AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to the following bonds issued by the city of Eugene, OR on behalf of the Eugene Water and Electric Board (EWEB):
--Approximately $96.5 million electric system revenue and refunding bonds, series 2016A;
--Approximately $22.8 million electric system revenue and refunding bonds, series 2016B.
Bond proceeds will refund around $124.6 million in outstanding debt for savings primarily in the next six years and pay costs of issuance. The final maturity of the bonds is not being extended. Bonds are expected to price on Aug. 23, 2016 via negotiated sale.
In addition, Fitch upgrades the rating on $198.8 million of parity electric utility system revenue bonds to 'AA-' from 'A+'.
The Rating Outlook is Stable.
The bonds are secured by electric system net revenues.
KEY RATING DRIVERS
IMPROVED PROFILE DRIVES UPGRADE: The upgrade reflects Fitch's expectation that improved financial margins will be sustained and that leverage will decline following retail rate increases, rate restructuring towards greater fixed revenues, revisions in capital spending, and the use of cash reserves and proceeds from an asset sale to reduce EWEB's debt burden.
RETAIL UTILITY: EWEB is a mid-size retail utility governed by an independent, elected Board of Commissioners with full rate-setting authority. The utility provides electric and water service primarily within Eugene, OR.
HYDROELECTRIC POWER SUPPLY: EWEB's power supply is balanced between owned resources and purchased power but concentrated in hydroelectric generation, as is the case with many utilities in the region. Capacity is sufficient to meet projected load growth and provides excess power for resale in most years. However these non-firm, short-term sales are subject to variability in hydrological conditions and market prices, which creates variability in revenues.
IMPROVED FINANCIAL PERFORMANCE: Financial metrics weakened considerably in 2008 through 2012, largely affected by lower pricing in the wholesale market, which reduced revenue from off-system sales. Rate increases and rate restructuring implemented since 2012 have strengthened EWEB's financial position.
RATE COMPETITIVENESS: Even with recent rate increases of 5% annually in fiscals 2012-2014, retail rates are competitive with neighboring utilities. EWEB has limited additional projected rate increases in the next five years beyond likely increases in Bonneville Power Administration's (BPA) power supply costs.
LOWER CAPITAL SPENDING: The utility has revised its capital plan downward and used reserves to pay down outstanding debt. EWEB still anticipates debt issuance in 2019 to fund capital projects related to the Carmen-Smith relicensing but the projected additional debt is lower than original forecasts.
INCREASED CAPITAL NEEDS: The rating upgrade reflects the improvement to financial margins for bondholders expected to occur given Eugene Water and Electric Board's lower planned capital spending and debt issuance over the next two years. Unexpected, sizable increases to required capital spending related to the Carmen-Smith relicensing effort or higher borrowing requirements that, in turn, reduce financial margins and increased leverage could place negative pressure on the rating.
EWEB is the largest municipal electric provider in Oregon, serving 91,409 customers within and around the city. EWEB 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 10 largest account for approximately 17% of retail revenues. EWEB's largest customer, International Paper, accounts for 18% of retail sales and 10% of retail revenues.
While there has been year-over-year fluctuation in retail sales, on average retail load has been steadily declining by 0.5% per annum. Retail customer growth has been averaging almost 1% per year, indicating the decreased energy sales are more a factor of conservation and weather, as opposed to customer or load loss. EWEB's projections assume flat load going forward, which Fitch views as a reasonable assumption.
HYDROELECTRIC POWER SUPPLY PORTFOLIO
EWEB's power portfolio is predominately hydroelectric, with 65% of its 2015 energy (lower than many year due to economic market purchases) provided by hydroelectric resources but nearly all of its capacity provided by hydroelectric generation. Approximately 50% of EWEB's power supply is from a long-term block-and-slice power purchase contract with the BPA. Owned resources include hydro and wind units that accounted for approximately 14% of 2015 power supply. Smaller purchase power contracts and market purchases make up the remaining power supply. EWEB projects its demand will remain relatively flat over the next five years and additional power supply will not be needed over the medium- to long-term.
The Carmen-Smith Hydroelectric Project is EWEB's largest owned generation resource, supplying approximately 6.0% of total energy in 2015. 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, EWEB has received a stay of licensing decision from FERC until August 2016, while the settlement agreement was renegotiated.
EWEB believes that the overall costs related to project relicensing will be reduced from original estimates in order to allow the project to remain economic. The trade-off will likely result in lower generation output but at a lower capital cost in order to keep the project economics competitive in the region. EWEB estimates the future project costs associated with relicensing to be around $119 million, not including the $20 million spent to date. These costs are significantly lower than original estimates of $184 million. This development is positive from a credit perspective, given EWEB's efforts to lower its leverage, an already long power supply position, and dominance of hydro-electric generation within its power supply portfolio.
FINANCIAL PERFORMANCE IMPROVED
EWEB's reliance on hydroelectric-based resources and wholesale sales makes the utility vulnerable to wholesale market pricing and hydrology. The utility was significantly affected by the drop in pricing after 2008. This, combined with increasing debt service payments, caused a weakening of financial metrics through fiscal 2012. Since that time, EWEB has implemented significant cost-cutting measures and enacted rate increases to retail customers and increased the percentage of revenues generated by the fixed charge component in rates.
Fitch-calculated debt service coverage (DSC) was over 2.3x in fiscals 2013 and 2014 and then declined slightly to 1.9x in fiscal 2015. These coverage levels reflect improvement as compared to the low point of 1.62x in fiscal 2012. Fitch-calculated DSC levels are after the general fund transfer, since after fiscal 2012, EWEB ceased including the collection of funds to pay the transfer in its operating revenues. Therefore, these DSC calculations are comparable to other utility DSC ratios after the transfer is paid.
The long-term financial plan shows DSC remaining above 1.9x, including the lower planned capital spending on Carmen-Smith and debt reduction. EWEB generally outperforms projections, as they are based on water flows that are only 90% of average.
LOWER LEVERAGE POSITION
EWEB sold its 38 megawatt (MW) Smith Creek hydroelectric project in 2016. Given EWEB's long position and the expected flat load growth, management has been working towards the sale of excess generation capacity for the past two years. The sale closed on Aug. 1, 2016 and $22 million in proceeds was used to defease approximately $9 million in debt remaining attributable to the project. Remaining funds will be combined with $5 million in reserves and used to defease debt in connection with this bond refunding. The refunding will target lowering debt service in the next six years, which will level out EWEB's debt service payments.
This debt reduction follows the use of $29 million from reserves in 2015 to repay debt related to the Harvest Wind project. Previous financial forecasts had assumed the 2015 term maturity was refinanced long-term, adding to future debt service obligations. Overall, debt has declined from $289.2 million at the end of fiscal 2014 to $193.5 million expected at the end of fiscal 2016, or a decline in Fitch-calculated debt to FADS (funds available for debt service) from 5.12x in fiscal 2014 to 3.65x in fiscal 2016. Continued declining debt levels with scheduled amortization should provide debt capacity for the $67 million debt issuance planned in fiscal 2019 to fund a portion of Carmen-Smith relicensing needs.
CHANGES TO RATE STRUCTURE
Management and the board have focused on rate redesign since 2012 as well as shifting costs to retail rates that were previously covered by higher wholesale revenues. Revisions to the rate structure include providing management with the ability to pass-through Bonneville rate changes without board approval and increased 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.
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