SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings assigns its 'A' rating to the following Grays Harbor County Public Utility District (PUD or the district) No. 1, WA electric revenue bonds:
--$33,625,000 electric revenue and refunding bonds, series 2013.
Approximately $14.9 million of the proceeds will finance substation, transmission, and operational system improvements and pay costs of issuance. In addition, approximately $18.7 million of the proceeds will be used to restructure and refund a portion of the outstanding series 2005 and series 2006 electric revenue bonds. The restructuring will provide debt service relief by extending the original maturity from 2025 to 2033 with most of the savings structured into 2015-2018. The bonds will be sold via negotiation the week of Nov. 4.
In addition, Fitch affirms the following Grays Harbor County PUD electric revenue bonds at 'A' although a portion of this amount will be refunded by the 2013 bonds upon closing:
--$113,580,000 electric revenue bonds, series 2005, 2006, and 2010.
The Rating Outlook is Stable.
Fitch has withdrawn the 'A' rating on two series of Grays Harbor County Public Utility District No. 1 (WA) electric revenue bonds, series 2008 and 2010B, as the bonds were not sold.
SECURITY
The bonds are secured by a pledge of net revenues of the electric system.
KEY RATING DRIVERS
DISTRIBUTION SYSTEM: The district is a retail electric system serving a primarily residential customer base of 41,625. Power supply needs are met through a long-term, low-cost purchase power contract with Bonneville Power Administration (BPA).
REDUCED WHOLESALE REVENUES: Low power-market prices have reduced revenues provided by wholesale sales available to support financial margins and metrics. In response, the district has increased its retail rates significantly over the past four years and plans additional increases over the near term, which will provide greater revenue stability.
PROJECTED FINANCIAL IMPROVEMENT: Fiscal 2012 financial performance was adequate for the rating with Fitch calculated coverage at 1.51x and 69 days cash (108 days liquidity) on hand. Financial metrics are projected to improve as the new management team and commission have recommitted the district to achieving financial targets, including 1.75x debt service coverage and rebuilding cash reserves.
WEAK SERVICE AREA ECONOMY: Economic indicators for the district's service area are weak with an elevated unemployment rate of 11.7% and below-average wealth levels. The local economy is concentrated in lumber and wood products, which have been subject to some volatility over the past several years with several mills closing and opening.
MANAGEABLE DEBT: Debt levels for the district are expected to increase modestly but remain satisfactory for the rating with debt-to-funds available for debt service (FADs) projected at 8.7% and equity as a percentage of capitalization at 50.7%. No additional debt is expected over the near term.
RATING SENSITIVITIES
RETAIL RATE FLEXIBILITY: The district's ability and willingness to raise rates to strengthen financial performance and continue the transition of the revenue base away from its previous reliance on wholesale sales is seen as critical for the rating.
CREDIT PROFILE
Grays Harbor provides electric service to nearly all of Grays Harbor County, which is located on the Washington state coast about 110 miles southwest of Seattle. The relatively limited economy is primarily supported by the lumber and wood products industries, fishing, and tourism. The service territory is viewed as weak with an above-average unemployment rate and below-average wealth levels.
HYDROELECTRIC, COST-BASED POWER SUPPLY
The district's advantageous power supply contract with Bonneville Power Administration provides most of the energy needed to serve retail customers at cost-based rates. A portion of the district's Tier 1 power supply is provided under Bonneville's 'slice' product, which gives the district a percentage share of the federal hydroelectric output. Since the slice product was created in 2001, it has generally provided excess energy for resale into the market to the district at certain times during the year and at varying amounts by year, depending on hydrology in the region.
REVENUE-BASE TRANSITION
In the last 10 years, the district was able to subsidize its retail ratepayers through off-system sales of surplus BPA power. However, revenues from off-system sales decreased significantly over the past few years largely due to low wholesale power market prices in the region. Similar to other slice customers, the district continues to adjust its business strategy and rates as it increasingly relies on retail sales to support operations.
The district implemented three rate increases over the past four years and projects annual increases in fiscal 2014 through 2016. The relatively higher retail rates are designed to offset diminished revenues from wholesale sales and to address rising costs from BPA, renewable requirements, and conservation mandates.
The impact of rate changes and declining wholesale revenues are apparent in the changing breakdown of the district's revenues. Revenues from retail sales and wholesale sales were roughly equal in fiscal 2008. Since then, however, the proportion of revenues from retail sales has increased significantly (84% of total revenues in fiscal 2012) while wholesale revenues declined (16% in fiscal 2012).
STRONGER FINANCIAL PERFORMANCE EXPECTED
The district's financial performance is modestly below similarly rated entities but has remained relatively stable, primarily as a result of the on-going transition towards a greater reliance on revenues from retail sales.
Annual debt service coverage has generally stayed above 1.4x over the past five audited years and stood at 1.51x in fiscal 2012. Management projects similar coverage levels in fiscal 2013. Unrestricted cash, which amounted to $17.3 million at the end of fiscal 2012, was equal to a somewhat low 69 days operating expenses. However, overall liquidity levels improve to 108 days on hand after including the district's $10 million line of credit with Key Bank.
Financial performance is projected to strengthen as the district's management has renewed its commitment to achieving financial targets that are incorporated into the budgeting and forecasting process. The district's financial projections, which are based on conservative water estimates, show debt service coverage above 1.8x annually from 2014 through 2017 with cash balances incrementally increasing to $28.5 million at the end of 2017.
Additional information is available at 'www.fitchratings.com'.
This rating action was informed by information identified in Fitch's U.S. Public Power Rating Criteria and Revenue-Supported Rating Criteria.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria' (Dec. 18, 2012);
--'Revenue-Supported Rating Criteria' (June 12, 2012).
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696027
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=805896
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