June 24, 2010

Media contact: Chris Gleason, Community & Media Services manager, (253) 502-8222

An improved financial position, low rates and stable power supply are some of the reasons Tacoma Power received an AA- bond rating from Fitch, AA rating from Standard & Poor’s and an AA3 rating from Moody’s.

Tacoma Power’s rating from Fitch increased to AA- from A+ on June 17. Fitch noted several reasons for the upgrade, including:

• Tacoma Power's improved financial position, resulting from multiple years of strong operating margins and funding capital expenditures from current revenues.
• The utility's power supply is competitively priced, carbon-free, and balanced between power purchase contracts with Bonneville Power Administration and owned hydroelectric generating units.
• Rates are below the state average which, when combined with Tacoma Power's history of rate approval, indicates rate and financial flexibility.
• Tacoma Power is not planning any new power supply resource funding other than its conservation program through 2028.

Standard & Poor’s assigned an AA rating to Tacoma Power’s new bonds and upgraded the utility’s existing bonds from AA- to AA, citing a “sustained strong financial condition.” Standard & Poor’s also noted other reasons for the upgrade, including:

• Favorable power supply position, with surplus capacity in nearly all months, even under low stream flow conditions and below-average power supply costs
• Strong financial performance, with debt service coverage of more than 2.0x after transfers to the city and 1.6x fixed-charge coverage, manageable debt levels and good unrestricted liquidity of more than $220 million as of Dec. 31, 2009
• History of competitive retail rates for the region. Tacoma’s rates are also well below the national average and are also competitive within the state of Washington

Moody’s assigned an Aa3 rating for Tacoma Power’s new bonds and affirmed an Aa3 rating for its existing bonds.

According to Moody’s, “The utility’s credit quality is supported by power sourced from low-cost hydro generation, demonstrated historical willingness to raise rates, current strong liquidity level, low debt ratio at year end 2009 and substantial debt amortization over the next five years leading to debt levels about 22% higher by end of 2014 compared to the end of 2009.”

Bond ratings and their effect on utilities

Ratings by agencies such as Standard & Poor’s, Moody’s and Fitch describe the riskiness of the bonds issued by an organization and influence the interest rate the organization must pay when borrowing money.

Bond ratings are particularly important to utilities because of the large amounts of money they must invest in capital projects and the long-term nature of their assets. For example, Tacoma Power invests about $1 of capital for every $3 of revenue.

Utilities borrow money by issuing long-term bonds to finance their investments in assets such as dams, power lines, reservoirs, water pipes, etc. For most utilities, the interest on this long-term debt represents a significant fraction of their annual operating costs. Reduced interest payments ultimately benefit utility customers in the form of lower rates.

Credit rating services such take into account many factors when rating debt obligations. In addition to various financial ratios, the primary factors considered include the quality and stability of the management team and the history and willingness of the governing body to adjust rates as necessary to ensure the utility’s ability to repay its debt.

Moody and Fitch Rating Scales