SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to the following Cowlitz County Public Utility District No. 1 (Cowlitz PUD), WA revenue bonds:
--$38,670,000 electric distribution system revenue refunding bonds, series 2015B.
In addition, Fitch affirms the 'A' rating on the following outstanding obligations of the district:
--$60,495,000 Production system revenue and refunding bonds series 2006, series 2014, and series 2015;
--$157,555,000 Electric distribution system revenue and refunding bonds, series 2006, 2007, 2010A, 2010B, and 2015.
The Rating Outlook on all bonds is Stable.
Purpose: Electric system bond proceeds will refund a portion of the outstanding electric distribution system revenue bonds, series 2007, and pay the costs of issuance. The bonds will be sold via negotiated sale the week of Nov. 17.
SECURITY
The electric distribution system revenue bonds are payable from net revenues of the electric distribution system. The production system bonds are payable from production system revenues, consisting of payments from the distribution system.
KEY RATING DRIVERS
COUNTYWIDE ELECTRIC SERVICE PROVIDER: Cowlitz PUD provides electric service to approximately 48,507 customers in Cowlitz County, WA. The district maintains two systems: a production system (largely consisting of the Swift No. 2 hydroelectric project) and an electric distribution system.
SATISFACTORY FINANCIAL METRICS: The district's 2014 financial metrics remained generally in line with similarly rated entities. These include Fitch-calculated consolidated debt service coverage (DSC) and coverage of full obligations of 1.65x and 1.19x, respectively, and strong liquidity at 176 days. A 7.5% rate increase in September 2015 should support stable financial performance over the near term.
LIMITED ECONOMY; CUSTOMER CONCENTRATION: The local economy is limited with a concentration in wood-related industries and transportation/shipping. Economic indicators for the district's service area are somewhat weak. The top two customers accounted for a very high 66.7% of energy sales and 51.9% of energy revenues in 2014. The limited net margin on sales to these customers lessens the direct financial effect to a manageable level; however, these customers are among the county's largest employers and their impact on the local economy is significant.
LOW-COST POWER SUPPLY: Rates remain relatively low and competitive in large part due to a favorable purchase power agreement with the Bonneville Power Administration (BPA), which supplies the bulk of the district's power.
REDUCED RELIANCE ON WHOLESALE SALES: A series of rate increases since 2009, including a 17.5% increase in 2011, incorporated the cost of the district's wind generation resources and the loss of very low cost hydropower resources into the retail rate base, reducing the district's reliance on wholesale sales to support financial performance.
RATING SENSITIVITIES
SERVICE AREA ECONOMY: An economic contraction, particularly one driven by the closure of a large industrial customer, could lead to diminished rate flexibility or financial pressure, negatively affecting the rating.
CREDIT PROFILE
Cowlitz PUD provides electricity to approximately 48,507 customers throughout Cowlitz County, WA. The district maintains two systems, but Fitch analyzes Cowlitz PUD on a consolidated basis as the two systems are closely interconnected. The district has covenanted, on a take-or-pay basis, to make sufficient payments from the electric distribution system to support the production system's debt service costs.
IMPROVED FINANCIAL PERFORMANCE
Financial performance and metrics have improved notably since 2010 as rate increases, modestly higher wholesale power prices, and less capital spending have increased DSC levels and bolstered cash balances. Fitch calculated DSC was 1.65x and 1.59x in 2014 and 2013, respectively. Fitch-calculated coverage of full obligations, which is adjusted for purchase power costs (net of Swift No. 2 expenses), was 1.19x and 1.17x, respectively, in 2014 and 2013.
The district's cash balances have increased significantly over the past few years, following a period where the district spent a large portion of its reserves to finance its share of the White Creek and Harvest wind projects. However, since then, management has prudently made rebuilding reserves a priority. At the end of 2014, cash balances, including dedicated rate stabilization funds, totaled $110.6 million (176 days cash on hand), more than double the ending balance of $41.8 million in 2011 (77 days).
Financial performance is expected to remain stable in 2015 with management projecting consolidated debt service coverage at 1.64x. The projected results are supported by the district's conservative budgeting practices and a retail rate increase of 7.5% (effective September 2015). The rate increase offsets an effective 5% increase to the district's cost of power from a recent BPA rate increase, and a reduction in non-industrial sales, which have been affected by the mild winter.
HIGHLY CONCENTRATED CUSTOMER BASE
The district's customer base is largely residential, accounting for approximately 89% of customers in 2014. However, electricity sales and revenues are dominated by industrial customers that make up less than 1% of the total customer base. Industrial customers as a class accounted for 78.7% of retail MWh sales and 63% of retail revenues in 2014.
The district's two largest industrial customers - Weyerhaeuser and KapStone Paper - account for the bulk of retail MWh sales and revenues at 66.7% and 51.9%, respectively, in 2014. Rating concerns regarding customer concentration are partly addressed by the limited assets owned to serve these customers, the pass-through provisions included in the power-sales contracts, and the relatively thin margins made on these sales.
Management estimates that the potential rate impact from the loss of these two customers is about 3.1%. However, the indirect effect could be potentially more significant as Weyerhaeuser and KapStone Paper are the county's largest employers, representing approximately 8.4% of total county employment.
For more information about the district, please see Fitch's new issue report 'Cowlitz County Public Utility District No. 1, Washington', dated May 15, 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
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=993429
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993429
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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