NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A-'rating on Boise Kuna Irrigation District ADA and Canyon Counties, ID's $39.3 million Arrowrock Hydroelectric Project (Arrowrock) revenue bonds series 2008 at 'A-'.
The Rating Outlook is Stable.
The series 2008 bonds are non-recourse revenue obligations of the issuer (Boise Kuna Irrigation District) and are payable solely from, and secured solely by, the funds pledged under the long-term take-or-pay power sales contract with Clatskanie People's Utility District (Clatskanie), and other reserve funds available pursuant to the resolution.
KEY RATING DRIVERS
Efficient Hydroelectric Project: The Arrowrock Hydroelectric Project (Arrowrock) is an 18 MW hydro unit owned and operated by five irrigation districts (the districts), four of which are located in southwest Idaho and one in southeast Oregon. Project construction was completed in 2010 ahead of schedule and within budget. Since commercial operation, project performance has been sound.
Long-Term Take-or-Pay Contract: Clatskanie People's Utility District (Clatskanie) is the sole off taker of 100% of Arrowrock's output and thus the power sales contract hinges on Clatskanie's financial performance and ability to meet the project's operations and maintenance (O&M) expense and debt service obligations. Fitch believes that Clatskanie's standalone financial and overall credit profile is supportive of the 'A-' rating on the bonds.
Single Large Industrial Customer: Clatskanie's operating revenues are highly concentrated in a single large customer, Georgia Pacific, a paper mill accounting for 80% of retail sales during 2013. While the loss of this single customer can be partially offset by the remarketing of low cost Bonneville Power Administration (BPA) surplus power, the customer concentration remains a risk.
Stable Financial Metrics: Clatskanie's metrics are supportive of the project's 'A-' rating. Strong debt service coverage (DSC) of 2.6 times (x) in 2013 is balanced by weak liquidity of 29 days cash on hand (DCOH).
Significant Off-System Sales: Clatskanie's financial performance is supported by off-system sales which have generated about 20% of total sales historically. Clatskanie's high DSC provides the utility with the flexibility to absorb the financial impact in years of adverse hydrological conditions and reduced off-system sales.
Low Retail Electric Rates: Residential and industrial rates are among the lowest in the state; however, there is limited rate flexibility due to a price sensitive service area.
Underperforming Arrowrock Operations: Payments by Clatskanie are dependent on the successful long-term operation of the project and minimum water flows through the dam.
Weaker Off Taker Financial Metrics: Clatskanie's ability to meet its obligations pursuant to the power sales contract will remain an important trigger to the rating.
Loss of Single Industrial Customer: The loss of Georgia Pacific is an ongoing concern, as it would leave Clatskanie long power with market risk until they are able to remarket the power.
Long-term Power Sales Contract
In conjunction with the issuance of series 2008 bonds, Clatskanie entered into a power sales contract with the Districts on Sept. 2, 2008 for purchase of the net output generated by the project. The contract will expire on March 1, 2039, coterminous with the date of the expiration of the FERC license. Fitch notes that the debt matures on June 1, 2040 resulting in minimal project tail risk of one year.
Clatskanie agrees to purchase all net output at a price equal to 90% of the monthly average Dow Jones Mid-Columbia Index. Clatskanie is also required to maintain electric rates sufficient to meet O&M and debt service obligations on the project. In the instance where the payments are insufficient to meet project obligations, Clatskanie is required to step up and make prepayments to cover the shortfall if reserves are depleted.
Stable Off-Taker Financials
Clatskanie's financial metrics are adequate, supported by operating margins averaging 4.6% over the last five years. The utility's metrics are supportive of the project's 'A-' rating balanced by continued weakness in liquidity of 29 DCOH in 2013. The utility is well capitalized at 60.7% and has a relatively low leverage metric of 5.2x debt to funds available for debt service (FADS).
DSC deteriorated moderately in 2012 and 2013 due to the absence of colder winter weather conditions but nonetheless remains solid at more than 2.5x.
Single Customer Concentration
Clatskanie's distribution system serves approximately 4,600 predominately residential customers. However, these customers only account for a small portion of the utility's operating revenue. The bulk of Clatskanie's revenues, approximately 80%, is generated from sales to a single large industrial customer, Georgia Pacific, which operates two paper consumer product mills.
Clatskanie sells more than two-thirds of its power to industrial customers directly exposing it to the pulp and paper market and mill operations. Services are provided under the terms of an ongoing contract that may be terminated by either party one year from the date of operation.
While the industrial load has been stable over the last several years, the potential loss of Georgia Pacific is an ongoing concern, as it would leave Clatskanie with excess power subject to market risk until they are able to remarket or reduce the excess power. This concern is partially offset by the low cost of Clatskanie's surplus BPA power, which would facilitate remarketing.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Public Power Peer Study', June 13, 2013;
--'U.S. Public Power Rating Criteria', March 18, 2014.
Applicable Criteria and Related Research:
U.S. Public Power Peer Study -- June 2013
U.S. Public Power Rating Criteria