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Rating Action:

Moody's assigns Baa2 to Pend Oreille County P.U.D. 1, WA's new 2018 Box Canyon Revenue Bonds; outlook stable

02 Aug 2018

Approximately $134 million of revenue bonds currently outstanding ($170 million pro-forma for the 2018 Box Canyon Bonds)

New York, August 02, 2018 -- Moody's Investors Service ("Moody's") affirmed the Baa2 rating for Pend Oreille Public County Utility District 1, WA Electric System Revenue Bonds and Box Canyon Revenue Bonds. Concurrently, Moody's assigned a Baa2 rating to Pend Oreille's new Box Canyon Production System Revenue and Refunding Bonds, 2018 (Green Bonds). The rating outlook has been changed to stable from negative.

RATINGS RATIONALE

The outlook revision, and ratings affirmation at Baa2 and ratings assignment at Baa2 reflects our belief that Pend Oreille County Public Utility District (Pend Oreille or the utility) has implemented appropriate risk mitigation measures in response to the potential shutdown of its largest customer, a fiber mill and paper plant owned by Ponderay Newsprint Company (PNC or Ponderay), due to structural declines in the newsprint industry. Importantly, the two parties recently settled a long-running dispute detailing payment of damages upon a shutdown that will provide Pend Oreille substantial additional liquidity if a closure occurs in the near term. The utility has also established a financial buffer, building up a strong liquidity position in excess of 300 days cash on hand and holding its debt ratio below 50%. These financial safeguards are supportive of the utility's credit profile.

In February Pend Oreille and PNC settled a long-running dispute over contract terms in the event Ponderay shuts down prior to the 2027 expiration of its power purchase contract with the utility. The settlement established a schedule of gross liquidated damages payments from Ponderay to the utility based on the date of contract termination, starting at $49 million in 2018 and stepping down annually to $0 by 2025. In exchange, the utility will provide a $50,000 monthly credit to Ponderay provided it continues to operate.

Power demand from PNC has been strong in 2018 as positive developments in the newsprint industry supported production through the first half of the year. A preliminary tariff raised costs on Canadian newsprint, prompting the closure of several Canadian mills and driving up the price of newsprint. It appears, however, that these developments may not be sustainable given recent announcements that several shuttered US-based mills will reopen and uncertainty about whether the final tariff will align with the preliminary determination. Transparency into PNC's operations remains limited, providing little visibility into the potential timing of a shutdown, should it occur.

Other key factors that support the Pend Oreille's credit quality include ownership of or access to competitive hydro generation, low retail rates, conservative risk management philosophy, and the it's demonstrated willingness to raise rates. We view the utility's willingness to raise rates as an important credit anchor and any weakening of that assessment could have a multi-notch impact on the utility's rating. We also view the utility's access to competitive hydro generation as a core strength which should enhance its ability to attract other high load electric users in the region.

RATING OUTLOOK

The stable outlook reflects Moody's view that Pend Oreille will continue to bolster its risk mitigation measures in preparation for the potential closure of Ponderay, including maintaining liquidity of at least 250 days and pursuing replacement customers for its Box Canyon power generation.

FACTORS THAT COULD LEAD TO AN UPGRADE

- An upgrade could occur if Pend Oreille continues to maintain strong financial metrics, including liquidity in excess of 300 days and a debt ratio below 50%.

- An upgrade could also occur if Pend Oreille were able to broaden its customer clientele such that PNC no longer represented an outsize threat to the utility's long term financial stability.

- The utility could also be upgraded if the it is able to source a creditworthy replacement power purchaser on a long term basis for Box Canyon's output.

FACTORS THAT COULD LEAD TO A DOWNGRADE

- PNC shuts down leading to the utility experiencing a sustained deterioration of financial metrics.

- Pend Oreille's internal liquidity drops below 250 days cash on hand or if consolidated DSCR drops below 1.1 times on a sustained basis.

- The utility's willingness to raise rates as necessary weakens.

LEGAL SECURITY

The 2018 issue along with the other Box Canyon bonds include a pledge of net revenues of the Box Canyon project, which 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 net of the federal subsidy on interest. The reserve is cash funded and is equal to around the annual debt service in most years. While there is no explicit minimum debt service coverage ratio, Box Canyon's additional bonds test effectively requires a 1.0x debt service coverage.

The Electric System revenue bonds are secured by a first lien on the revenues of the utility's Electric System. The rate covenant and additional bonds test for the Electric Revenue bonds are 1.25x. 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. The debt service reserve is backed by cash and is equal to around the annual debt service in most years.

USE OF PROCEEDS

Bond proceeds will be used to fund capital expenditures for turbine upgrades and an upstream fish passage facility at the Box Canyon Production System, repay existing debt, fund the reserve account and cover costs of issuance.

PROFILE

Pend Oreille County Public Utility District operates a utility system that generates and delivers electricity to approximately 9,056 retail customers in Pend Oreille County, which is located in the northeastern part of Washington State. Pend Oreille also provides other services such as water and wholesale fiber-optic albeit they are a small portion of revenues and assets.

METHODOLOGY

The principal methodology used in these ratings was US Public Power Electric Utilities With Generation Ownership Exposure published in November 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Gayle Podurgiel
Lead Analyst
Project Finance
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Kurt Krummenacker
Additional Contact
Project Finance
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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