Fitch Affirms Silicon Valley Power's (Santa Clara, CA) Electric Rev Bonds at 'A+'

SAN FRANCISCO--()--Fitch Ratings has affirmed the 'A+' rating on the following outstanding electric revenue bonds:

-- $64.4 million electric revenue refunding bonds, series 2013A;

-- $54.8 million electric revenue bonds, series 2011A;

-- $75.6 million electric revenue bonds, series 2008B.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of adjusted net revenues of the electric system. Adjusted net revenues include (for indenture coverage purposes) net operating revenues plus all unrestricted cash balances.

KEY RATING DRIVERS

CITY-OWNED ELECTRIC SYSTEM: Santa Clara's electric system, trademarked Silicon Valley Power (SVP), is a city-owned, vertically integrated electric system serving approximately 53,139 customers within the city of Santa Clara.

DROUGHT AFFECTS FINANCIAL PERFORMANCE: Fitch-calculated debt service coverage fell to 0.95 times (x) in fiscal 2014 due to significantly higher purchased power costs, largely driven by California's on-going drought and the resultant lack of hydropower production. Debt service coverage after including the $10 million transfer from the rate stabilization fund, which is designed to support financial performance in low hydro years, was 1.82x.

INDUSTRIAL CUSTOMER BASE: SVP's customer base is predominantly industrial, accounting for 86.9% of revenues (88.5% of kWh sales) in 2014. Rating concerns regarding concentration are somewhat mitigated by the diversity of the industrial customers.

HEALTHY LIQUIDITY LEVELS: SVP's liquidity levels are healthy with approximately 310 days funds on hand at the end of fiscal 2014. Solid liquidity levels help offset rating concerns regarding rate structure, a rate base concentrated in industrial customers, and the recent weakening of financial performance due to hydro volatility.

DIVERSE POWER SUPPLY: The utility benefits from a diverse power supply, sufficient resource capacity, and a renewable portfolio that already exceeds the state mandate of 33% by 2020. In addition, SVP remains well positioned to comply with the state's efforts to reduce greenhouse gas emissions.

RATING SENSITIVITIES

TIMELY COST RECOVERY: The ability of SVP to adjust rates to maintain healthy liquidity levels and adequate debt service coverage is important given the rate structure's lack of an automatic rate adjustment clause and the rate base's concentration in industrial customers.

CREDIT PROFILE

SVP is an enterprise fund of the city of Santa Clara, providing service to all 53,139 customers within the city's boundaries. The retail electric utility is composed of generation, transmission, and distribution facilities, serving a population of 120,245. SVP also participates in projects developed by joint power agencies (JPAs), and receives a significant share of its energy (45.9% in fiscal 2014) through these relationships.

INDUSTRIAL CONCENTRATION

SVP's customer base is concentrated in industrial customers that comprised approximately 88.5% of energy sales and 86.9% of revenues in fiscal 2014. The 10 largest customers accounted for 40.6% of sales and 36.1% of revenues (fiscal 2014). Fitch views the industry concentration as a credit risk. However, the concentration in the technology industry is partially offset by the diversity of other industrial customers that include a mix of data centers, research and development facilities, factory load, and others.

WEAKER THAN EXPECTED FINANCIAL PERFORMANCE

Fitch calculated debt service coverage declined to 0.95x in fiscal 2014 from 2.43x in fiscal 2013. The low coverage was largely driven by a sharp increase in purchased power expenses over the past two years as drought conditions have reduced hydropower generation. Lodi Energy Center's start of commercial operations in fiscal 2013 also contributed to the increase.

Rating concerns regarding the low coverage levels are offset by SVP's healthy liquidity levels. At the end of fiscal 2014, SVP retained $254.9 million in unrestricted cash and investments or approximately 310 days funds on hand. Approximately $92.3 million of that cash balance is designated as the utility's rate stabilization fund with the purpose, in part, of mitigating the financial impacts of low water years.

The city council approved 5% rate increases effective January 1, 2014 and January 1, 2015, which should help improve financial performance. Additional rate increases are projected but not yet approved, including a 3.5% increase in 2016 and a 3% increase in 2017. Despite the rate changes, Fitch expects coverage to remain relatively low over the near term.

SUFFICIENT RENEWABLES AND CARBON ALLOWANCES

The system's power supply is diverse in terms of fuel source, generation assets, and ownership status. Natural gas, wind, geothermal, and large hydro all play significant roles in meeting retail power supply needs.

SVP already exceeds current requirements under the state's renewable portfolio and is poised to surpass the 33% mandate (effective in 2020) with 34% of retail power projected to come from renewables in 2015. SVP continues to sell excess RECs into the market to help finance its procurement of renewable energy. In fiscal 2014, SVP sold RECs for approximately $5.4 million.

SVP's allocated greenhouse gas (GHG) emission allowances for the purposes of California's cap-and-trade program exceed forecasted emissions through 2020. SVP is therefore hedged against cost pressures from California's cap-and-trade program through at least through 2020.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria, this action was informed by information from CreditScope.

Applicable Criteria and Related Research:

-- 'Revenue-Supported Rating Criteria' (June 16, 2014);

-- 'U.S. Public Power Rating Criteria' (March 18, 2014);

-- 'U.S. Public Power Peer Study Addendum - February 2015' (Feb. 9, 2015).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

U.S. Public Power Peer Study Addendum -- February 2015
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=861490

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980923

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Matthew Reilly, +1-415-732-7572
Director
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Kathy Masterson, +1-512-215-3730
Senior Director
or
Committee Chairperson
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Matthew Reilly, +1-415-732-7572
Director
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Kathy Masterson, +1-512-215-3730
Senior Director
or
Committee Chairperson
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com