NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'A-' rating on the following Klickitat County Public Utility District No. 1, WA (the district) electric revenue bonds:
--$5.37 million electric system refunding revenue bonds, series 2011A;
--$8.24 million electric system revenue bonds, series 2011B;
--$14.3 million electric system revenue bonds, series 2009A;
--$22.3 million electric system revenue bonds, series 2009B;
--$17.6 million electric system revenue bonds, series 2006A;
--$71.4 million electric system revenue bonds, series 2006B.
The Rating Outlook is Negative.
Fitch has withdrawn the 'A-' rating on the Klickitat County Public Utility District No. 1 (WA) electric revenue bonds series 2009C (taxable Build America Bonds-Direct Payment) as the bond was not sold.
SECURITY
Bonds are secured by net revenues of the electric system, and do not include system revenues received from the district's water and wastewater system.
KEY RATING DRIVERS
NONTRADITIONAL HYDRO UTILITY: The district's operating profile is less traditional than other retail systems that Fitch rates, as its business lines extend beyond simply generating or procuring power and delivering it to retail customers. While the margins generated by diverse business lines can help offset costs to retail customers, they also add layers of risk that are much less prevalent, if they exist at all, in traditional retail systems.
DEPENDENCE ON WHOLESALE REVENUES: Wholesale revenues accounted for 16.3% of total operating revenues in fiscal 2011, but have ranged from 11.5% to 31.5% over the last five years. This exposure to wholesale market price volatility played a significant role in the weak financial performance during fiscal 2010 and 2011. Projections point to wholesale revenues accounting for 26.3% of total operating revenue by 2014.
COMPLETION OF LANDFILL GAS PROJECT PHASE II: The district completed its H.W. Hill landfill gas project in October 2011. The plant is currently running at full capacity based on the available amount of methane gas. The project is expected to boost and diversify district revenues and account for about 20% of 2014 projected revenue.
WEAK FINANCIAL PERFORMANCE: The district is working to address its weak 2010 and 2011 operating performance through the implementation of multiple rate increases to offset reduced retail and wholesale revenues, rising debt costs, and the effect of a delay in the second phase of the landfill gas project.
SMALL BUT STABLE RETAIL BASE: The district's native load is very small, but the utility serves a stable customer base of 12,157 retail customers, 82.5% of which are residential. The five largest customers represented a moderate 8.7% of total operating revenues in 2011.
WHAT COULD TRIGGER A RATING ACTION
CONTINUED FINANCIAL INSTABILITY: Meeting projected performance targets over the short term is critical to maintaining the 'A-' rating given the district's weakened operating profile and dependence on less predictable wholesale revenues.
FAILURE TO MARKET SURPLUS CAPACITY: Difficulty in finding a market for the district's surplus wind and landfill gas capacity could pressure revenue and necessitate sizeable rate adjustments to cover related costs. Longer term contracts to purchase capacity would be viewed favorably.
FAILURE TO MEET INCREASING DEBT SERVICE REQUIREMENTS: The district's debt service will increase approximately $2 million in 2017, and the 'A-' rating is predicated on the utility adequately raising rates and stabilizing revenues to meet the increased requirements.
CREDIT PROFILE
Non-traditional Business Operations
The district is a retail electric system located in south central Washington, providing service to 12,157 customers in a predominantly rural territory. Power is mainly supplied by Bonneville Power Administration (BPA), under the terms of a long-term contract. Recent investments in renewable energy projects (landfill gas and wind) have positioned the utility with excess generating capacity and energy production. The district is therefore reliant on off-system energy and transmission sales to keep customer electric rates low and bolster financial metrics. The district owns transmission lines from various wind projects and therefore has long-term transmission service agreements with the earliest renewal in 2022. Fitch views the district's transmission business as producing a predictable and stable cash flow stream. Transmission accounted for 15.6% of total operating revenue in 2011.
Completion of H.W. Hill Landfill Gas Project
Fitch views the completion of the landfill gas project favorably and believes that securing contracts for the project's capacity is a key credit driver.
As of March 2012, all available output has been sold for the remainder of 2012 and all of 2013, thereby eliminating market risk for that period. Management has indicated a preference for varied short-term and longer-term contracts and is currently looking to market capacity for the period 2014-2016. Typically, renewable energy production costs are higher than hydro power, but landfill gas qualifies to meet state mandated renewable portfolio standards, and is also a more reliable and cost efficient resource compared to wind and solar, making it a more attractive option for offtakers.
The new combustion turbine generators and the steam cycle went online in October 2011 and April 2012, respectively. The plant is currently generating 18 megawatts (MW) and is expected to grow by 1.5 MW annually until the project reaches its 26 MW capacity. Most of the energy from the project is in excess of the district's native load and historically has been sold either under contract or in the open market.
Weak Financial Performance
The district's financial metrics are weaker than comparable 'A-' Fitch-rated systems, but were largely unchanged compared to 2010. Fitch calculated coverage slipped to 1.23x in 2011 from 1.27x. As the district strengthens its operations and finances following last year's performance, management expects long-term coverage to improve 1.40x by 2014. Planned rate increases and contracted landfill gas capacity should help boost financial metrics. Management expects 1.17x coverage for fiscal 2012.
Liquidity remains strong with 175 days cash on hand for fiscal 2011, above the median for the rating notch. The district's initial plan to draw down its rate stabilization fund to meet debt service coverage did not materialize in 2011. Rate stabilization funds totaled $2.4 million at year end 2011.
Leverage is high for this size system. Fiscal 2011 debt-to-funds available for debt service was 17.9x as debt service increased due to the 2011 debt issuance and weaker cash flow. Debt per customer for the district is one of the highest among Fitch-rated credits at $11,831. The district has an increasing debt service profile but Fitch expects revenue from the landfill gas project and rate increases to offset this anticipated rise in debt service.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'U.S. Public Power Rating Criteria' (Jan. 11, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=665815
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