NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following Public Utility District No. 2 of Grant County, WA's (Grant County) electric system revenue and refunding bonds:
--$162,320,000 series 2011-I.
The 2011-I electric system revenue and refunding bonds are being issued to fund a 230kv transmission project, ongoing capital improvements, as well as refunding and defeasing outstanding 2001 bonds. The 2011-I bonds are expected to sell via negotiation the week of Sept. 19, 2011.
In addition, Fitch affirms Grant County's outstanding ratings as follows:
--$173.4 million electric system revenue bonds at 'AA';
--$211,000,000 Priest Rapids hydroelectric project revenue bonds at 'AA';
--$360,370,000 Wanapum hydroelectric project revenue bonds at 'AA';
--$345,690,000 Priest Rapids Project revenue bonds at 'AA'.
The Rating Outlook on all bonds is Stable.
SECURITY
The bonds are payable from the electric system revenue bond fund after payment of operating expenses and priest rapids project resource obligations.
KEY RATING DRIVERS
Low-Cost Power: The 'AA' rating reflects Grant County's exceptionally low-cost and carbon-free power resources which translate into very low and competitive retail and wholesale electric rates.
Priest Rapids Project Output: Grant County benefits from 62% of the physical output from the Priest Rapids Project (Priest Rapids and Wanapum hydro facilities) as well as the potential to access 30% more of the output through a financial entitlement.
Industrial Customer Concentration: Industrial customer concentration is a significant risk for Grant County, which will become more pronounced if the economic recovery softens and longer-term growth prospects in the region are negatively impacted. Industrial customers represented 56.7% of energy sales and 47.9% of electric system revenues in fiscal 2010 which have increased as new customers have been added or current customers increased demand.
Proactive Rate Increases: Financial projections for 2011 and beyond show improved metrics and coverage over 2010 driven by more normal hydrological conditions, as well as recent and prospective electric system rate increases through 2015. Future rate increases have been preliminarily approved by the board during the most recent budget review and are central to Grant County's ability to adequately meet debt service requirements given future debt needs. Additionally, the rate increases will allow the electric system to rebuild its cash position to provide increased flexibility during low water years.
Variability in Hydro Conditions: Grant County's financial performance is heavily linked to hydro conditions in the Pacific Northwest, given the reliance on hydro power to meet its native load, which can result in supplemental power purchases in low-water years.
Management of Wholesale Sales: Grant County will have to manage moderately greater net secondary wholesale power sales due to the revised power sales contracts (2005 and 2009) which resulted in the system gaining a larger share of the hydro projects' output in most years. While this will require more managerial oversight and counterparty involvement, it could also benefit the system in years where favorable hydro conditions provide for ample surplus sales and the resultant increase in net income to the system.
Increasing Leverage: Leverage is expected to increase from an already relatively high position with significant debt expected to be issued for the Priest Rapids project over the next five years.
Growing Sales and Customer Base: Grant County has seen a significant increase in customer sales, despite the broader economic recession, driven largely by new industrial customers as well as increased demand by existing customers.
WHAT COULD TRIGGER A RATING ACTION
Managing Increased Debt: Negative rating pressure could occur if Grant County fails to improve financial metrics - specifically debt service coverage and days cash on hand from historically low points in 2010 - given its increasing debt burden.
CREDIT PROFILE
Retail System with Significant Hydro Capacity
The system's electric operations consist of the Grant County Public Utility District retail distribution system and the Wanapum and Priest Rapids hydroelectric generating projects. The hydroelectric facilities are separately financed and accounted for relative to the electric distribution system. The distribution system is currently entitled to 62% of the combined projects' hydro output and costs, but it can take up to the maximum 92% of the projects' combined output (62% physical delivery and 30% financial) which provides flexibility as the district's retail load grows. The electric distribution system provides service to approximately 46,000 retail customers, which continue to exhibit sales growth despite the economic downturn. The separately secured and financed hydroelectric projects have a combined nameplate generating capacity of 1,993.6 megawatts (MW).
Low Cost Hydro Resources
A key strength is the exceptionally low cost of the projects' hydropower production. As of Dec. 31, 2010, the Priest Rapids and Wanapum hydro projects produced power at an average cost of just 1.97 cents per kilowatt hour (kWh) and an all in average cost of 2.18 cents per kWh. This continues to compare favorably to the region's biggest power player, Bonneville Power Administration (BPA), with an average wholesale preference power cost of approximately 2.87 cents per kWh for 2010. Going forward, with planned capital expenditures at the projects totaling roughly $862 million over the next five years (turbine replacement and fish/wildlife protection costs), the cost of the projects' hydro will rise into the 2.0 cents-2.2 cents per kWh range, which is still very competitive for the region and less than what BPA's cost of hydropower is likely to be. Additionally, the district benefits from a very carbon-free power resource base.
Financial Performance
Grant County financial performance is largely tied to hydro conditions in the Pacific Northwest. Fiscal 2010 financial metrics were lower than historical figures due to a below average water year (81% of average water) and increased debt service costs associated with Priest Rapids Debt. These two factors resulted in both lower debt service coverage (DSC) levels of 1.73 times (x) in FY 10 vs. 2.51x in FY 09, as well as reduced days cash on hand with 255 days cash on hand (DCOH) in FY 10 vs. 321 in FY 09. While DSC was low for FY 2010, the available cash provided sufficient flexibility during the low water year and the 255 DCOH was still strong. Fiscal 2011 metrics are tracking above Fiscal 2010 and are expected to continue that trend due to an above average water year (approximately 130% of average water) as well as a 6% rate increase that went into affect in February 2011. Following a decade with few base rate increases, Grant County is forecasting multi-year rate increases that are essential to the system improving its financial strength and maintaining its flexibility during a period of escalating debt costs and unpredictable hydro conditions.
Capital Plan
Grant County's five-year capital plan (2011-2015) is currently projected to be $221 million for the electric system and $641 million for the Priest Rapids Project. Approximately 45% of the electric system spending is expected to be debt funded during the five-year period. After the 2011-I issuance, no new debt is expected for the electric system. With respect to the Priest Rapids Project capital plan, 100% is expected to be debt funded with new debt expected in 2013 and 2015.
Customer Concentration
The largest customer of the electric system represents 16% of retail sales and the 10 largest customers represent 42% of retail sales. While there is some diversification with respect to industrial customer type, the above average industrial customer concentration remains a risk.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from CreditScope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 20, 2011);
--'U.S. Public Power Rating Criteria' (March 28, 2011).
For information on Build America Bonds, visit 'www.fitchratings.com/BABs.'
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=613065
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