Fitch Ratings has assigned a ‘AA-‘ rating to the following bonds issued by the Anaheim Public Financing Authority, CA (APFA) on behalf of Anaheim Public Utilities (APU):
–Approximately $88.2 million qualified obligation revenue refunding bonds, series 2012A.
Bond proceeds will refund the outstanding series 2002A bonds for savings, fund a debt service reserve fund, and pay costs of issuance.
Fitch also affirms the ‘AA-‘ ratings on the following outstanding bonds:
–603.4 million APFA qualified obligation revenue bonds;
–116.5 million APFA second qualified obligation revenue bonds; and
–$301.47 million (issued by the Southern California Public Power Authority) Canyon Power Project bonds, series 2010A and 2010B.
The Rating Outlook on all bonds is Stable.
KEY RATING DRIVERS
MATURE SERVICE AREA: APU provides retail electric service to 114,662 customers within the city of Anaheim. Retail sales have declined between 2-3% in each of the past three years, reflecting weather conditions, economic pressure in the region, and the loss of some industrial load.
STRONG RATE FLEXIBILITY: APU’s automatic rate adjustments provide management with the authority to adjust rates quickly, providing flexibility to adapt to unexpected cost pressures. Furthermore, there is a history of unanimous support for base rate increases at the city council level, when requested.
CONSISTENT AND EXPERIENCED MANAGEMENT: APU has a tenured management team, with extensive experience, the ability to achieve financial performance in line with budget, and a consistent philosophy between management and City Council (the rate setting body) regarding timely cost recovery at the utility.
MIXED FINANCIAL PERFORMANCE: Financial margins have narrowed in the past few years. Debt service coverage improved somewhat in fiscals 2011 and 2012 with base rate and automatic adjustment increases as well as cost cutting measures.
LOW LIQUIDITY IS CREDIT CONCERN: Cash balances declined for the fifth year in a row to a balance of $59.3 million at FY 2011 and a projected balance of $56 million for FYE 2012 or 71 and 61 days, respectively. Management projects improved liquidity, which will be key to maintenance of the rating.
POWER SUPPLY PRESSURES: The state’s renewable energy requirements and greenhouse gas reduction legislation will require costly changes to APU’s power supply mix, considering coal accounted for approximately 70% of its energy supply in 2011. The rating reflects Fitch’s expectation that the cost of transition in power supply will be fully absorbed by ratepayers and will not occur at the expense of financial metrics for bondholders.
CANYON PROJECT BONDS RELY ON ANAHEIM: SCPPA’s Canyon Power Project revenue bonds are secured by a power supply agreement with APU. The take-or-pay power supply agreement unconditionally obligates APU to pay the costs of the project, including debt service on the bonds. The rating of the Canyon Power Project bonds reflects the rating of APU.
WHAT COULD TRIGGER A RATING ACTION
FAILURE TO MEET FINANCIAL PROJECTIONS: Fitch expects APU to meet its expectation of improved financial performance, particularly the improvement of unrestricted cash balances.
CONTINUED COMMITMENT TO BASE RATE INCREASES: Fitch will monitor APU’s continued use of rate stabilization adjustments to cover rising costs initially and then periodically move the increased costs to base rates.
APFA bonds are secured by a net revenue pledge of APU. The second qualified obligation bonds are secured by a pledge of net revenues that are subordinate to the qualified obligation bonds.
The SCPPA Canyon project 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.
Tightening Financial Conditions at APU
Anaheim has experienced an overall tightening of its financial margins over the past five years. Debt service coverage levels have been adequate, at between 1.6x-1.8x with revenues recognized from the rate stabilization fund, or between 1.3x-1.4x after the 4% transfer to the general fund. Cash reserve levels have declined from $244 million in fiscal 2007 to $56 million projected at the end of fiscal 2012, including $46 million in the rate stabilization fund.
APU’s financial profile and metrics are weak for the ‘AA-‘ rating category, but this is partially mitigated by the rate flexibility provided by two adjustable components in the rate structure that allow for timely recovery of limited additional cost components. These adjustment factors, in addition to the use of regular base rate increases, have provided timely rate recovery, which is critical in the California environment of rising regulatory-related costs. However, the additional revenues generated by the rate increases have, at times, been outpaced by cost increases and revenues that have fallen below projections with lower than anticipated electric sales.
Financial projections provided by management indicate slowly improving liquidity over the next few years. Low liquidity remains a concern; however, it is expected to increase from the low point in fiscal 2012.
Diverse Generation Resources; Renewable Investments Ongoing
APU serves its retail electric customers through a mix of owned generation and purchase power contracts. Energy in 2011 was provided from coal-fired resources (70%), natural-gas (18%), renewable energy (10%), and large hydro-electric (2%). APU’s combined 758 MW of generation capacity is more than sufficient to serve its system peak demand of 580 MW.
The addition of the Canyon Power Project in July 2011 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, which is estimated by management to save APU $14 million annually. Finally, the plant provides a locally owned, physical hedge against power supply disruptions.
APU has been adding renewable energy supplies in order to comply with California’s renewable requirement of 20% in 2011-2013, 25% in 2014-2016, and 33% by 2020. Renewable generation provided 10% of APU’s sales in 2011. A large 27 MW landfill gas power purchase contract is expected to begin operations in October 2012, which will provide baseload renewable energy to APU. With some additional renewable energy credit purchases, APU expects to be positioned to meet the first two compliance periods and continues to explore new renewable opportunities to meet the third compliance period.