Moody's Investors Service said it has downgraded Chelan County Public Utility District No. 1, Wash., to Aa3 from Aa2 on its Consolidated System, Chelan Hydro Consolidated, Rock Island, and Rocky Reach revenue bonds.
Consolidated System Subordinate notes, which are the most junior debt at Chelan PUD, have been downgraded to A1 from Aa3. The rating outlook has been revised to stable from negative.
The downgrade of Chelan PUD's ratings considers the district's considerable exposure to wholesale power prices and hydrology risk and the district's reliance on non-retail revenue to subsidize its retail business. The downgrade also considers counterparty concentration with significantly lower rated entities and the ongoing execution risk of its financial and hedging objectives under challenging and volatile market conditions.
Factors supporting Chelan's Aa3 on its senior revenue bonds and A1 rating on its subordinated notes are the district's highly competitive hydro generation, strong liquidity position, low retail rates, and long-term contracts for more than 50% of Rocky Reach and Rock Island's output.
Additionally, Chelan PUD's ratings are supported by the district's targeted debt reduction to less than $700 million by 2016, forecasted maintenance of strong internal liquidity of 600 to 700 days cash on hand, expected debt service coverage ratios in excess of 2 times in most years, and the district's materially improved risk management over the last three years. Chelan PUD's high liquidity position, strong risk management, and expected improvement in financial profile over time are factors that support the Aa3 senior rating compared to the A2 indicated under Moody's Public Power with Ownership Generation methodology.
Moody's also affirmed the VMIG 1 rating assigned to the Series 2008B bonds (2008B Bonds) in connection with the delivery of an alternate standby bond purchase agreement (the SBPA or liquidity facility) to be provided by Union Bank, N.A (the Bank) in substitution for the current SBPA provided by U.S. Bank, National Association. Upon substitution, the short-term rating will be based on the short-term rating of Union Bank, N.A. and the likelihood of early termination of the SBPA without a mandatory tender of the 2008B Bonds. The long term and short term other senior obligation (OSO) ratings of Union Bank, N.A. are A2 and P-1, respectively. Events which would cause the liquidity facility to terminate without a mandatory purchase of the 2008B Bonds are directly related to the credit quality of the district. Accordingly, the likelihood of any such event occurring is reflected in the Aa3 long term rating assigned to the 2008B Bonds.
The stable outlook considers the district's forecast of high liquidity, an expected debt service ratio that is above 2.0x on average, the continuation of its risk management policies including hedging, and deleveraging over time.
