NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA-' rating on the following bonds issued by the Anaheim Public Financing Authority, CA (APFA) on behalf of Anaheim Public Utilities (APU):
--$567.41 million APFA qualified obligation revenue bonds;
--$111.27 million APFA second qualified obligation revenue bonds.
Fitch has also affirmed the 'AA-' rating on the following bonds issued by the Southern California Public Power Authority (SCPPA):
--$301.47 million Canyon Power Project bonds, series 2010A and 2010B.
The Rating Outlook on all bonds is Stable.
APFA qualified obligation bonds are secured by a pledge of net revenues of APU. The second qualified obligation bonds are secured by a pledge of net revenues that is subordinate to the qualified obligation bonds.
The SCPPA bonds are secured by a power supply agreement with APU, the sole purchaser of the project output. APU is unconditionally obligated to pay for the project's total operating, fuel and debt service costs through the life of the bonds regardless of whether the project is operating or operable. APU payments to SCPPA are paid as an operating expense of the utility and prior to APU's own debt service.
KEY RATING DRIVERS
MATURE SERVICE AREA, SOME GROWTH: APU provides retail electric service to 115,418 customers within the city of Anaheim. Retail sales grew in fiscal years 2012 and 2013, reversing a three-year trend of decreases and reflecting improvements in the local economy and the addition of new industrial customers.
STRONG RATE FLEXIBILITY: Management maintains the authority to employ timely rate adjustments needed to adapt to unexpected cost pressures. In addition, there is a history of unanimous support for base rate increases at the city council level, when requested.
IMPROVED FINANCIAL PERFORMANCE: Financial margins and Fitch-calculated debt service coverage (DSC) are much improved, due to base rate and automatic cost adjustment increases taking effect coupled with prudent management of expenses. DSC is still low compared to the rating category median, but is expected to remain within an acceptable range of 2.0x.
INCREASING LIQUIDITY BALANCES: While still below pre-recession levels, unrestricted reserve levels have improved ahead of schedule. Reserves declined substantially during the recession; however, stronger financial performance has bolstered reserves at fiscal year-end 2013.
HIGH DEBT LEVELS: APU's debt levels are high as compared to similarly rated entities, especially after including off balance sheet debt issued by joint action agencies. While the utility is working to accelerate debt repayment, leverage is expected to remain at an elevated level due to APU's upcoming capital needs.
CHANGING POWER SUPPLY: The state's renewable mandate and greenhouse legislation require APU to implement changes to its predominately coal-based power supply. The rating reflects Fitch's expectation that the cost of power supply transition will be absorbed by ratepayers and will not result in weaker financial metrics, disadvantaging bondholders.
CANYON BONDS RELY ON ANAHEIM: SCPPA's Canyon Power Project revenue bonds are secured by a take-or-pay power supply agreement with APU. The rating of the Canyon Power Project bonds reflects the rating of APU.
COMMITMENT TO RATE INCREASES: Fitch will monitor APU's willingness to supplement use of rate stabilization adjustments (RSAs) and periodic base rate increases to cover rising costs in order to maintain the utility's improved financial profile and to continue to increase unrestricted fund balances.
Financial Conditions Improve
The electric system was noticeably affected by the recession, given the city's dependence on tourism and the utility's large concentration of industrial and commercial customers. However, fiscal years 2012 and 2013 showed strong signs of recovery, as evidenced by strengthening financial metrics and retail energy sales growth. Fitch-calculated DSC was 2.06x in fiscal 2013, above APU's historical level of 1.60x, and a strong 1.73x including the utility's transfer to Anaheim's general fund. Unrestricted reserve levels have started to strengthen as well, with fiscal year-end 2013 levels equal to 129 days. The increase represents a substantial improvement from APU's low of 71 days at fiscal year-end 2011. Unrestricted reserves have increased more quickly than anticipated, as previous projections did not show any meaningful increase until fiscal years 2014-2015.
APU's financial profile and metrics, while stronger than historical performance, are still below the median levels for the 'AA-' rating category. The somewhat weaker financial metrics are partially mitigated by APU's rate flexibility provided by two adjustable components in the rate structure that allow for timely recovery of additional cost components. These adjustment factors, in addition to the use of regular base rate increases, provide timely rate recovery, which Fitch believes is critical as APU implements changes to its power supply.
Financial projections provided by management indicate that DSC should be in the range of 2.0x (stronger than APU's previous 1.6x target) and liquidity should continue to improve.
Renewable Investments Ongoing
APU operates and manages a resource mix that is made up of city-owned and jointly-owned resources, along with transmission and distribution facilities. The current resources are predominately coal-based, which accounted for 50% of energy supplied in 2013. The remainder of 2013 energy supply was natural gas (17%), renewable (17%), large hydro (1%) and market purchases (15%). Combined generation capacity of 789 MW is more than sufficient to serve APU's system peak demand of 542 MW.
Management has been focused on diversifying its resource mix since 2007, when APU sold its 70-MW interest in the San Onofre Nuclear Generating Station. Diversification emphasis has been on increased generation from natural gas and various renewable resources. APU has added 31 MW of renewable power over the past two years and is creating a long-term plan to move away from its coal reliance.
The addition of the Canyon Power Project in Sept 2011 (fiscal 2012) resulted in a power position in excess of the system's peak load and 15% reserve requirement (current and projected). APU uses the Canyon Power Project to meet local capacity requirements instead of purchasing reserves. The plant provides a locally owned, physical hedge against power supply disruptions and firming capacity for renewable resources.
The utility's existing renewable portfolio predominately consists of wind and short-term contracts. Going forward, APU's strategy to comply with the state's renewable portfolio standards (RPS) is to target long-term base load renewables. Fitch views the progression of APU's RPS strategy favorably, in that it shows management's forward-thinking and long-term power supply outlook.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Public Power Peer Study -- June 2014' (June 13, 2014);
--'U.S. Public Power Peer Study Addendum - June 2014' (June 13, 2014);
--'U.S. Public Power Rating Criteria' (March 18, 2014);
--'2014 Outlook: U.S. Public Power and Electric Cooperative Sector' (Dec. 12, 2013).
Applicable Criteria and Related Research:
2014 Outlook: U.S. Public Power and Electric Cooperative Sector (Calm Under Pressure)
U.S. Public Power Rating Criteria
U.S. Public Power Peer Study Addendum - June 2014
U.S. Public Power Peer Study -- June 2014