SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'AA-' rating on the following outstanding bonds issued by the city of Riverside, CA on behalf of the Riverside Public Utility (RPU) electric system.
--$428.2 million electric revenue bonds, series 2008D, 2009A, 2010A, 2010B, 2013;
-- $112.5 million variable-rate electric revenue bonds, series 2008A and 2008C (underlying ratings);
--$70.5 million variable-rate refunding electric revenue bonds, series 2008A (bank bonds). The rating will only become applicable if the bonds cannot be remarketed and are purchased by the bank providing the liquidity facility.
The Rating Outlook is Stable.
Bonds are secured by a net revenue pledge of the city's electric system.
KEY RATING DRIVERS
VERTICALLY INTEGRATED RETAIL SYSTEM: RPU is a city-owned, vertically integrated utility providing retail electricity to approximately 108,358 meters within the city of Riverside, CA (rated 'AA'/Stable Outlook). The city's economy, which experienced a significant downturn during the housing-led recession, continues to improve. RPU's retail sales have generally recovered to pre-recession levels.
EVOLVING POWER SUPPLY: RPU is relatively well-positioned to meet California's increasing environmental regulations due to its evolving power supply, which is transitioning towards additional geothermal and other renewable resources. The impact of the costly changes on the rating has been mitigated by management's ability to procure favorable long-term purchase power contracts for renewable energy.
STABLE FINANCIAL PERFORMANCE: Liquidity levels are strong at 310 days cash on hand and Fitch-calculated debt service coverage levels remained satisfactory for the rating at 1.93x and 2.35x in fiscals 2014 and 2013, respectively. The utility's relatively high transfer lowers Fitch-calculated coverage of full obligations to a still adequate 1.13x and 1.38x in fiscals 2014 and 2013, respectively.
ABOVE-AVERAGE DEBT LEVELS: RPU is moderately more leveraged than comparably rated entities, particularly after including off-balance-sheet debt issued by joint power agencies (JPAs). Capital needs over the next few years, including transmission system improvements, are likely to keep debt levels somewhat elevated over the near term.
DECOMMISSIONING COSTS: Riverside Public Utilities has restricted sufficient funds to meet its projected decommissioning liability for the San Onofre Nuclear Generating Station (SONGS). However, Fitch views the actual liability as uncertain. A significant increase in expected decommissioning costs could pressure the rating.
RPU is a vertically integrated municipal utility system that provides retail electric service within the city limits of Riverside, an area of approximately 81 square miles. RPU supplied power to 108,358 meters in 2014, a modest increase from fiscal 2013.
Retail kWh sales decreased by 1.4% in fiscal 2014 due to cooler weather following a 3.7% increase in fiscal 2013. Overall sales trends show that retail sales are generally back to pre-recession levels after declining significantly during and after the recession. Commercial and industrial load growth is expected to modestly increase MWh sales over the next few years as local businesses continue to recover and expand.
EVOLVING POWER SUPPLY
RPU's power supply is expected to transition toward a greater reliance on renewable energy over the next decade. By 2019, management projects that approximately 37% of its power supply will qualify as renewable energy under California's renewable portfolio standard (RPS). Favorably, geothermal power will play an increasing role in RPU's power supply, providing a consistent source of renewable energy.
Fitch views RPU's evolving power supply positively as California continues to implement stricter environmental regulation. RPU is relatively well-positioned to meet the Governor's recently announced targets of a 50% RPS and a significant reduction in greenhouse gas emissions by 2030.
STABLE FINANCIAL PERFORMANCE
RPU's financial metrics have remained at solid levels in recent years, despite some weakening in fiscal 2014. Fitch-calculated debt service coverage in fiscals 2014 and 2013 was 1.93x and 2.35x, respectively. Coverage of full obligations, which is adjusted for transfers to the city and purchase power costs, were lower but still adequate for the rating at 1.13x and 1.38x, respectively, in fiscals 2014 and 2013. The bulk of the difference between the coverage calculations reflects RPU's relatively high transfer to the city, which is set at the legal limit as established by the city charter of 11.5% of gross annual revenues.
RPU's unrestricted cash balances remain strong for the rating with a fiscal 2014 ending balance of $210.9 million or 310 days funds on hand. Fitch views this healthy reserve as an important offset to potential cost pressures, including those associated with the SONGS decommissioning.
Management's financial projections show operating reserves modestly increasing and debt service coverage staying around 2.0x through fiscal 2019. The projections do not reflect any increase in rates.
LONG-TERM PLANNING PROCESS UNDERWAY
The management team, the Riverside Board of Public Utilities, and the city council are currently in the process of developing a comprehensive 10-year financial plan. The goal is to develop a business strategy and supporting financial policies to manage the rapidly changing regulatory and business environment. This includes establishing a 10-year financial model and updating RPU's reserve policy and debt financing plan.
Fitch views this planning effort as a continuation and positive expansion of the management team's historically proactive and prudent approach in maintaining the system's solid financial profile while addressing and planning for California's various environmental regulation changes.
Fitch views SONGS' decommissioning risk as potentially important over the medium- to long-term as uncertainty exists regarding the actual costs, given SONGS unique attributes and limited experience with decommissioning nuclear plants in California. At fiscal year-end 2014, RPU had deposited approximately $77.9 million (not including the $1.7 million in designated but unrestricted funds) against an estimated decommissioning liability of $75.3 million.
An updated estimate of the decommissioning cost is expected every three years (next one in 2017). RPU has decided to continue setting aside $1.6 million annually against a potential increase in the liability, which Fitch views positively.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Public Power Rating Criteria (pub. 18 May 2015)