By Guest Editorial Jim Smith
General Manager, KPUD 

Bond ratings and your PUD: see the bigger picture


The Sentinel reported last week that the bond rating firm, Moody’s Investor Service, downgraded our PUD financial ratings from A2 to A3. While we had hoped it would not happen, we expected it.

The PUD utilizes two ratings agencies, Fitch and Moody’s. Fitch has maintained our rating at A- since 2009. Moody’s however, upgraded us in 2011 from A3 to A2, which was unexpected. Moody’s A3 rating is the equivalent of Fitch’s A- rating, so the upgrade meant that Moody’s rated us one level higher than Fitch. Moody’s has tended to judge us more in the traditional electric service world, rather than the wholesale Market world. By re-evaluating that rating and downgrading us this past week, they are rating us the same as Fitch once again.

I think that Moody’s was responding to our recent undertaking to shift the use of the renewable methane gas we own from Republic Services’ Roosevelt land fill from electric generation, to the production of renewable natural gas (RNG) input directly to the natural gas pipeline nearby. Moody’s said in their press release:

“The downgrade to A3 from A2 reflects continued weakness in the district's wholesale sales and the construction risks associated with substantial new debt for capital improvements to improve the margins on its wholesale activities. The rating also reflects a small, stable retail operation that serves a mostly rural, residential community.

I agree with their statements in that we undertook the project to improve our net margins. Our margins have been weak since about 2010, and we have been working to improve them. Improving our margins is the whole point of the RNG project and in talking with Moody’s, they understand that. Moody’s specified that their concern was in “construction” risk, not contract risk. In fact, they told us that once the facility is operating, they would look at the rating again.

However, I disagree about the level of the construction risk they are assigning. There is always some level of risk in any construction we undertake. There is also risk in NOT undertaking alternatives and continuing with electric generation had its own risks. We have visited almost every similar RNG facility in the country, and we have spent almost 4 years talking with more than 80 parties to get the best, most efficient, and most proven technologies to ensure we can complete the project and produce RNG reliably. We also argued with Moody’s that since the RNG facility will be commercially operating within six months, why change the rating for that short amount of time. Their response was that they are doing their rating now, and there is construction risk now.

In their detailed credit review, I think they characterized our utility and the business plan very well. That report is available from us if you contact Luann Mata at (509) 773-7606 or contact us via our website. In it, Moody’s reported that our credit strengths were 1) a stable and relatively inexpensive primary source of power from BPA, that meets the majority of retail load, 2) a stable retail customer base, with minimal concentration of load, and 3) rates that are relatively competitive, and are set without external regulation.

I believe that the RNG project and the contracts we have in place significantly reduce the Market risks from the electric generation related alternatives that were available to us. I also believe there will be significant improvements in our financial stability from this project. In spite of the downgrade, an A3 rating is still a strong position for our utility. That A rating, coupled with the cost cutting and improvements we have already made here at your PUD, provides us a solid financial footing to move forward.


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