Fitch Rates Redding Joint Powers Authority, CA's Electric System Rev Bonds 'A+'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has assigned an 'A+' rating to the following Redding Joint Powers Authority, CA revenue bonds:

--37,300,000 electric system revenue bonds, 2015 series A.

In addition, Fitch affirms the 'A+' rating on the following certificates of participation (COPs) issued by Redding, CA on behalf of its electric system:

--$30.7 million COPs, series 2005;

--$124.9 million COPs, series 2008.

The Rating Outlook is Stable.

Purpose: Proceeds will be used to finance REU's new administration building, refinance the outstanding 2005 COPs, and pay the costs of issuance.

SECURITY

The bonds are ultimately payable from the net revenues of the city of Redding's Electric Utility (REU).

KEY RATING DRIVERS

VERTICALLY INTEGRATED RETAIL UTILITY: REU is a vertically integrated utility providing electric services to a largely residential customer base of 43,832 in the city of Redding. Retail sales, which have declined modestly over the past few years, are largely driven by a non-concentrated mix of residential and commercial customers.

SOLID FINANCIAL METRICS: Financial metrics have steadily improved as a series of rate increases have offset declining retail sales and lower wholesale revenues. Fitch calculated debt service coverage was 2.06 times (x) in fiscal 2015 (unaudited), and days cash on hand increased to an adequate 129 from 72 in fiscal 2012. Prudent financial policies and budgeting practices are expected to support solid financial performance over the medium term.

FLEXIBLE RESOURCE MIX: REU benefits from a diverse and flexible resource mix with a renewable portfolio that is projected to exceed state mandated requirements through 2024. Reduced hydropower availability due to California's drought has been managed well to date due to favorable market prices for replacement power and additional energy available from REU's owned generation resources.

COMPETITIVE RATES: REU's rates remain competitive with other utilities in the area, although they have increased significantly over the past several years due to frequent and substantial increases. Future rate increases are expected but are likely to be more moderate than in the recent past.

REDUCED RELIANCE ON WHOLESALE SALES: REU's reliance on wholesale sales has been reduced as retail rates have increased and wholesale revenues have fallen. While wholesale revenues accounted for a still significant 19.4% (unaudited) of total operating revenues in fiscal 2015, the utility's conservative financial practices, which include only contracted wholesale sales in budget and financial targets, reduce REU's financial exposure to volatile market conditions.

RATING SENSITIVITIES

HIGHER RATING UNLIKELY: The rating is likely capped at 'A+' given the service area's somewhat limited economy and the utility's expected financial performance, which is in line with similarly rated peers.

CREDIT PROFILE

REU is a vertically integrated system, providing generation, transmission and distribution of electric power to approximately 43,832 customers (2015) located within the city of Redding, CA (the city). Redding is the county seat for Shasta County and is located on the Sacramento River approximately 160 miles north of Sacramento, the state capital, and 150 miles east of the Pacific Ocean at the northernmost end of the Sacramento Valley. The city has an estimated population of 91,110 (2015) and encompasses approximately 60 square miles.

The utility's customer base primarily consists of residential customers (86%) with operating revenues largely driven by residential (47.7%) and commercial (44.8%) customers. Retail sales continued to decline by a modest 0.8% in fiscal 2015 as efficiency gains and relatively mild weather reduced demand.

Customer concentration is not a significant concern with the largest customers being the City of Redding and the Mercy Healthcare Center at 4% and 1.6%, respectively, of operating revenues. The top 10 customers cumulatively account for 11.9% of operating revenues.

SOLID FINANCIAL METRICS

REU's financial performance continues to steadily improve as retail rate increases have offset modestly declining retail sales and reduced wholesale revenues. Fitch calculated debt service coverage has improved annually since dropping below 1.0x in fiscal 2010. Coverage levels in fiscal 2014 were 2.69x and expected to be 2.06x in fiscal 2015 (unaudited). Coverage of full obligations is lower, largely due to the utility's power purchases, but has been generally in-line with 'A+' rated medians. In fiscals 2014 and 2015 (unaudited), REU's coverage of full obligations was 1.93x and 1.28x, respectively.

Following the same trend of improving financial performance, REU's cash balances have steadily increased over the past few years. At the end of fiscal 2014, the utility had approximately $45.6 million or 130 days cash on hand. Cash balances are expected to increase again in fiscal 2015 to $47.7 million or 129 days cash on hand.

Financial projections through fiscal 2020 reflect increasing debt service coverage and additional growth in cash reserves. Forecast assumptions appear reasonable but include annual rate increases through 2020 that have not been adopted to date. Notably, the forecast does not include wholesale sales that are not currently under contract and ending cash balances are net of funds dedicated to future spending, both of which demonstrate the utility's budgeting conservatism.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Public Power Rating Criteria (pub. 18 May 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=993391

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993391

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Matthew Reilly, CFA
Director
+1-415-732-7572
Fitch Ratings, Inc.
650 California St, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Kathy Masterson
Senior Director
+1-512-215-3730
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Matthew Reilly, CFA
Director
+1-415-732-7572
Fitch Ratings, Inc.
650 California St, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Kathy Masterson
Senior Director
+1-512-215-3730
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com