Approximately $146 million of debt securities affected
Box Canyon Production System Revenue Bonds 2010 Series A
Expected Sale Date
Electric Revenue and Refunding Bonds 2010 Series A
Expected Sale Date
NEW YORK, Oct 14, 2010 -- Moody's has assigned A3 ratings to $53.6 million of Pend Oreille Public Utility
District No. 1's (Pend Oreille PUD or District) revenue bonds comprised of $33.5
million of Box Canyon Production System Revenue Bonds 2010 Series A and $20.1
million of Electric Revenue and Refunding Bonds 2010 Series A. Moody's
also affirmed Pend Oreille PUD's A3 ratings on Electric System and Box
Canyon revenue bonds. The outlook remains negative.
Pend Oreille's rating continues to be supported by ownership of or access to
competitive hydro generation, competitive retail rates, $10 million in cash
collateral backing Ponderay Newsprint contract obligations, likely ability to
replace Ponderay Newsprint as offtaker, above average liquidity for the rating
and conservative risk management philosophy. Pend Oreille PUD has also
demonstrated a willingness to raise rates, has settled disputes regarding its
FERC license for Box Canyon and has fixed a major portion of the costs related
to the Box Canyon capital expenditure program.
The rating also incorporates significant customer concentration in
Ponderay Newsprint and to a lesser extent Teck's zinc mine, the District's rural
service area, expected consolidated debt service coverage ratios around 1.2x to
1.3x, and the likely rise in Box Canyon's average production costs due to the
largely debt financed capital expenditure program.
The negative outlook considers the inherent risks in the large
capital expenditure program for the Box Canyon hydro project and the
Community Network System through 2015, potential deterioration of the
debt service coverage below the current forecast and the increase in
local unemployment. While the newsprint sector remains under stress, Moody's
near term concerns regarding Ponderay Newsprint has abated with the expected
emergence of AbitibiBowater from bankruptcy.
Pend Oreille PUD operates a utility system that includes water and
wholesale fiber-optic services in addition to generating and delivering
electricity to approximately 8,732 retail customers in Pend Oreille
County, which is located in the northeastern part of Washington State. Pend
Oreille PUD's 1,400 square mile service area is primarily rural and has a
population of approximately 13,100. The major economic activities are mining,
agriculture, forestry and recreation.
In addition to the 72 MW Box Canyon hydro project, Pend Oreille PUD benefits
from ownership in a 0.67 MW Calispell Hydro plant, rights to the first 48 MW of
capacity from the 1,050 MW Boundary hydro plant (Boundary Project) and
approximately 37 MW of block/slice generation from the Bonneville Power
Administration (BPA). Pend Oreille PUD's main customer is the Ponderay Newsprint
company (Ponderay Newsprint) that represents approximately 74% of the
District's total MWh sales and 66% of total revenue in 2009. Ponderay Newsprint
purchases power under a cost based power purchase agreement (PPA) through June
2027 and has a $10 million cash collateral deposit to cover possible liquidated
damages over a two-year period after termination. Liquidated damages are
determined net of power resales into the market. Total revenue from Ponderay
Newsprint was $22 million in 2009.
The District's governing body is comprised of three independent board of
commissioners who are elected under staggered six-year terms. The president of
the commission is up for election in 2010.
As of December 31, 2009, the District had total rated debt of approximately
$92.6 million comprising of $19.7 million of Electric System revenue bonds and
$72.9 million of Box Canyon revenue bonds. The Electric System also had
$5.2 million of unrated debt obligations at year-end 2009.
USE OF PROCEEDS: Proceeds from the new Box Canyon revenue bonds will fund a
portion of the Box Canyon upgrade capital expenditures, fund incremental amounts
in the debt service reserve and pay for transaction expenses. Proceeds from the
Electric System revenue bonds will repay borrowings under a bank line of credit,
fund Electric System capital expenditures, fund debt service reserves and refund
approximately $6 million of existing revenue bonds.
The Electric Revenue bonds are secured by a first lien on the revenues of the
District's Electric System. The rate covenant and additional bonds test for the
Electric Revenue bonds are 1.25 times. The debt service reserve requirement is
equal to the lesser of maximum annual debt service, 10% of bond proceeds or
125% of average annual debt service. Currently the District has sufficient cash
in the debt service reserve account to meet the minimum reserve requirement and
the Electric System's refunding of the 1998 bonds should result in replacement
of the Ambac surety currently backing a portion of the debt service reserve.
Box Canyon bondholders benefit from a pledge of net revenues of the Box Canyon
project and the Box Canyon project is considered a 'resource' obligation of the
Electric System. As a resource obligation, the Electric System agrees to pay for
Box Canyon's operating costs, non-debt financed capital expenditures and debt
service payments irrespective of generation levels. Box Canyon revenue bonds
have a debt service reserve requirement equal to the lesser of maximum annual
debt service, 10% of bond proceeds or 125% of average annual debt service. The
reserve is cash funded. While there is no explicit minimum debt service coverage
ratio, Box Canyon's additional bonds test effectively requires a 1.0x debt
INTEREST RATE DERIVATIVES: None
KEY RATING FACTORS
MARKET/COMPETITIVE POSITION: ACCESS TO OR OWNERSHIP OF LOW COST HYDRO SYSTEM
A fundamental credit strength and major risk mitigant for Pend Oreille PUD
represents the District's access to or ownership in hydro generation totaling an
annual average generation of 132 MW with an average system cost of power of
$21/MWh in 2009. The 1,050 MW Boundary Project owned by Seattle City Light
represents Pend Oreille PUD's cheapest source of power at around $4-5/MWh and
the District is entitled to the first 48 MW of capacity. Power from the Boundary
project is primarily used to serve the general service load and a portion of
Ponderay Newsprint's requirements. The FERC license for the Boundary
project expires in 2011 and the District is supporting Seattle City Light's
license renewal, which is expected to ensure that Pend Oreille PUD retains the
first 48 MW of capacity under the new expected license.
The District's Box Canyon project represents the District's largest source of
power with average annual energy production of approximately 53 MW and all in
cost of production of around $23/MWh in 2009. Most of Box Canyon's energy
production is used to meet a majority of Ponderay Newsprint's power
requirements. The Box Canyon project operates under a new 50-year FERC license
issued in July 2005. Disputes regarding fish protection and habitat restoration
under the FERC license were settled in 2007 and the District is currently
engaged in a large multi-year capital expenditure program to upgrade Box Canyon
(see Box Canyon Capital Expenditure section).
The District also benefits from power purchase agreements (PPA) with
the Bonneville Power Administration for approximately 37 MW of power under a
block/slice contract through September 2011. Under new 20 year PPA executed with
the BPA, the District will benefit from about 28 MW starting in October 2011
through a combination of block and slice products.
THE DISTRICT OPERATES IN A RURAL SERVICE AREA WITH PER CAPITA INCOME BELOW THE
STATE AVERAGE WHILE NEWSPRINT AND MINING CUSTOMERS REMAIN SIGNIFICANT RISK
The District operates in a rural service area with significant
customer concentration and below average per capita income. In 2008, per capita
income in Pend Oreille County was around $26,560 compared to $43,732 for
Washington State. Additionally, local unemployment in Pend Oreille County has
been rising with unemployment at 13.9% at year end 2009 compared to 8.2% for
2008 and 6.9% for 2007. Moody's views these factors as potentially limiting the
District's rate and financial flexibility.
Pend Oreille PUD's large customer concentration in newsprint and, to a lesser
extent, mining represents a significant source of uncertainty. Ponderay
Newsprint is the District's largest customer representing approximately 74% of
total MWh sales and approximately 66% of revenues in 2009. Ponderay Newsprint is
also the third largest employer in the county and contributes meaningfully to
Pend Oreille County's budget. Teck's zinc mine is currently shutdown due to
economic reasons. Teck Mining Company (Teck)'s zinc mine is the District's
second largest customer representing 5-6% of revenues and power sales prior to
the mine shutdown in early 2009.
While Moody's does not rate Ponderay Newsprint, Moody's recognizes that the
newsprint sector continues to face challenging industry conditions and that
Ponderay Newsprint's 40% owner and managing partner, AbitibiBowater (prospective
B1-corporate family rating), filed for bankruptcy in April 2009. Additionally,
Ponderay Newsprint's other owners comprise of publishing companies which face
negative industry fundamentals. Given these circumstances, the possibility of
Ponderay Newsprint shutting down remains a material long-term risk though this
event occurring in the near term has recently abated as evidenced by Ponderay
Newsprint's continued operations during the industry downturn and
AbitibiBowater's expected emergence from bankruptcy in late 2010. Additionally,
the credit quality of the remaining owners appear to have improved or stabilized
If Ponderay Newsprint were to shut down, this would affect the District directly
through the termination of the long-term contracts and indirectly due to the
shutdown's effect on the local economy. Moody's notes that the Ponderay
Newsprint's contracts contain credit positive terms such as recovery of the
District's actual costs including BPA power costs and pass through of net risks
associated with surplus power resales derived from the BPA contract.
That said, Pend Oreille's access to and ownership in low cost hydro power, above
average liquidity and a $10 million cash collateral backing Ponderay Newsprint's
contract obligations serve as important mitigants since these strengths should
allow the District sufficient time to source a replacement long term contract
under favorable terms if Ponderay Newsprint were to close down. Moody's
understands that sufficient transmission capacity exists to transmit power from
Box Canyon to major load centers outside the region. The $10 million cash
collateral is expected to be available after a shutdown to cover a net two years
of liquidated damages once resale of Box Canyon's power and a portion of the
Boundary resource is taken into consideration.
Another meaningful mitigant is effective elimination of the
District's obligation to buy power under the BPA contract since a shutdown of
Ponderay Newsprint would change the District's net power requirement to
zero. This provision should significantly reduce the amount of power the
District would have to resell into the market or resell through a replacement
LARGE CAPITAL EXPENDITURE PROGRAM AT COMMUNITY NETWORK SYSTEM AND DEBT FUNDED
CAPITAL EXPENDITURE AT BOX CANYON
The District estimates the total cost of the Box Canyon's turbine
upgrades, plant modernization and projects related to the FERC license at
around $180 million through 2015. Since the Box Canyon improvements are
primarily debt funded, total consolidated debt is expected to increase to almost
$200 million by 2014 compared to approximately $33 million at year-end 2008.
The largest portion of the capital program is to upgrade the nameplate capacity
of Box Canyon to 90 MW from 72 MW by upgrading the existing turbines. The cost
of the upgrade is currently estimated at $111 million compared to $99 million
originally. The primary reason for the increase are issues found during the
disassembly of the first unit and the District conservatively assumes the
remaining units will have similar issues. Approximately $83 million of the
original $99 million has been contracted with Andritz Hydro, a subsidiary of the
Andritz Group (unrated). Andritz Group had total sales of EUR 3.2 billion and
EBITDA of EUR 218 million in 2009. The District also expects to spend $24
million on upgrades of the Box Canyon's auxiliary systems to accommodate the
turbine upgrades. As of year-end 2009, the District has spent $26.7 million on
turbine upgrades and over $16 million on the auxiliary systems.
From 2013 to 2015, the District forecasts spending roughly $45 million on
capital projects to minimize total dissolved gas and improve fish passage as
stipulated in the FERC license and settlement agreements. The $45 million
represents the District's current estimate and the figure is likely to be
refined over time.
Mainly due to the large debt financed capital expenditure program, Box Canyon's
competitive position relative to market is likely to weaken over time. Box
Canyon's average total cost of power is forecasted to increase from $25/MWh in
2007 to $41/MWh in 2015 contributing to a weakening of Box Canyon's overall
competitiveness. The other major contributing factor is lower forward market
prices. Over the next four years, Box Canyon's average total cost of
production is projected to be around the weighted average market price
(Mid-Columbia) compared to approximately $33/MWh less than market prices
(i.e. difference between Box Canyon costs and market price) from 2004 to 2007.
The District also plans to spend $34.4 million on expanding Community Network
System's fiber optic system to retail customers. Approximately $27.3 million of
the expenditures will be funded through federal grants and $7.1 million by Pend
Oreille PUD. The District's contribution is expected to comprise of
contributed assets and $4.25 million advanced by the Electric System. Another
$2.5 million is expected to be advanced by the Box Canyon System to ensure
liquidity at Community Network System. The bulk of the rollout is expected to
occur in 2011 and 2012 so the District can meet the milestones set under the
grant. Under the grant, the District needs to have 67% of the expansion complete
by April 2012 and 100% complete by April 2013. While Community Network System's
expansion is not expected to materially increase consolidated debt, the District
will be responsible for cost overruns and represents another large capital
THE DISTRICT'S CONSERVATIVE RISK PHILOSOPHY, BELOW AVERAGE RETAIL RATES AND
WILLINGNESS TO RAISE RATES REPRESENT MAJOR STRENGTHS
Overall, the District's management has operated conservatively including no
exposure to derivative instruments, minimal net exposure to market based
revenues and historically managed investment in local
telecommunication infrastructure. Furthermore, Pend Oreille PUD's management is
focused on the risks posed by Ponderay Newsprint and other potential risks faced
by the District such as low water levels.
Additionally, Pend Oreille PUD's historically demonstrated willingness to raise
rates is another major credit strength. In 2009, the District raised rates 12%
across its retail, commercial and industrial customers and a prior rate increase
in 2006 resulted in an approximately 15-16% increase across its customer
base. The District currently anticipates increasing rates approximately 15% in
2011 and multiple smaller increases thereafter to pay for increasing expenses
including the Box Canyon project.
The District's ability to raise rates is supported by below average
rates especially compared to the major publicly owned utilities. The average
monthly residential bill is estimated 27% below the regional average while
commercial rates are 29 to 45% below the regional average depending on usage and
HISTORICAL STRONG LIQUIDITY POSITION AND DEBT SERVICE COVERAGE RATIOS ARE
EXPECTED TO DECLINE
At year-end 2009, the District's liquidity remains relatively strong with 229
days cash on hand and is well above the District's policy of maintaining $10
million of unrestricted cash and investments. The District's unrestricted cash
at year-end 2009 was nearly $20 million. That said, the substantial increase in
debt is likely to result in a decline in the cash to debt ratio from an average
of 45% from 2005 to 2008 to around 10-15% assuming the District maintains around
$20 million of liquidity. Since the District does not forecast unrestricted
liquidity, the expected cash days on hand and cash to debt ratio is unavailable.
Given the large capital expenditure program at both Box Canyon and Community
Network System and the major customer concentrations, the maintenance of
meaningful liquidity remains a key rating consideration.
Historical consolidated debt service coverage for the District was strong for
the rating with average consolidated debt service coverage for the last five
years at 2.5x and at 2.08x for 2009 according to Moody's calculations.
Additionally, the Electric System's standalone debt service coverage (per
resolution) was 2.28x on average over the last five years and 2.07x at year-end
2009. While Moody's considers both the District's consolidated and the
Electric System's standalone credit metrics, the consolidated metrics serve as
the primary metrics for rating purposes.
Looking forward, Moody's expects the consolidated debt service coverage ratio to
decline to an average of 1.24x and minimum of 1.20x primarily due to the
increased indebtedness at Box Canyon. The Electric System's projected debt
service coverage through 2014 is forecasted to weaken to an average of around
1.73x with a minimum of 1.47x, which is below the Electric System's targeted
debt service coverage of 1.75x. Moody's notes that the new forecast is below
District's forecast made in 2009 which had average debt service coverage ratio
of 2.19x from 2010 to 2013 for the Electric System and average consolidated debt
of 1.36x from 2010 to 2013. Moody's understands that higher operating costs and
lower expected investment income are the primary causes of the drop in debt
service coverage ratios relative to the 2009 forecast. Further declines in debt
service coverage below the current forecasted level would likely result in a
negative rating action.
The negative outlook considers the large capital expenditure program for the Box
Canyon hydro project and the Community Network System through 2015, potential
deterioration of the debt service coverage below the current forecast and the
increase in local unemployment. While the newsprint sector remains under stress,
Moody's near term concerns regarding Ponderay Newsprint has abated with the
expected emergence of AbitibiBowater from bankruptcy.
What Could Change the Rating - DOWN
Pend Oreille PUD's ratings could decline if the District encounters
significant problems with either of the Box Canyon's or Community Network
System's capital expenditure programs, if the District significantly relies on
market based revenues or if the District's consolidated debt service coverage
drops below the forecasted 1.2x minimum and 1.24x average. The District's rating
could also decline if Pend Oreille PUD incurs materially higher than forecasted
debt, if the District does not implement the planned 2011 rate increase or if
consolidated liquidity significantly falls below current levels. Additionally,
Pend Oreille PUD's rating could come under negative rating pressure if
Ponderay Newsprint shuts down and the District does not enter into a new
long-term contract on a timely basis.
What Could Change the Rating - UP
The ratings are unlikely to be upgraded given the negative outlook. The
District's rating could stabilize if the District is able to make substantial
progress for both the Box Canyon and Community Network System capital
expenditure programs without material delays or cost overruns, Pend Oreille PUD
achieves expected consolidated financial metrics including liquidity and the
newsprint sector does not incur further deterioration. Pend Oreille PUD's rating
could improve if the District's major customers are of strong credit quality and
if the District achieves consolidated debt service coverage ratios and liquidity
greater than forecasted.
Consolidated Restricted & Unrestricted Cash and Investments, 2009: $72
Box Canyon (Nameplate): 72 MW
Customers, 2009 (average): 8,732
Electric System Debt Service Coverage (per bond resolution), 2009: 2.07 times
Consolidated Debt Service Coverage (per Moody's), 2009: 2.14 times
Cash to Debt Ratio, 2009: 20%
Debt Ratio, 2009: 63%
Days Cash on Hand, 2009: 229 days
Average System Retail Rate (excluding Ponderay Newsprint), 2009: Approximately
Electric System Revenue Bonds, 12/31/2009: $19.7 million
Box Canyon Project Debt, 12/31/2009: $72.9 million
The last rating action with respect to Pend Oreille PUD was on September 10,
2009, when a municipal finance scale rating of A3 was assigned with a negative
outlook. That rating was subsequently recalibrated to A3 on May 10, 2010.
The principal methodology used in rating Pend Oreille County Public
Utility District 1, WA was U.S. Public Power Electric Utilities rating
methodology published in April, 2008. Other methodologies and factors that may
have been considered in the process of rating this issuer can also be found on
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, parties not involved in the ratings, public information
and confidential and proprietary Moody's Investors Service's information.
Moody's Investors Service considers the quality of information available on the
credit satisfactory for the purposes of assigning a credit rating.
MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.
Clifford J Kim
Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S ASSIGNS A3 RATING TO PEND OREILLE PUD'S NEW BOX CANYON AND ELECTRIC SYSTEM REVENUE BONDS. OUTLOOK REMAINS NEGATIVE.
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