SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to the following bonds issued by Benton County Public Utility District No. 1 (the district), WA:
--$22,705,000 electric revenue and refunding bonds, series 2016.
In addition, Fitch affirms the following district bonds:
--$49,735,000 revenue bonds, series 2010 and 2011.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from the net revenues of the electric system.
KEY RATING DRIVERS
RETAIL DISTRIBUTION SYSTEM: The district provides electric service to a growing customer base in southeastern Washington. The district's customer base is moderately concentrated with the single largest customer accounting for 11.5% of retail MWh sales and 8.2% of retail revenues in 2015.
ADEQUATE FINANCIAL METRICS: The district's financial metrics remained adequate for the rating in 2015 despite weaker revenue performance driven by a weather-related decrease in retail sales and a drop in wholesale revenues. Financial performance is expected to improve in 2016 as precipitation levels and weather return to more average conditions.
REDUCED EXPOSURE TO WHOLESALE SALES: Regular retail rate increases over the past decade have reduced but not eliminated the district's reliance on wholesale revenues to support financial performance. Wholesale revenues accounted for approximately 12.7% of total operating revenues in 2015, leaving the district somewhat exposed to market pricing and the availability of surplus sales.
FAVORABLE POWER SUPPLY: Power supply needs are largely met through a long-term contract with the Bonneville Power Administration (BPA) that is favorably priced, but exposes the district to hydrology risk and a variable energy supply. Additional resources, particularly contracts for wind energy and renewable energy credits (RECs), keep the district compliant with the state's renewable portfolio standards.
COMPETITIVE RATES: The district's rates are expected to remain competitive despite recent and projected rate increases. Additional increases are planned for two of the next three years to match rising costs from Bonneville Power Administration (BPA) rate increases, system capital needs, and other cost pressures.
RATING SENSITIVITIES
Retail Rate Increases: The rating reflects Fitch's expectation that Benton County Public Utility District No. 1 will continue to implement the rate increases necessary to support financial metrics in line with rating group medians and consistent with historical performance. Failure to do so in the wake of increasing costs would likely result in downward rating pressure.
CREDIT PROFILE
The district provides retail electric services in a 939-square-mile service area of Benton County, Washington. The majority of the district's customers are located within the cities of Kennewick, Prosser, and Benton. The district does not serve certain other areas within Benton County including the cities of West Richland and Richland. It also does not serve the significant operations of the U.S Department of Energy on the Hanford Reservation or the rural areas in the county which are served by the Benton Rural Electric Association.
The district's assets include 89 miles of 115 kV transmission lines, 1,662 miles of distribution lines, 37 substations, and contractual rights to purchase power and renewable energy credits (RECs) under various long-term agreements that exceed the district's power needs under average water conditions. Power supply is predominately met with power purchased from BPA, with remaining requirements met through power purchase contracts and market purchases.
EXPOSURE TO WHOLESALE SALES
Wholesale sales of surplus power continue to play a significant role in the district's financial performance. While the district continues its strategic shift towards a greater reliance on retail sales following the sharp and persistent decline in wholesale market prices since 2008, wholesale revenues still contributed 12.7% of total operating revenues in 2015.
ADEQUATE FINANCIAL PERFORMANCE
The district's financial performance supports the rating and is generally characterized by narrow but adequate financial margins, satisfactory liquidity levels, and coverage levels modestly below but in line with similarly rated peers.
The district's financial performance weakened in 2015 compared to immediately preceding years as revenues declined due to a 2.4% drop in retail MWh sales and approximately $5.6 million less in wholesale revenues than in 2014. The district's operating margin fell to negative 2.4% in 2015 after averaging 3.6% from 2011-2014. Net income in the year was a negative $2.4 million.
Debt service coverage and coverage of full obligations remained adequate for the rating in 2015 at 1.93x and 1.16x, respectively, despite the weaker financial performance. The rating reflects Fitch's expectations that the district's financial performance will improve in 2016, based on management's updated projections that reflect partial-year performance. Financial metrics for 2016 are expected to return to more recent norms for the utility.
Liquidity levels remain satisfactory for the rating. At the end of 2015, the district had $45.5 million in cash and investments or 130 days cash on hand. The district also maintains a $10 million revolving line of credit that raises overall liquidity levels to 158 days on hand.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/site/re/864007
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1011393
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011393
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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