Fitch Ratings has assigned an 'A-' rating to Boise Kuna
Irrigation District Ada and Canyon Counties, ID's $41 million
Arrowrock Hydroelectric Project (Arrowrock) revenue refunding
bonds, series 2015. In addition, Fitch affirms its 'A-' rating on
the following bonds:
--$38.6 million Arrowrock revenue bonds, series 2008.
Proceeds from the series 2015 bonds will be used to refund a
portion of the outstanding series 2008 bonds for debt service
savings and to shorten the maturity by one year. The bonds will be
sold via negotiation the week of March 16.
The Rating Outlook is Stable.
SECURITY
The bonds are non-recourse revenue obligations of the issuer
(Boise Kuna Irrigation District) and are payable solely from the
funds pledged under the long-term power sales contract with
Clatskanie People's Utility District (Clatskanie).
KEY RATING DRIVERS
SMALL HYDROELECTRIC PROJECT: The Arrowrock Hydroelectric Project
(Arrowrock) is an 18MW hydro unit owned and operated by five
irrigation districts (the districts), four of which are located in
southwest Idaho and one in southeast Oregon. Project performance
has been mostly sound since commercial operation began in 2010,
with a three-month period of non-operation due to low hydrological
conditions.
CONDITIONAL POWER SALES CONTRACT: Clatskanie People's Utility
District (Clatskanie) is the purchaser of 100% of Arrowrock's
output. The power sales contract requires Clatskanie to purchase
the full output of the project and make payments sufficient to pay
the project's O&M and debt service obligations. Fitch views
Clatskanie's financial and credit profile as supportive of the 'A-'
rating on the bonds.
PAYMENTS SUBJECT TO PERFORMANCE: Clatskanie's payment obligation
is suspended if the project fails to produce electricity for 24
consecutive months or if net output for 48 months averages less
than 20,000MWh per year.
CLATSKANIE's CUSTOMER BASE CONCENTRATION: Clatskanie's operating
revenues are highly concentrated in a single large customer,
Georgia Pacific, with two paper mills accounting for 86% of retail
revenues in 2013. Retail rates would need to increase significantly
to offset the load loss from the two mills.
RATE INCREASE TO IMPROVE METRICS: Clatskanie's financial metrics
have weakened somewhat recently but are expected to improve in 2015
and 2016 following a 11% rate increase in October 2014.
Fitch-calculated debt service coverage and coverage of full
obligations in 2013 were 2.61x and 1.21x, respectively. Cash on
hand was relatively low at 29 days although augmented by a line of
credit that raised liquidity levels to a still low 51 days.
Unaudited financials for 2014 reflect improvement in both coverage
and liquidity ratios.
REDUCED RELIANCE ON WHOLESALE SALES: The recent rate increase
will shift more costs to Clatskanie's retail rate base, which will
remain comparatively low in the region. The reduced reliance on
wholesale sales should provide additional financial stability.
RATING SENSITIVITIES
PROLONGED OPERATIONAL PERFORMANCE: The project has exceeded the
minimum performance measures to date, although the project did not
generate power for a three-month period in 2013 due to very low
hydrology conditions. Negative rating action will occur if
operational performance approaches either of the two payment
suspension triggers.
LOSS OF LARGE CUSTOMER: The loss of one or both of the Georgia
Pacific paper plants is an ongoing concern, as Clatskanie would
need to significantly raise rates to maintain adequate financial
metrics for the rating.
CREDIT PROFILE
LONG-TERM POWER SALES CONTRACT
The districts entered into a long-term power sales contract with
Clatskanie for the sale of the project's net output. The contract
expires on March 1, 2039, matching the expiration of the FERC
license for the project. The final bond payment, which is made June
1, 2039, will be structured to be paid from partial-year revenues
received through March 1, 2039.
Under the contract's term, Clatskanie pays 90% of the monthly
average Dow Jones Mid-Columbia Index for the power. The monthly
index price paid is subject to a maximum cap but the capped price
is not viewed as a risk to full cost recovery under the contract.
If payments due at the monthly index price are insufficient,
Clatskanie is required to prepay for the energy in amount
sufficient to fully cover operation and maintenance costs of the
project and debt service. Due to low market power prices,
Clatskanie has prepaid for energy since 2011.
Clatskanie is also required by the contract to maintain its own
electric rates sufficient to meet O&M and debt service
obligations on the project. The contract requires Clatskanie to
continue making payments while it disputes such payments or its
obligation to make them.
SOUND PROJECT PERFORMANCE
The project has performed well to date, exceeding the minimum
performance standards that would trigger a suspension of
Clatskanie's payments. Fitch views the occurrence of a suspension
event as unlikely. On both measures, actual performance has far
exceeded the minimum requirements that would trigger a suspension
of Clatskanie's payments. The year 2013 was a dry year with the
Boise river run-off at 56% of the historical average. Generation in
that year fell to a low of 48,972 MWh, which remained more than
double the 20,000 average annual amount required under the sales
contract. The project did not generate power for three months in
the same year due to the dry conditions, far less than the 24
consecutive month period required to trigger a payment
suspension.
RATE INCREASE EXPECTED TO IMPROVE CLATSKANIE'S FINANCIALS
Clatskanie's financial metrics are adequate and support the
project's 'A-' rating. Clatskanie's financial performance is
expected to improve over the near term due to the recent 11% rate
increase (16.84% rate increase for residential customers)
implemented in October 2014 and an additional 2.2% rate increase
for industrial customers effective Oct. 1, 2015. These rate
increases should raise operating margins which have declined in
recent years due to mild winter weather and reduced wholesale
revenue.
Debt service coverage and coverage of full obligations remained
adequate at 2.61x and 1.21x, respectively, in 2013. Cash levels
remain relatively low at 29 days. Liquidity levels are somewhat
better due to a line of credit that ended the year with $2.5
million in available credit, raising liquidity to a still low 51
days.
Unaudited financial statements for 2014 show improvement due to
increased wholesale revenues, the rate increase effective in
October, and other factors. Preliminary Fitch calculated debt
service coverage is 3.11x and days cash on hand increased to 46 (29
in 2013).
SINGLE-CUSTOMER CONCENTRATION
Clatskanie's distribution system serves approximately 4,600
predominately residential customers in a 275 mile service territory
on the Oregon side of the Washington-Oregon border, approximately
75 miles northwest of Portland. The vast majority of Clatskanie's
MWh sales (88%) and operating revenues (86%) are derived from sales
to two paper mills owned by Georgia Pacific.
The potential loss of the mills remains an on-going concern,
although management has received no indication that either mill is
closing. The likely rate increase necessary if the mills were to
close would be substantial and implementation would present
political and economic challenges.
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 16, 2014);
--'U.S. Public Power Rating Criteria' (March 18, 2014);
--'U.S. Public Power Peer Study Addendum - February 2015' (Feb.
9, 2015).
Applicable Criteria and Related Research:
U.S. Public Power Peer Study Addendum -- February 2014
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735601
U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980827
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Fitch RatingsPrimary AnalystMatthew
ReillyDirector+1-415-732-7572Fitch Ratings, Inc.650 California
StreetSan Francisco, CA 94108orSecondary AnalystHugh
WeltonDirector+1-212-908-0742orCommittee ChairpersonKathy
MastersonSenior Director+1-512-215-3730orMedia Relations:Elizabeth
Fogerty, New York, +1 212-908-0526Email:
elizabeth.fogerty@fitchratings.com