NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to the approximately $240 million electric system revenue and refunding bonds, 2013 series A&B, to be issued by the city of Tacoma, WA (the city) on behalf of Tacoma Power, a department of the city.
The 2013 series A&B bonds, expected to price May 14 (series A) and June 5 (series B), 2013, will mature serially through 2041. Proceeds will be used to: (i) fund a portion of Tacoma Power's capital plan (approximately $94.2 million in new money), (ii) refund the series 2004 and 2005A bonds for savings, (iii) defease the series 2005B and 2007 bonds, and (iv) pay cost of issuance.
In addition, Fitch affirms the following ratings:
--$331.81 million electric system revenue bonds, series 2004A, 2005A, 2010A, B & C at 'AA-';
--$199.13 million electric system refunding bonds, series 2005B and 2007 at 'AA-'.
Fitch has withdrawn the 'AA-' rating on Tacoma (WA) electric system revenue & refunding bonds series 2004B, as the bond was not sold.
The Rating Outlook is Stable.
The bonds are secured by and payable solely from electric system net revenues.
KEY RATING DRIVERS
SOLID POWER SUPPLY RESOURCES: Tacoma Power is a vertically integrated retail electric system that draws on a resource mix balanced between low-cost owned hydro resources and purchased power (primarily from Bonneville Power Administration). Capacity is sufficient to meet projected load growth through at least 2028.
EXPERIENCED MANAGEMENT TEAM: Current management team has an extensive depth and breadth of industry knowledge, along with a proven ability to achieve or outperform financial targets.
COMPETITIVE RETAIL ELECTRIC RATES: Tacoma Power's rates are in line with other Washington utilities and below that of neighboring investor owned utilities. Competitive rates, combined with a history of timely rate approvals, indicate some rate flexibility. Favorably, the utility has been increasing its rate stabilization fund (RSF) balance, which can be drawn on, if needed, to smooth future rate increases.
DIVERSE CUSTOMER BASE: The service area has a diverse economy with a range of industry sectors. Residential sales make up a healthy 48% of retail revenue and the 10 largest customers account for a moderate 17% of retail electric revenues. However, the city economy and rating have been under pressure, as noted by a recent downgrade of the city's general obligation (GO) rating to 'A+' with a Negative Outlook.
WHOLESALE SALES AND HYDROLOGICAL CONDITIONS: Tacoma Power is a net seller into the wholesale power market in most years. These nonfirm, short-term sales are subject to variability in hydrological conditions and market prices, which creates variability in revenues. Favorably, anticipated retail rate increases will help insulate Tacoma Power from future wholesale sales fluctuations.
TELECOMMUNICATIONS EXPOSURE: Tacoma Power operates a telecommunications division, in addition to the electric system, which contributed approximately 13.7% of the utility's operating income in 2012. The telecommunication division's operations are cash flow positive, however, the competitive nature of this business provides an additional level of risk.
MANAGEMENT OF REVENUE STREAMS: Given Tacoma Power's reliance on more volatile wholesale sales and uncertain telecommunication revenues, it is important for the utility to manage these operations together with electric rates in a way that maintains stable financial performance.
Tacoma Power is a division of the city's Department of Public Utilities, which operates the city's vertically integrated electrical generation and distribution facilities and its telecommunications division, the Click! Network (Click). Serving approximately 169,012 retail electric customers, Tacoma Power is one of the largest publicly owned utilities in the Pacific Northwest. Its service area is approximately 180 square miles and encompasses the greater Tacoma area.
The city is located approximately 30 miles south of Seattle in the Puget Sound region. The area has a diverse economy, with industry sectors that include the military, healthcare, manufacturing and wholesale distribution, along with the Port of Tacoma, which is considered an economic engine for the region. The city's GO debt rating was downgraded in July 2012 from 'AA' Stable Outlook to 'A+' with a Negative Outlook. Favorably, Tacoma Power is not required to make transfers to the city's general fund, which somewhat insulates the utility from the city's fiscal problems. The utility is instead charged a gross earnings tax by the city, which is legally restricted to 6% of electric revenues and 8% of telecommunications revenues.
POWER SUPPLY RESOURCES
Fitch views Tacoma Power's asset mix as a predominant credit strength. All of Tacoma Power's resources are carbon free and the utility has a healthy balance of purchased power and owned generation. The majority of Tacoma Power's resources are hydroelectric based, with 41% of its 2012 resource portfolio provided by its four hydroelectric generating projects and 51% provided by a long-term power purchase contract with BPA, the regional federal power marketing agency.
Tacoma Power is a net seller into the wholesale electricity market under most water conditions. Wholesale revenues for any year are based on market prices, loads and water availability for generation, which creates volatility in the utility's overall revenues. Tacoma Power has implemented a series of rate increases to make the utility less dependent on its wholesale sales and strengthen its retail revenue base.
In addition to the power system, Tacoma Power operates Click, its telecommunications division. Maintaining an approximate 20% cable TV market share in a very competitive region, Click provides retail cable TV services to 22,449 customers, in addition to 18,627 internet customers. Click also provides internet service for all city employees, which keeps the city's cost of telecommunications low. Additionally, the cable modem system supports Tacoma Power's 18,371 SMART electric meters throughout its service area.
Fitch views Click as increasing the business risk profile of Tacoma Power due to the competitive nature of telecommunications. This risk is partially mitigated by Click's positive track record of operating the cable and internet system over the last 10-plus years.
Total revenues, inclusive of amounts transferred to the rate stabilization fund, increased slightly in 2012, due to an implemented retail rate increase of 5.8% that was partially offset by a decrease in wholesale sales. Fitch-calculated debt service coverage (DSC), while still healthy at 2.15x, decreased from 2011's 2.44x. DSC is modestly below the peer median level of 2.54x for 'AA-'rated systems. However, coverage of full obligations compares favorably to the median at 1.45x versus 1.36x, primarily due to a nominal transfer to the city's general fund in the form of gross earnings taxes.
The 2013 financing includes $92.4 million of new money, with the remainder used for refunding outstanding series of debt. Tacoma Power's existing debt structure is conservative and amortizes quickly, with approximately 67% of total debt maturing by 2021. The current bond issuance will extend the overall life of debt from 2034 to 2041, past the license date of owned resources and the BPA contract date, introducing some tail end risk.
Financial metrics are projected to remain stable and should not be strained by the current debt issuance. Management projections show Fitch-calculated DSC will average 1.93x through 2017 and unrestricted cash balances will remain above $180 million.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria' (Dec. 18, 2012);
--'Revenue-Supported Rating Criteria' (June 12, 2012).
Applicable Criteria and Related Research
U.S. Public Power Rating Criteria
Revenue-Supported Rating Criteria