NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A+' rating on $260.4 million of electric utility system revenue bonds issued by Eugene, OR on behalf of Eugene Water and Electric Board (EWEB).
The Rating Outlook is Stable.
The bonds are secured by and payable solely from electric system net revenues.
KEY RATING DRIVERS
RETAIL SYSTEM, AMPLE SUPPLY: EWEB is a vertically integrated electric system that draws on a power supply that is relatively balanced between owned resources and purchased power mainly from Bonneville Power Authority (BPA). Capacity is sufficient to meet projected load growth and provides excess power for resale in most years. However these nonfirm, short-term sales are subject to variability in hydrological conditions and market prices, which creates variability in revenues.
FINANCIALS STABILIZING: Financial metrics weakened considerably in 2008 through 2012, largely affected by lower pricing in the wholesale market, which reduced revenue from off-system sales. Enacted base rate increases in 2012 through 2014 have begun to take hold, bolstering financial metrics from the low point experienced in 2012.
RATE COMPETITIVENESS: Retail rates are inline with neighboring utilities and rate flexibility exists in order to absorb moderate planned rate increases for expected capital needs and likely increased BPA costs.
POSITIVE CHANGES TO RATE STRUCTURE: Recent revisions to EWEB's rate structure include the ability to pass-through BPA rate revisions without board approval and an increase in fixed rate charges. Both changes should ensure more stability in financial metrics and the increased fixed charge should help to insulate the utility from demand fluctuations.
PLANNED DEBT LESSENED: The utility has revised its capital plan downward and funded a portion of its OPEB liability with reserves, in order to lessen anticipated debt issuances. Notable issuances are still planned in 2017 and 2022 however the utility anticipates additional rate increases, to support the planned debt.
MANAGEMENT OF RATES, METRICS: Given Eugene Water and Electric Board's reliance on more volatile off-system sales, the utility's sizable capital plan and anticipated debt issuances, managing electric rate increases will be important to maintaining strong financial performance. Continued stability of EWEB's improved financial metrics could provide upward rating pressure.
EWEB is the largest municipal electric provider in Oregon, serving 90,109 customers within and around the city. The electric system provides service to all of the electric customers within the city's borders, and some industrial and commercial customers outside of the city. There is moderate concentration among EWEB's customers, as the 25 largest account for approximately 25% of retail energy sales (14% of total sales) and 15% of retail revenues. EWEB's largest customer, International Paper, accounts for 17.3% of retail sales and 9.5% of retail revenues.
The city has had relatively modest recovery since the recession and retail energy sales have generally trended down, averaging a decrease in usage of 2% per year since 2008. The local economy has moved away from a historic concentration in lumber and agriculture, and become more diverse. The city's 10 major employers comprise 13% of the workforce and are primarily in the education, government and healthcare sectors. The city's unemployment rate has been steadily decreasing since the recession and compares favorably to both the state and the nation.
SOLID POWER SUPPLY RESOURCES
EWEB's generation resource mix is strong, with all carbon free resources and a healthy balance of purchased power and owned generation. EWEB's power portfolio is predominately hydroelectric, with 60% of its 2014 portfolio provided by hydroelectric resources. Approximately 50% of EWEB's power supply is from a long-term block and slice power purchase contract with BPA. Owned resources include hydro and wind units that accounted for approximately 14% of 2014 power supply. Smaller purchase power contracts and market purchases make up the remaining power supply. EWEB projects native load will remain relatively flat over the next five years and additional power supply will not be needed over the medium to long-term, given that the utility is long on capacity.
The Carmen Smith Hydroelectric Project is EWEB's largest owned generation resource, supplying approximately 6.0% of total energy in 2014. The project's FERC license expired on Nov. 30, 2008. At that time, a settlement agreement was reached for relicensing and the new license was anticipated for 2013. However, the settlement is being reevaluated and the licensing process remains underway. EWEB has requested a stay of licensing decision from FERC until early 2016. This delays a sizable portion of EWEB's anticipated capital plan, and related debt issuance by a few years, which will help to stabilize DSC over the near term.
FINANCIAL PERFORMANCE STABILIZING
EWEB's reliance on hydroelectric-based resources and wholesale sales makes the utility vulnerable to wholesale market pricing. The utility was significantly affected by the drop in pricing in 2008 through 2010, causing a steady weakening of financial metrics over the same period and into 2012. The utility was slow to implement needed base rate increases, instead relying on rate stabilization funds, which led to a decrease in liquidity. The utility enacted base rate increases in 2012, 2013 and 2014, which has begun to stabilize financial metrics.
Debt service coverage (DSC) was 2.29x in 2014, a substantial improvement as compared to the low point of 1.62x in 2012. Unrestricted funds have also begun to recover, as shown through days cash on hand of 153 days, as compared to 108 in 2012. In addition to enacted rate increases, management also reduced operating expenses and its CapEx program.
The long-term financial plans show DSC remaining between 1.75x - 2.0x, which includes other income of approximately $10 million per year and anticipates multiple base rate increases. EWEB generally outperforms projections, as they are based on water flows that are only 90% of average. Implementation of planned rate increases, leading to a track record of stable financial performance at EWEB's current level would be viewed favorably and could provide upward rating pressure.
CHANGES TO RATE STRUCTURE
Management and the board have been focused on rate redesign. Recent revisions to the rate structure include providing management with the ability to pass-through BPA rate changes without board approval and increasing fixed rate charges. Both changes should ensure more stability in financial metrics and the increased fixed charge should help to insulate the utility from demand fluctuations. A set target for the amount of fixed costs to be recouped has not been set, but management is working with the board to decide on the appropriate level
While transitioning to a higher fixed cost charge, EWEB has been keeping the demand charge stable or decreasing, in order to keep retail rates relatively steady. EWEB targets a retail rate that is middle of the pack, as compared to neighboring utilities. EWEB's average retail rate is only approximately 6% above average, as compared to neighbors and will become more competitive as EWEB's rate are held steady and other regional utilities are preparing for rate increases.
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