Fitch Ratings has assigned a 'AA' rating to the following revenue
refunding bonds issued by Energy Northwest, Washington (ENW) and secured
by payments from the Bonneville Power Administration (Bonneville):
--Approximately $183.3 million Project 1 series 2016-A;
--Approximately $85.2 million Columbia Generating Station series 2016-A;
--Approximately $195.8 million Project 3 series 2016-A;
--Approximately $11.3 million Project 1 series 2016-B (taxable);
--Approximately $38.7 million Columbia Generating Station series 2016-B
--Approximately $17.6 million Project 3 series 2016-B (taxable).
The bonds are scheduled to price on March 23, 2016, via negotiation.
Bond proceeds will refund outstanding debt for all three projects. The
transaction will refinance those maturities out longer as part of ENW
and Bonneville's regional cooperation debt plan.
Fitch has also affirmed the 'AA' ratings on debt issued by Port of
Morrow, the Lewis County Public Utility District, WA, and ENW
(prerefunding) and similarly secured by payments from Bonneville:
--$884.7 million ENW Project 1 revenue bonds;
--$3.45 billion ENW Columbia Generating Station revenue bonds;
--$1.11 billion ENW Project 3 revenue bonds at 'AA';
--$377 million Port of Morrow transmission facilities revenue bonds;
--$82 million Lewis County Public Utility District No. 1 Cowlitz Falls
hydroelectric project revenue refunding bonds, series 2013.
Fitch affirms the rating on Bonneville Power Administration's implied
non-federal revenue obligations at 'AA'.
The Rating Outlook on all ratings is Stable.
Bonneville's payments to ENW for debt service on the bonds are
unconditional and are made as an operating expense from the Bonneville
These 'non-federal' obligations are paid prior to Bonneville's payments
on its borrowings from the U.S. Treasury ($4.6 billion) and federal
appropriations debt ($3.9 billion).
KEY RATING DRIVERS
BONNEVILLE'S OBLIGATION SECURES BONDS: The rating on the ENW bonds
reflects the credit quality of Bonneville and its absolute and
unconditional obligation to make payments for debt service. Bonneville
has pledged the Bonneville Fund, which includes revenues from its power
and transmission business lines.
COMPETITIVE REGIONAL SUPPLIER: Bonneville provides wholesale electricity
to a population of more than 12 million in the Pacific Northwest region
through a competitive resource portfolio consisting primarily of
low-cost hydropower. Transmission services are provided to a similar
six-state region but to a broader cast of utilities.
LOW-RISK POWER SALES CONTRACTS: Bonneville sells power through
long-term, take-or-pay contracts that recover cost of service from 125
preference customers. The contract terms limit Bonneville's financial
exposure to member load increases and lower-than-expected generation
output. However, the contracts expire in 2028 and customers are not
obligated to continue to purchase from Bonneville if new contracts are
CASH RESERVE VARIABILITY: Cash reserves have been variable given market
price fluctuations and changing hydrology conditions, but strengthened
in fiscals 2014 and 2015. Bonneville also has access to a $750 million
federal line of credit with the U.S. Treasury Department, which provides
CAPITAL NEEDS INCREASING LEVERAGE: Capital needs are sizable in order to
fund aging generation infrastructure and new transmission investment in
the region. Bonneville's overall leverage is increasing ($2.5 billion
over the past five years).
WEAKENING OF RESERVES: Bonneville Power Administration's reserve levels
exhibit variability. While they have strengthened in the past two years,
reserve levels remain linked to seasonal hydrological conditions and
power market prices received for excess energy sales. The maintenance of
strong reserves, given the variation in revenues that can result from
these two factors, is key to the ratings and a sustained and sizable
reduction in reserves could result in downward rating pressure.
ENW, formerly known as the Washington Public Power Supply System, was
created in 1957. ENW has 27 members, consisting of 22 public utility
districts and the cities of Centralia, Port Angeles, Richland, Seattle,
and Tacoma, WA. ENW owns and operates the Columbia Generating Station
(CGS), the Packwood Lake Hydroelectric Project, and the Nine Canyon Wind
Project. ENW also has financial responsibility for Projects 1 and 3, its
terminated nuclear projects.
Bonneville is the largest of the regional federal power marketing
agencies within the Department of Energy. Bonneville accounts for around
33% of the electricity consumed and 75% of transmission infrastructure
in the region.
BONNEVILLE'S RATING NOT BASED ON DIRECT FEDERAL SUPPORT
The ratings reflect the credit quality of Bonneville as a
self-supporting entity. Bonneville's subordinate obligations to the U.S.
Treasury offer a layer of structural support to the ENW, Port of Morrow
and Lewis County PUD bonds (non-federal debt), in that Bonneville may
defer payment to the Treasury, at its discretion. This could provide
payment flexibility but Fitch's rating reflects the expected timely
repayment on all obligations. A linkage with the federal government
exists in the form of governance by the DOE, appointment of the
administrator, congressional approval on Bonneville's budget, and the
banking and lending relationship with Treasury. However, Fitch's ratings
reflect Bonneville's stand-alone credit quality and its ability to repay
its obligations from ongoing revenues.
REGIONAL COOPERATION DEBT
Bonneville and ENW have agreed to a regional cooperation debt plan that
extends the maturity of outstanding ENW debt (CGS and Projects 1&3) and
uses the revenues made available from lower debt service costs on those
projects to prepay higher interest rate debt to the U.S. Treasury. While
this effectively accelerates payment of Bonneville's subordinate lien
obligations by extending the senior ENW bond maturity, it makes
available federal borrowing capacity and provides economic benefit to
preference customers, who are the ultimate ratepayers that repay both
types of debt.
SUFFICIENT POWER SUPPLIES; RELIANCE ON NET SECONDARY REVENUES
Bonneville is statutorily required to provide power to preference
customers in the region. Bonneville currently makes power sales to
preference customers under 20-year contracts that became effective in
fiscal 2012. The contracts limit Bonneville's role as a regional
provider to the allocation of the existing federal system (predominantly
hydro-electric generation but including CGS) at cost-based rates.
For operational planning purposes, Bonneville uses an assumption of
water conditions below the 30-year average, referred to as critical
water. Bonneville estimates its available generation resources will
produce 8,089 aMW of firm energy under low (or critical) water
conditions in fiscal 2017. This represents the amount of firm energy
(Tier 1) Bonneville plans to have available to divide among its
preference customers, with an estimated demand in fiscal 2017 of 6,934
aMW. Bonneville's other power sales include small amounts to federal
agencies in the region and direct service industrial customers. The
remaining power produced is sold into the market.
For ratemaking and financial planning purposes, Bonneville considers the
additional energy production available for sale under 'average' water
conditions. The federal system is expected to produce 10,309 aMW in
2017, based on average water conditions. The production in excess of
estimated demand is assumed to be sold at forward market prices, with
revenues used to supplement sales to preference customers. These
wholesale sales, netted against market purchases made by Bonneville
during certain months of the year to shape the output of the federal
system, compose net secondary system revenues.
Bonneville's sizable hydro-electric generation fleet requires market
sales in some months and market purchase in other months to balance the
load demands with actual output of the federal system. While Bonneville
has reduced its financial reliance on net secondary revenues in recent
years, there continues to be a degree of variability in net secondary
revenues in the power business line. The risk of revenue variability is
managed through cash reserves and ultimately, a cost recovery adjustment
clause that can be enacted in Tier 1 rates, if needed.
Bonneville's reserves for risk, or unencumbered reserves, improved in
fiscals 2014 and 2015, after five previous years of declines. At the end
of fiscal 2015, Bonneville had $845 million in unencumbered reserves.
The balance of reserves between the power ($395 million) and
transmission ($450 million) business lines had become more equitable as
well. Management estimates included in the rate case approved for
fiscals 2016 and 2017 indicate that reserves will stay in the same
LARGE CAPITAL INVESTMENTS NEEDED; INCREASING LEVERAGE
As with many utilities across the county, Bonneville faces the issue of
aging infrastructure and delayed capital reinvestment. Capital needs
over the next five years are estimated at $4.0 billion, with around half
of the spending (around $2.2 billion) occurring in the transmission
business line. These amounts do not include approximately $600 million
that ENW estimates will be needed at CGS through 2024. Capital needs are
expected to continue to place upward pressure on Bonneville's rates.
Bonneville raised its power rates 7.l% and transmission rates 4.4% on
October 1, 2015.
Bonneville and its customers face the challenge of funding upgrades and
improvements to the valuable fleet of aging hydroelectric facilities.
Although the assets are owned by the Bureau of Reclamation and U.S. Army
Corps of Engineers, Bonneville makes the decisions regarding the pace
and scope of capital reinvestment. Bonneville does not have authority to
issue its own debt and has a statutory debt limit with the U.S. Federal
Treasury of $7.7 billion ($4.6 million outstanding at year-end fiscal
2015), making capital funding decisions complex. The Port of Morrow or
similar lease financing structures provide financing for transmission
assets while the regional cooperation debt strategy frees up ongoing
treasury capacity as non-federal debt is extended.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Public Power Rating Criteria (pub. 18 May 2015)
Dodd-Frank Rating Information Disclosure Form
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