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Pend Oreille County P.U.D. 1, WA -- Moody's affirms Baa2 rating for Pend Oreille County P.U.D. 1, WA Box Canyon and Electric Revenue Refunding Bonds, outlook revised to stable from positive

·15 mins read

Rating Action: Moody's affirms Baa2 rating for Pend Oreille County P.U.D. 1, WA Box Canyon and Electric Revenue Refunding Bonds, outlook revised to stable from positive

Global Credit Research - 21 Aug 2020

New York, August 21, 2020 -- Moody's Investors Service affirmed the revenue bond Baa2 ratings on Pend Oreille County Public Utility District 1, WA (Pend Oreille PUD or the utility) following the Chapter 7 bankruptcy filing of its largest customer, a fiber mill owned by Ponderay Newsprint Company (PNC). The outlook has been revised to stable from positive.

RATINGS RATIONALE

Today's rating action reflects our view that Pend Oreille PUD is positioned to weather the closure of the PNC mill while maintaining an investment grade credit profile due to its strong liquidity position, with 486 days cash on hand in August 2020. PNC was the utility's largest customer, representing 70% of load and roughly $30 million in annual revenues. The utility will not be able to fully replicate these revenues from a replacement contract because PNC's cost-based contract dating back to 1986 averaged $10-15/MWh above current market prices. We fully expect that Pend Oreille PUD will be able to recontract 100% of the lost volume from the fiber mill with creditworthy counterparties, albeit at prices closer to market rates.

The utility plans to raise rates incrementally and to use its liquidity to offset the revenue shortfalls that are expected to occur for the next several years. Pend Oreille PUD has already received $10 million of secured collateral from PNC following its bankruptcy and has an estimated remaining unsecured claim in excess of $22 million, representing the remaining amount of net liquidated damages and balance-of-year power costs owed to the utility from PNC per its 2018 settlement agreement with the mill. The utility has already implemented a 6.5% electric rate increase that went into effect on August 1 and implemented cost cutting measures in response to the mill closure announcement. Because of the utility's strong liquidity position that includes $74 million in cash, of which $46 million is unrestricted, we have no concerns about its ability to handle debt service or operating expenses over the medium term.

In 2019, Pend Oreille PUD was able to remarket the Box Canyon power being consumed by PNC via a physical exchange with Portland General Electric Company (PGE:A3 stable) through December 2020. The exchange traded carbon-free hydro power from Pend Oreille PUD, plus a premium, in exchange for system power from PGE, which PNC consumed. Since PNC's closure, Pend Oreille continues to sell power to PGE but has ceased receiving system power in exchange and is retaining the premium, mitigating to some extent the shutdown's immediate impact on its financial performance.

Moody's consolidated debt service coverage ratio is expected to average around 1x over the next few years. The utility plans to rely on unrestricted cash, including PNC collateral and rate stabilization funds, to add a 30% buffer that cushions its annual funding needs. The rating action acknowledges the utility's more resilient financial position, including a substantial liquidity position in excess of 486 days cash on hand that is expected to remain strong over the next few years as well as its moderate adjusted debt ratio of 58%, which is likely to decline over the next several years.

Other key factors supporting Pend Oreille PUD's credit quality include its strong management team with a track record of conservative risk management; ownership of or access to competitively priced hydro generation; low retail rates and a demonstrated willingness to raise rates. Pend Oreille PUD's access to carbon-free hydro generation is a core strength that is attractive within the wholesale markets and should facilitate its ability to resell power in the region.

RATING OUTLOOK

The stable outlook acknowledges the strong liquidity position that Pend Oreille PUD has amassed along with its accomplishments to resell its load and lower its future capital requirements while maintaining competitive electric rates.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

An upgrade could occur if the utility is able to source a creditworthy replacement power purchaser on a long term basis for Box Canyon's output while also achieving Moody's consolidated DSCR above 1.2x and liquidity in excess of 300 days cash on hand.

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

A downgrade could occur if the utility is unable to source a creditworthy replacement power purchaser or if its willingness to raise rates weakens. Further weakening of financial metrics could also occur if liquidity falls below 200 days cash on hand and if Moody's consolidated DSCR falls below 1.0x on a sustained basis.

LEGAL SECURITY

The 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. Box Canyon has a sum sufficient additional bonds test.

The Electric 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.

PROFILE

Pend Oreille PUD operates a utility system that generates and delivers electricity to approximately 9,377 retail customers in Pend Oreille County, which is located in the northeastern part of Washington State. The district also provides other services such as water and wholesale fiber-optic, however, 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 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 rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website 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.

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_1133569.

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.

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

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