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Rating Action:

Moody's upgrades Douglas County Public Utility District 1, WA's to Aa2 from Aa3. Outlook is stable

16 Aug 2021

Approximately $148 million of debt securities affected

New York, August 16, 2021 -- Moody's Investors Service has upgraded Douglas County Public Utility District 1, WA's (Douglas PUD) electric distribution system and Wells hydroelectric system revenue bonds to Aa2 from Aa3. The rating outlook is stable.

RATINGS RATIONALE

Douglas PUD's upgrade to Aa2 reflects robust debt service coverage ratios (DSCR) exceeding 4.0x, additional revenue earned by the district given its contract with Portland General Electric Company (PGE, A3 stable) that started in May 2020, and the utility's expectation that it will achieve a key milestone of refurbishing half of its ten turbines at the 840 MW Wells hydro dam (Wells) by early 2022. The district's substantial increase to its DSCR from an average of around 1.20x from 2011-2017 to well above 4.0x since 2019 reflects both a near doubling of net revenues and an almost 46% step down to scheduled debt service. Supporting the significant revenue increase are power purchase agreements (PPAs) with investment grade utility counterparties that provides substantially greater compensation to Douglas PUD compared to the legacy take-or-pay contracts that were in place for over fifty years and expired in 2018.

Other credit strengths are the district's highly competitive hydro generation, extremely low retails rates, and conservative management. The latter has also led to the maintenance of the utility's strong liquidity ranging between 350 to 425 days cash on hand over the last three years and low adjusted debt ratio at around 38% in addition to the previously stated contracting of excess power and step down to debt service.

The rating also recognizes operating, hydrology and market price risk retained by the district under its PPAs, the utility's primarily rural economic service area, contract renegotiation risk between 2026 and 2028, and generation concentration with Wells representing almost 90% of the district's consolidated power supply. On the latter, Wells has been classified as 'moderate' risk under the federal government's risk classification due to the possibility that a major earthquake could lead to the failure of the dam's east embankment, an earthen structure that supports the main dam. We understand the utility is examining the issue with a long term plan forthcoming probably in the mid 2020s. In the interim, the district, in conjunction with guidance from federal regulators, has implemented risk mitigation measures such as the stockpiling of materials. Regarding contract renewal risk, stringent renewable energy and decarbonization requirements in Washington and Oregon significantly enhances the value of the Wells hydro dam, all of which mitigates contract renewal risk, as recently demonstrated by the utility's contract with PGE.

RATING OUTLOOK

The stable outlook incorporates our expectation that the district will continue to be conservatively managed leading with liquidity well above 400 days cash on hand in most years, and debt service coverage ratios (DSCR) between 4.0x to 5.5x. The stable outlook also incorporates our assumption that the Wells turbine refurbishment program will progress without further delays or cost increases.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

Given the recent upgrade, the district's rating is unlikely to be upgrade in the near term. Over the longer term, the district's rating could be upgraded if there is a permanent resolution to the east embankment issue, the turbine refurbishment program is fully completed, and financial metrics are significantly stronger than expected.

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

The district's rating could be downgraded if there are major costs overruns or delays at the Wells refurbishment project, liquidity declines to below 300 days cash on hand or if DSCR drops below 3.0x on a sustained basis. Additionally, major operational issues at Wells or a large, debt funding capital spending requirement could lead to a negative rating action.

LEGAL SECURITY

Douglas PUD's Electric System's bonds have a pledge of net Electric System revenues and require that the district set rates to maintain 1.25 times debt service coverage including transfer to and from the rate stabilization fund. Further, the Electric System bonds have a segregated cash funded debt service reserve sized to the lower of 125% of average annual debt service, maximum annual debt service or 10% of principal.

The Wells project bondholders benefit from a pledge of net revenues of the Wells Project and the Electric System is obligated to pay for the Wells project's costs including debt service irrespective of whether the Wells project is operational. The Wells project bonds have cash funded, segregated debt service reserve accounts sized to twelve months maximum interest which is weaker than typical though the Wells project must also maintain a minimum $5 million reserve and contingency fund.

PROFILE

Douglas PUD operates a utility system that primarily generates and delivers electricity to retail customers in Douglas county, which is located in the central part of Washington state. The district also provides wholesale fiber-optic services, generates electricity for sale to three electric utilities under contracts that extends to May 2026 or September 2028. The district's governing body is comprised of a three-member independent board of commissioners who are elected under staggered two-year terms.

METHODOLOGY

The principal methodology used in these ratings was US Public Power Electric Utilities with Generation Ownership Exposure Methodology published in August 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1170209. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Clifford Kim
Lead Analyst
Project Finance
Moody's Investors Service, Inc.
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Angelo Sabatelle
Additional Contact
Project Finance
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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