SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to the following bonds issued by Grays Harbor County Public Utility District No. 1, WA (the district):
--$13,090,000 electric revenue refunding bonds, series 2016.
Fitch has affirmed the 'A' rating on the following bonds issued by the district:
--$128 million electric revenue bonds, series 2005, 2006, 2010 2013, and 2015.
The Rating Outlook is Stable.
Proceeds from the bonds will current refund a portion of the outstanding series 2006 bonds for savings and pay the costs of issuance. The bonds will be sold via negotiation the week of Sept. 12.
SECURITY
The bonds are payable from the net revenues of the district's electric system.
KEY RATING DRIVERS
RETAIL ELECTRIC SYSTEM: The district provides retail electric services to a largely residential customer base of 41,625. Retail MWh sales have continued to decline since 2011 due to mild weather and weak economic conditions.
FINANCIAL IMPROVEMENT IN 2016: The rating and Outlook reflect Fitch's expectation, supported by actual performance through June, of financial improvement in 2016 relative to 2015 (unaudited). Financial metrics in 2016 are projected to be in line with historical results after declining notably in 2015 due to declining revenues and rising expenses, including several one-time items.
COMPETITIVE RATES: Electric rates remain competitive despite significant rate increases since 2010. Retail rates have risen to offset a sharp and persistent decline in wholesale revenues stemming from continued weakness in market prices. Future rate increases are expected to be relatively modest.
HYDRO-BASED POWER SUPPLY: Power supply needs are largely met through a favorably priced contract with the Bonneville Power Administration (BPA) that exposes the district to hydrology risk and a variable energy supply. The district is compliant with the state's renewable portfolio standard through contracts for wind and biomass cogeneration resources.
LIMITED ECONOMIC BASE: The district's service area is economically limited with elevated unemployment rates, below average income levels, and industrial concentration in lumber and wood products. Customer concentration is moderate with the top 10 customers accounting for 15.2% of revenues.
RATING SENSITIVITIES
CONTINUED WEAKNESS IN FINANCIAL PERFORMANCE: Fitch may downgrade Grays Harbor County Public Utility District's rating if financial performance does not continue to improve in 2016, raising financial metrics to levels consistent with the district's historical performance and rating category medians.
CREDIT PROFILE
Grays Harbor provides electric service to nearly all of Grays Harbor County, which is located on the Washington state coast about 110 miles southwest of Seattle. The utility serves a predominately residential (85%) customer base of approximately 41,675. The overall number of customers served by the district has remained relatively stable over the past several years, although MWh sales have declined approximately 9% from 2012 through 2015 due to mild weather, weak economic conditions, and other factors.
The relatively limited economy is primarily supported by the lumber and wood products industries, fishing, and tourism. The service territory is viewed as somewhat weak, with an above average unemployment rate and below average income levels.
The district meets the majority of its load requirements through an advantageous long-term power contract with BPA. Prior to 2008, the district was able to subsidize its retail ratepayers through off-system sales of surplus power. However, revenues from off-system sales decreased significantly alongside wholesale market prices beginning 2009. The district continues to adjust its business strategy and electric rates as it increasingly relies on retail sales to support operations.
Weak 2015 Financial Performance
The district's financial performance declined notably in 2015 due to both declining revenues and rising expenses. Operating revenues fell by approximately $2.9 million (2.4% of 2014 operating revenues) as retail MWh sales declined by 2.7%, offsetting the potential positive impact from recent rate increases, and wholesale revenues continued to be pressured by low market prices.
Operating expenses were approximately $5 million higher (4.4% of 2014 operating expenses) in 2015 compared to 2014. Higher expenses were driven by several factors, including certain one-time and nonrecurring items such as a $2.7 million write-off of bad debt expense, $608,000 for increased pension costs due to the implementation of GASB 68, and $357,000 in storm recovery expenses that are expected to be reimbursed by FEMA.
Financial metrics in 2015 were well below the district's historical norm with Fitch-calculated debt service coverage, adjusted to remove the $2.7 million bad debt expense from operating expenses, at just 1.30x. Debt service coverage would have fallen just below 1.0x if the bad debt expense was kept as an operating expense. Fitch views the write-off, which occurred following the implementation of a new financial system that identified improperly aged receivables stretching back as far as 20 years, as a one-time and nonrecurring expense and, therefore, removed it from operating expenses in calculating coverage.
Liquidity levels also fell in 2015 with an ending unrestricted cash balance of $15.8 million or 56 days cash compared to $20.9 million or 75 days cash at the end of 2014. The district retains an additional source of liquidity through a $10 million line of credit with Bank of America N.A. that has not been drawn on. The district's liquidity increases to 91 days after including the line of credit.
Financial Improvement Expected in 2016
The rating and Stable Outlook reflect Fitch's expectations that the district's financial performance will return to more baseline levels in 2016. Actuals through June 2016 support the expectation of improved financial performance with district revenues $2.3 million higher than expenses and retail revenues up $2.7 million over the same period in 2015. The improved revenue performance is due to rate increases and increased MWh sales brought about by more normal weather patterns. Operating expenses are consistent with budgetary expectations.
Management projects debt service coverage of over 2.0x without considering the savings from the current refunding or BABs subsidy payments on the series 2010 bonds.
The district's five-year financial forecast reflects financial performance in line with years prior to 2015 and consistent with the current rating.
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=1010996
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010996
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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