TEXT - Fitch rates Clark County, PUD Wash.
Nov 8 - Fitch Ratings assigns an 'A+' rating to the following Clark County Public Utility District No. 1 (the district or Clark Public Utilities) revenue bonds: --$53.63 million electric system revenue and refunding bonds, series 2012; --$37.47 million generating system revenue and refunding bonds, series 2012A; --$15.28 million generating system revenue bonds, series 2012B (taxable) The 2012 bonds are scheduled to price Nov. 15, 2012, via negotiation. Electric system proceeds will fund a portion of capital expenditures, cash fund the debt service reserve requirement, and economically refund certain outstanding parity bonds (portions of series 2002A, 2003 and 2005). The generation system proceeds will finance capital improvements, repay an outstanding draw on a bank line of credit (used to fund generation system capital expenditures), refund the remaining series 2000 parity generation system bonds, and cash fund the debt service reserve account to its required amount (replacing existing surety bonds). In addition, Fitch affirms the following ratings: --$226.4 million electric system revenue and refunding bonds; --$179.3 million generation system revenue and refunding bonds. The Rating Outlook is Stable. SECURITY The electric system bonds are secured by a pledge of the net revenues of the district's electric system; the generation system bonds are secured by the net revenues of the generation system. It is important to note that the operating expenses of the electric system include 'contract resource obligations'. These obligations encompass all the costs of the generation system (including debt service), which is payable as an operating expense of the electric system and ahead of the electric system's own debt service. The electric system is required to meet the contract resource obligations whether or not the generating system plant is operable. KEY RATING DRIVERS STABLE, SEPARATE UTILITY SYSTEMS: Clark Public Utilities maintains three separately financed utility systems: retail electric distribution (184,488 customers); generation (district is sole offtaker); and water (30,000). The 'A+' rating reflects the stable financial position of the utility systems, solid plant operating performance and diverse customer base. SOUND FINANCIAL PERFORMANCE: The district's financial coverage metrics at both the electric distribution (1.5x debt service coverage) and generation system (1.14x) strengthened in 2011 due to modest energy sales growth and consecutive annual rate increases since 2009. Financial coverage for 2012 is poised to surpass 2011 with better than average regional water conditions contributing to greater surplus power sales for the district. REBUILDING LIQUIDITY: The district's management team has made a concerted effort to rebuild liquidity, which had fallen in recent years due to recession induced lower energy sales. In 2011, liquidity rose to 46 days operating cash from 11 days in the prior year. The rate stabilization fund balance, in particular, was boosted by $20 million in 2011 (to $22.7 million) reflecting improved margins and cash flow at the district. RELIABLE PURCHASED POWER MIX: The district's 2011 purchased power resource mix is adequately diverse, reliable and competitive: 58% Bonneville Power Administration hydropower; 37% River Road natural gas plant (generating system); and wind/market purchases accounting for the rest. The district does not need new baseload generation until post-2020. DIVERSE CUSTOMER BASE: The district benefits from a heavily residential customer and revenue base (totaling 60% of 2011 operating revenues). Residential users are typically the most stable utility customer class. Industrial concentration is not a concern as all industrial users represent just 12.6% of operating revenues and the largest single user accounts for a modest 4.6% of revenues. COMPETITIVE RETAIL RATES: The district's average retail rates are above some of the other public utility districts that own hydroelectric generation in the state; however, rates compare favorably (20%-30% lower) to similar sized municipal and investor-owned utilities in the area. WHAT COULD TRIGGER A RATING ACTION FAILURE TO BALANCE MARGINS AND LIQUIDITY: The district's failure to maintain adequate liquidity and financial coverage measures, given narrow financial margins and more variable BPA power purchases, would be viewed negatively. CREDIT PROFILE The district's management team has an established history of fiscal conservatism coupled with close fiscal oversight, which results in consistent and stable financial metrics, albeit at a lower level compared to their rating category peers. Company projections, by design, incorporate tight financial protection measures, with electric system debt service coverage targeted in the 1.30x range. Fitch believes this relatively low debt service coverage is somewhat offset by the district's very conservative assumptions, willingness to raise rates to maintain financial position, and frequently stronger actual operating results than originally budgeted. Liquidity levels for the district (at 46 days operating cash) remain low for the rating category ('A+' retail systems' median is 134 days), but have improved. The district is focused on strengthening cash reserves, in particular, the rate stabilization fund. For 2012, the district is expecting to transfer another $8 million from the revenue fund to the rate stabilization fund, bringing the balance to $30.7 million and adding roughly 10 more days operating cash. In addition, both the electric system and the generation system maintain separate $20 million lines of credit with US Bank N.A., which expire Dec. 31, 2014. With this external liquidity source, the district's liquidity rises to 70 days as of Dec. 31, 2011. Prospectively, the district's 5-year financial projections are based upon conservative assumptions including: below-average northwest water conditions, modest sales growth (0.25% per year), minimal retail rate adjustments, considerable BPA wholesale rate increases, and manageable capital expenditures. Fitch will be looking for the district's financial performance and liquidity levels to strengthen in 2012 and remain adequate for the rating category through the forecast period.