Rating Action: Moody's assigns Aa3 to Benton County PUD 1, WA's electric revenue bonds

Global Credit Research - 03 Sep 2020

New York, September 03, 2020 -- Moody's Investors Service has assigned Aa3 ratings to Benton County Public Utility District 1, Washington's (Benton PUD) $17.3 million Electric Revenue Bonds, Series 2020A and $6.2 million Electric Revenue Refunding Bonds, Series 2020B (Taxable). We maintain Aa3 ratings on the district's $62.9 million in debt outstanding, post-issuance.

RATINGS RATIONALE

The Aa3 rating reflects the large electric distribution system's solid financial metrics and capable management team. Coverage and liquidity are adequate for the system's size and debt remains low and is expected to stay modest, given the district's target to maintain a debt-to-capitalization ratio of 38% or less. Energy supply is primarily from Bonneville Power Administration, OR (BPA, Aa2 stable), which exposes the district to resource vulnerability due to BPA's dependence on weather conditions - including the timing and quantity of rain, snow and snow melt - to generate power. Benton PUD is particularly exposed to this vulnerability as it depends on wholesale power sales, based on demand and availability; it also supplements its share of BPA's power through power contracts for periods when demand is above supply. Favorably, a solid management team capably manages their supply and demand and adjusts in real-time, as needed, as well as over a reasonable forecast period of five years. Additionally, strong rate management practices - including 2-5% rate increases in four of the last five years - drive stable financial metrics.

We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The coronavirus crisis is not a key driver for this rating action. Though general service demand is about 15% below the prior year, overall demand declined less than this and delinquencies remain immaterial. However, the situation surrounding coronavirus is rapidly evolving and the longer-term impact will depend on both the severity and duration of the crisis. If our view of the credit quality of Benton PUD changes, we will update the rating and/or outlook at that time.

RATING OUTLOOK

Outlooks are not typically assigned to local governments with this amount of debt outstanding.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Substantial and sustained improvement in coverage and liquidity

- Significantly reduced exposure to resource vulnerability

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Material weakness in coverage and liquidity, especially if driven by consistently underperforming projections

- Sustained customer or demand loss that leads to revenue decline, not met with expense reductions or timely rate increases

- Sustained below-average water years that reduce energy from BPA and increases power costs and potential volatility

LEGAL SECURITY

The bonds are secured by the district's net revenue pledge, which includes all income (with certain exclusions) net of operating expenses, as well as available reserves in the revenue, construction and bond funds.

USE OF PROCEEDS

Proceeds of the 2020A bonds will primarily be used to fund planned capital investments. Proceeds of the 2020B bonds will primarily be used to refund certain maturities of the district's outstanding debt.

PROFILE

The district provides electricity to 939 square miles of Benton County (Aa2) in central Washington, including the cities of Kennewick (Aa3), Prosser and Benton City. Three elected board members govern the district, which is an independent local government. Of 54,581 customers in 2019, 83% were residential. However, of the 1.8 terawatt hours sold to customers in 2019, 43% were sold to residential customers, with 31% sold to general service customers and 23% to irrigation customers.

METHODOLOGY

The principal methodology used in these ratings was US Municipal Utility Revenue Debt published in October 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1095545. 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 ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are 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.

Samuel Feldman-Crough Lead Analyst Regional PFG West Moody's Investors Service, Inc. One Front Street Suite 1900 San Francisco 94111 US JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Orlie Prince Additional Contact Regional PFG Northeast 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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