AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to the following bonds issued by Clark County Public Utility District No. 1, WA (Clark PUD):
--Approximately $45.2 million generating system revenue and refunding bonds, series 2016;
--Approximately $96.4 million electric system revenue and refunding bonds, series 2016.
Bond proceeds will be used to fund capital needs of the electric and generating systems, refund outstanding debt and line of credit draws and pay costs of issuance. Bonds are expected to price via negotiation on Aug. 25, 2016.
In addition, Fitch affirms the 'A+' rating on the following bonds:
--$163.8 million of generating system revenue bonds;
--$139.0 million of electric system revenue bonds.
The Rating Outlook is Stable.
The electric system bonds are payable from the net revenues of the district's electric distribution system after payment of distribution system operating expenses, inclusive of generation system costs (including debt service).
The generation system bonds are payable from net generation system revenues, including payments from the electric distribution system pursuant to take-or-pay contract.
KEY RATING DRIVERS
CONSOLIDATED GENERATING AND ELECTRIC SYSTEMS: The operations of Clark PUD are composed of an electric distribution system, a generation system and a water system. The three utilities are separately financed. However, Fitch views the electric distribution and the generation systems as a consolidated utility, given that the electric system is the sole project participant and contractually bound through a take-or-pay contract to pay for the generating system debt.
DIVERSE POWER SUPPLY PORTFOLIO: The district's power supply is well-positioned against the hydrological variability that dominates the regional power market. A long-term block/slice contract with Bonneville Power Administration (Bonneville; rated 'AA'/Stable Outlook) accounts for the majority of the district's power supply and is supplemented by a mix of owned natural gas generation and long-term, renewable purchase power agreements.
HEALTHY FINANCIAL METRICS: Financial performance has been healthy, boosted by stronger wholesale sales than budgeted. Combined Fitch calculated debt service coverage was 1.73x in fiscal 2015. Stronger cash flows have allowed the district to bolster its rate stabilization fund balance, bringing the combined unrestricted funds to a strong 147 days in fiscal 2015.
NO LOAD GROWTH EXPECTED: The district benefits from a heavily residential customers base, which provides stability in energy usage. Growth in energy sales is expected to be flat even with a modest 1% customer growth rate, given energy efficiency advancements.
COMPETITIVE ELECTRIC RATES: Retail rates are competitive with similarly-sized municipal utilities in the region. The lack of additional projected rate increases until 2020 should enable Clark to retain rate flexibility.
STRONGER FINANCIAL MARGINS: A consistent trend of stronger financial margins could result in positive rating movement.
Clark PUD owns and operates three utility systems: electric distribution and electric generation that serve the entirety of Clark County, WA and a water system that serves the unincorporated portions of the county. Clark PUD is one of the largest publicly owned utilities in the Pacific Northwest, serving 198,792 electric customers. Clark County is located in the southwest corner Washington State, across the river from Portland, Oregon. The district's service area is approximately 657 square miles and is coterminous to Clark County. The county's economy is diverse and benefits from its proximity to Portland.
DIVERSE POWER SUPPLY
Clark PUD has a diverse power supply mix, given its ownership of a 248 MW combined-cycle natural gas plant in a region dominated by hydro-electric generation. Clark's generating system was created in 1995 as an alternative to increasing purchases from BPA. The River Road power plant was constructed and is owned by the Clark generating system with the full output sold to Clark's electric system. River Road provided approximately 33% of Clark's power supply in 2015.
The majority of the electric system's power is still supplied by Bonneville (approximately 51% in 2015). Bonneville's power supply is almost entirely carbon-free, which still puts Clark in a strong position to comply with Washington's renewable portfolio standard. Clark converted its contract with Bonneville in 2012 to include a 'slice' component that provides Clark with a share of Bonneville's full resource portfolio. The new contract provides additional risk and upside to Clark by moving the responsibility for firming and shaping the hydrological output on the Bonneville system to Clark from Bonneville. The Bonneville contract extends through 2028 at cost-based rates and Clark is entitled, but not obligated, to extend its purchases from Bonneville at cost-based rates beyond 2028.
WHOLESALE REVENUES PROVIDE REVENUES ABOVE BUDGET
In most months, the Bonneville contract and Clark's own resources provide it with an energy surplus, which provides an opportunity for wholesale sales. The exposure to wholesale markets creates variability in energy sales and financial metrics, due to fluctuations in water levels and market pricing. However, Clark's conservative financial planning assumptions have resulted in actual results that exceed budget. While wholesale energy sales have increased since 2012, they still account for less than 10% of operating revenues. The robust rate stabilization fund and contingency reserves in the budget should reduce the downside impact low wholesale sales could have on financial margins.
SOUND FINANCIAL PERFORMANCE
Financial performance over the past five years has been healthy. Fitch calculated debt service coverage (DSC) on a combined basis (including the electric and generating systems) has ranged between 1.7x and 2.0x over the past five years. Fitch DSC also include revenues collected prior to Clark's designation of excess funds in fiscals 2011-2014 into the rate stabilization fund and revolving fund. DSC, after the transfer of revenues to designated funds, was still healthy at between 1.1x and 1.8x. The district projects that its financial metrics over the next five years should be in a similar range to recent levels.
Financial metrics above the district's conservative base case forecast have resulted from stronger wholesale market sales than assumed. While many utilities have wholesale market energy sales that fluctuate depending on hydrology and market prices, including Clark, Clark's ability to make sales into the wholesale market from River Road when not needed to meet its retail load depends on natural gas prices instead of hydrology. Natural gas prices have been quite low, making the plant dispatch economic even given the low market prices. Robust revenues have been used to build the district's rate stabilization fund.
Unrestricted funds at fiscal year-end 2015 were $160.9 million or 147 days cash and investments, including the $50.4 million rate stabilization fund at the electric system. Fitch notes that these cash balances, as shown in the audit, include construction funds and the principal and interest fund that are available for the payment of debt service. Both the electric and generating systems maintain lines of credit ($20 million for the generating system and $27 million for the electric system), which bring Fitch's days liquidity on hand metric to 186 days.
Debt is relatively evenly split between the distribution and generation systems with $210 million outstanding in electric system revenue bonds and $167 million in generating system revenue bonds at the end of fiscal 2015. The series 2016 bonds include approximately $40 million and $29 million in additional debt for the electric and generating systems, respectively. On a combined basis, debt to funds available for debt service (FADS) at fiscal year-end 2015 was 4.8x.
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