NEW YORK - (Business Wire) Fitch Ratings has assigned an 'AA' rating to Energy Northwest (ENW), Washington's electric revenue refunding bonds as follows:
Proceeds from the 2010-A and 2010-B bonds, with maturities through 2018, will be used to refund all remaining ENW variable rate demand bonds. Proceeds from the 2010-C bonds, with a final maturity of 2024, will fund improvements at the Columbia Generating Station. The bonds are expected to price in a negotiated sale Feb. 23 and 24, 2010. The Rating Outlook is Positive.
- $15.615 million Columbia Generating Station electric revenue refunding bonds, series 2010-B;
- $76.125 million Columbia Generating Station electric revenue bonds (taxable Build America Bonds), series 2010-C;
- $68.350 million Project 1 electric revenue refunding bonds, series 2010-A;
- $1 million Project 1 electric revenue refunding bonds, series 2010-B;
- $279.670 million Project 3 electric revenue refunding bonds, series 2010-A;
- $29.930 million Project 3 electric revenue refunding bonds, series 2010-B.
The Energy Northwest bonds are separately secured by project and each project secured by a payment obligation from the Bonneville Power Administration (BPA). The output of the Columbia Generating Station (1,150 megawatt [MW] nuclear project) is provided to Bonneville. Projects 1 and 3 are non-operating projects. Payments can be made by Bonneville to Energy Northwest through a combination of credits against customer bills (according to the net billing agreements) or direct cash payments from the BPA Fund. BPA's payments to Energy Northwest are made as an operating expense and are paid prior to BPA's payments to the U.S. Treasury (approximately $6.5 billion in Treasury obligations outstanding).
KEY RATING DRIVERS
- The 'AA' rating reflects BPA's obligation to pay debt service on Energy Northwest's electric revenue bonds.
- BPA's credit strength is supported by BPA's regional position as a leading provider of electricity and transmission to over 12 million people in the Pacific Northwest and its highly competitive, predominantly hydro-electric, resource portfolio.
- The value of BPA's power supply is demonstrated by the signing of new contracts with all preference customers that now extend through fiscal 2028.
- Favorably, BPA has adjusted its base rate setting period down to a two-year cycle, which helps stabilize cash flow. Additionally, regulatory oversight by the Federal Energy Regulatory Commission is designed to ensure rates are sufficient to recover BPA's total costs.
- BPA's financial position has considerably improved since the western energy crisis (2000-2001), including the building of reserves to over $1.3 billion as of fiscal year end (FY) 2009, up from $188 million in fiscal 2002.
- However, while reserves are ample at $1.3 billion (equal to 261 days operating cash), the balance has declined from a maximum of $1.6 billion in FY 2008 and is projected to continue to decline to $1.09 billion by end of FY 2010 due to considerably lower than projected surplus power sales.
- BPA's financial performance continues to be tied to hydroelectric variability and market prices, given its reliance on secondary sales (energy sales typically to non-customers resulting from water conditions above critical levels used in operational planning) for around 20% of total revenues. Reserves and rate adjustment mechanisms help to manage this variability.
- The recently enacted U.S. federal stimulus plan increased BPA's borrowing authority from the Treasury by $3.25 billion to $7.7 billion. This provides significant near- and medium-term relief to BPA's funding requirements related to its capital plan.
- The federal government further augmented BPA's ability to draw on lines of credit from the U.S. Treasury from $300 million up to $750 million sustaining BPA days operating liquidity at 396 days for FY 2009.
BPA continues to face financial pressure related to lower than average hydrological conditions, particularly for the past three years and into fiscal 2010, with sustained low electricity market prices being driven by overall weakened economic conditions for its secondary sales. BPA's rate-setting takes into account anticipated secondary sales.
- The credit strength of BPA, with the obligation to pay debt service on ENW bonds is the key credit driver.
- The Positive Outlook reflects certain achievements BPA has surmounted over the past 12 months, including the successful completion of the Tier 2 supplemental power contracts. Prospectively, over the next year, ENW's rating is likely to move higher provided BPA maintains its financial strength in line with rating category medians, particularly cash reserve levels, through this period of economic recession (which contributes to lower kilowatt hour [kwh] sales and lower market electricity prices) and very dry (74% of 30-year average) water conditions in the northwest.
Secondary revenues derived from the portion of the federal system not allocated under slice contracts are used to offset the rates paid by preference customers in the non-slice products. Rates are established using extensive modeling of potential hydrological conditions but assume some level of secondary revenues based on water conditions and market prices.
In a low water year, these revenues may likely be lower than projected, requiring a rate adjustment to customers. Water levels in fiscal 2009 and 2010 are low, and compounding the problem are low overall market energy prices in the northwest that are likely being influenced by overall economic conditions and low thermal energy prices. BPA has revised downward its initial budgeted estimates of secondary revenues in fiscal 2010 which should prompt the use of reserves to buffer the financial impact. The continued worsening of hydrological conditions in the northwest for this 2009-2010 period, the severity of the loss in secondary revenues thus far, currently estimated at $225 million below 2010 projections (as of first quarter 2010) is a credit concern Fitch will be monitoring.
BPA is the largest of the regional federal power marketing agencies within the U.S. Department of Energy. BPA was created by Congress in 1937 to market electric power from the Bonneville Dam. Congress has since designated BPA to market power from all of the federally owned hydro projects (31) in the Pacific Northwest. BPA sells electric power in a 300,000 square-mile service area and accounts for approximately 33% of the electric power consumed in the region.
Applicable criteria available on Fitch's website at www.fitchratings.com includes:
Additional information is available at www.fitchratings.com.
- 'Revenue Supported Rating Criteria' (Dec. 29, 2009).
- 'Public Power Rating Guidelines' (June 11, 2009).
Fitch Rates Energy Northwest $470.7MM Electric Rev Rfdg Bonds 'AA'
Earth Times, February 19, 2010
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