SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings affirms the 'A-' rating on the following bonds issued by the Boise Kuna Irrigation District, Ada and Canyon Counties, ID's Arrowrock Hydroelectric Project (Arrowrock):
--$2.2 million Arrowrock revenue bonds, series 2008A;
--$38.6 million Arrowrock revenue refunding bonds, series 2015.
The Rating Outlook is Stable.
The bonds are non-recourse revenue obligations of the issuer (Boise Kuna Irrigation District) and are payable solely from the funds pledged under the long-term power sales contract with Clatskanie People's Utility District (Clatskanie).
KEY RATING DRIVERS
SMALL HYDROELECTRIC PROJECT: Arrowrock is an 18 MW hydro unit owned and operated by five irrigation districts. Project performance has been mostly sound since commercial operation began in 2010, with a short period of non-operation due to low hydrological conditions.
CONDITIONAL POWER SALES CONTRACT: Clatskanie People's Utility District (Clatskanie) is the purchaser of 100% of Arrowrock's output. The power sales contract requires Clatskanie to purchase the full output of the project and make payments sufficient to pay the project's O&M and debt service obligations. Fitch views Clatskanie's financial and credit profile as supportive of the 'A-' rating on the bonds.
PAYMENTS SUBJECT TO PERFORMANCE: Clatskanie's payment obligation is suspended if the project fails to produce electricity for 24 consecutive months or if net output for 48 months averages less than 20,000MWh per year.
CLATSKANIE's CUSTOMER BASE CONCENTRATION: Clatskanie's operating revenues are highly concentrated in a single large customer, Georgia-Pacific Corporation (Georgia-Pacific), with two paper mills accounting for approximately 81% of retail revenues in 2015 (unaudited).
RATE INCREASE TO IMPROVE METRICS: Clatskanie's financial metrics are adequate for the rating and expected to improve modestly in 2016 due to recent rate increases. Fitch-calculated debt service coverage and coverage of full obligations in 2014 were 3.56x and 1.32x, respectively. Cash on hand increased in 2014 to 58 days and liquidity levels are augmented by revolving lines of credit totaling $6 million. Unaudited figures for 2015 indicate that coverage levels will decline modestly.
PROLONGED OPERATIONAL PERFORMANCE: The Boise-Kuna Irrigation District hydroelectric project has exceeded the minimum performance measures to date, although the project did not generate power for a three-month period in 2013 due to very low hydrology conditions. Negative rating action will occur if operational performance approaches either of the two payment suspension triggers.
LOSS OF LARGE CUSTOMER: The loss of one or both of the Georgia Pacific paper plants as customers of the Clatskanie People's Utility District is an ongoing concern and would result in downward rating pressure, as Clatskanie would need to significantly raise rates to maintain adequate financial metrics to support the rating.
LONG-TERM POWER SALES CONTRACT
The district has entered into a long-term power sales contract with Clatskanie for the sale of the project's net output. The contract expires on March 1, 2039, matching the expiration of the FERC license for the project. The final bond payment, which is made June 1, 2039, is structured to be paid from partial-year revenues received through March 1, 2039.
Under the contract's term, Clatskanie pays 90% of the monthly average Dow Jones Mid-Columbia Index for the power. The monthly index price paid is subject to a maximum cap but the capped price is not viewed as a risk to full cost recovery under the contract. If payments due at the monthly index price are insufficient, Clatskanie is required to prepay for the energy in amount sufficient to fully cover operation and maintenance costs of the project and debt service. Due to low market power prices, Clatskanie has prepaid for energy since 2011.
Clatskanie is also required by the contract to maintain its own electric rates sufficient to meet O&M and debt service obligations on the project. The contract requires Clatskanie to continue making payments while it disputes such payments or its obligation to make them.
SOUND PROJECT PERFORMANCE
The project has performed well to date, exceeding the minimum performance standards that would trigger a suspension of Clatskanie's payments. Fitch views the occurrence of a suspension event as unlikely. On both measures, actual performance has far exceeded the minimum requirements. The year 2013 was a dry year with the Boise river run-off at 56% of the historical average. Generation in that year fell to a low of 48,972 MWh, which remained more than double the 20,000 average annual amount required under the sales contract. The project did not generate power for three months in the same year due to the dry conditions, far less than the 24 consecutive month period required to trigger a payment suspension.
Clatskanie's distribution system serves approximately 4,600 predominately residential customers in a 275 mile service territory on the Oregon side of the Washington-Oregon border, approximately 75 miles northwest of Portland. The vast majority of Clatskanie's MWh sales (87%) and operating revenues (81%) are derived from sales to two paper mills owned by Georgia Pacific.
The potential loss of the mills remains an on-going concern, although there is no indication that either mill is closing. The likely rate increase necessary if the mills were to close would be substantial and implementation could present political and economic challenges.
ADEQUATE FINANCIAL PERFORMANCE
Utility financial metrics are adequate and expected to improve over the near term due to the recent rate increases. Operating margins have declined in recent years due to mild winter weather and reduced wholesale revenue. However, debt service coverage and coverage of full obligations remained adequate at 3.56x and 1.32x, respectively, in 2014. Unaudited figures for 2015 indicate that coverage levels will decline modestly relative to 2014 but should improve in 2016 with the implementation of rate increases approved in September 2015.
Clatskanie's liquidity levels remain relatively low, but have improved recently. Cash on hand increased to approximately 58 days in 2014 compared to just 29 days at the end of 2013. Two revolving credit facilities totally $6 million augment liquidity levels.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Public Power Rating Criteria (pub. 18 May 2015)
Dodd-Frank Rating Information Disclosure Form