets to fund approximately 60% of its electric system capital plan from operations and available funds.
SUBSTANTIAL CASH RESERVES: The board of commissioners previously established a comprehensive reserve policy to provide a sizeable financial cushion, which can be used to fund capital projects and meet operation and maintenance expenses. As of Dec. 31, 2014, unrestricted cash and investments for the electric system conservatively exceeded $237 million and special reserve funds totaled $265 million.
WELL-SOURCED HYDROELECTRIC RESOURCES: A long-term block/slice contract with the Bonneville Power Administration (BPA) accounts for approximately 85% of long-term energy resources and is supplemented by a mix of renewable resources and smaller, owned generation. The district is well-positioned to meet state mandates and future growth requirements.
HEALTHY SERVICE AREA: The district's customer base is sufficiently diverse and is anchored by the Boeing Company, the county's largest employer. The aircraft company accounts for approximately 4% of the PUD's energy sales revenues. While employment concentration risk does exist, Boeing's recent decision to expand in the area and the county's strong local socio-economic factors provide a counterbalance to this concern.
RATING SENSITIVITIES
POWER MARKET VOLATILITY: Given Snohomish Public Utility District's reliance on variable hydroelectric power, greater than forecasted volatility in power costs could put pressure on the district's financial results. However, a solid record of timely rate adjustments and sizeable cash reserves largely mitigate this concern.
CREDIT PROFILE
The district's electric utility operations are composed of the electric distribution system and the generation system, which is separately financed and accounted for relative to the electric system. The electric system is made up of the PUD's electric transmission and distribution system and is the 100% off taker of the generation system, pursuant to a take-or-pay obligation. The generation system is composed of the Jackson hydroelectric project and two smaller hydro projects and provided approximately 6% of the electric system's 2014 power supply. Fitch views the district and its separately secured hydro developments as a single integrated system, given that the project debt is legally bound to the electric system, making it the ultimate obligor.
The district is issuing $40.7 million in generation system revenue bonds to fund the construction of two small hydroelectric generation projects - Hancock Creek Hydroelectric Project (6 MW capacity) and Calligan Creek Hydroelectric Project (6 MW capacity). The projects are run-of-the-river and very similar to the district's existing Youngs Creek Hydro Project, which it built in 2011. The projects are anticipated to cost a total of $53 million and the district anticipates funding the remaining portion of the project through reserves on hand and operations.
WELL-SOURCED POWER SUPPLY
The district benefits from a low-cost block/slice wholesale power contract with the hydro-based BPA, the largest power provider in the Northwest. The agreement extends through 2028. The majority of the district's power and energy needs are purchased through the block/slice contract, which accounted for 82% of energy supplied in 2014. The remainder of energy is supplied from a mix of the district's generation system consisting of smaller hydro projects, renewable projects and short-term market purchases.
Given the predominately hydro-based resource portfolio, the district's energy supply is affected by weather and precipitation variability. Water conditions for the remainder of the year are projected to be below average and may reach critical levels through the summer. BPA has stated the low runoff is not due to lack of precipitation, but high temperatures causing rain instead of snow, thereby reducing snowpack and runoff during summer months. BPA has publically stated it will meet all of its power obligations through the summer. In addition, the district has prepared for the low water conditions and implemented hedges to fix the cost of purchased power through the summer. While management does not think the scenario is likely, mid-year budget reductions or rate increases could be implemented if needed in order to maintain strong financial metrics.
AMPLE FINANCIAL PERFORMANCE
Financial results, which will vary due to the district's high reliance on hydroelectric-based resources, remained strong in 2014. Fitch-calculated debt service coverage (DSC) in 2014 was 2.26x, which was down slightly from 2013's DSC of 2.44x but still inline with 'AA-' rating category medians. The decrease was primarily driven by a $6.9 million write-off during the year in conjunction with the termination of a research project the district undertook to study the viability of tidal generation turbines in the Puget Sound.
Liquidity remained strong, with unrestricted funds totaling 154 days cash on hand at year-end 2014, not including special reserve funds. Leverage is low at 4.9x debt/funds available for debt service (FADS) and is stronger than the rating category median of 6.8x. In addition, debt amortizes quickly. The district anticipates using its $100 million debt management reserve fund to retire its outstanding Series 2005 bonds, which will mostly offset the series 2015 bond issuance and keep debt/FADS low, comparatively.
Projections show that, with the exception of 2015, DSC will remain above 2.0x. Lower than average, but still acceptable, projected DSC in 2015 takes into account actual energy usage to date, which has been weak due to an exceptionally warm winter. The district has not included an increase in summer energy usage due to the warmer weather, in order to be conservative. Projections include the series 2015 debt issuance and conservative assumptions.
Date of Relevant Committee: June 9, 2015
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990643
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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