SAN FRANCISCO–(BUSINESS WIRE)–Fitch Ratings affirms the ‘AA-‘ rating on the following series of electric revenue bonds issued by the City of Riverside, CA on behalf of Riverside Public Utilities (RPU):
–$399.7 million, series 2003, 2004A, 2008D, 2009A, 2010A (taxable Build America Bonds), and 2010B bonds;
–Underlying rating on $139.6 million variable rate series 2008A and 2008C bonds.
The Rating Outlook is Stable.
Bonds are secured by a net revenue pledge of the city’s electric system.
KEY RATING DRIVERS
STABLE FINANCIAL PERFORMANCE: Financial margins remain solid despite some declines in fiscals 2011 and 2012 related to flat revenues, slight cost increases, and higher debt service. Debt service coverage in fiscal 2012 was 1.97x, or 1.38x after the transfer to the city’s general fund and should remain at or above these levels over the next five years. Liquidity levels remain strong.
LIMITED COST PRESSURES: Cost pressures are limited in the near-term and no additional rate increases are anticipated through 2014 resulting in RPU extending its rate freeze for two additional years. However, the costs could increase from projections if natural gas prices or market power costs experience rapid increases, although these events appear unlikely.
MANAGEABLE CAPITAL NEEDS: RPU has invested in local generation resources over the last ten years and capital needs over the next five years are limited to asset maintenance and transmission improvements. This could take some pressure off high leverage levels.
POWER SUPPLY PRESSURES: California’s environmental requirements and legislation require costly changes to RPU’s power supply mix over the next decade. The rating reflects Fitch Ratings’ expectation that the cost of power supply transition will be absorbed by ratepayers and will not occur at the expense of financial metrics for bondholders.
NUCLEAR UNCERTAINTY: RPU’s interest in the San Onofre Nuclear Generating Station (SONGS) is a key baseload and carbon-free resource that typically provides around 12% of the system’s energy. The plant’s two units have been out of service since January 2012 and the timeline for restarting the units is uncertain.
SERVICE AREA STABILIZING: Riverside provides retail electric service to 107,321 customers within the city. Electric sales declined 7% between 2008 – 2011, reflecting cooler weather conditions, economic pressure in the region, energy efficiency programs and some industrial load loss. The local economy was weakened by the recession and housing collapse but has shown signs of stabilizing. Retail energy sales grew 4.6% in fiscal 2012.
CITY’S FINANCIAL PERFORMANCE: The healthy financial performance and solid reserves of the city’s general fund (G.O. Bonds rated ‘AA with a Stable Outlook by Fitch) are relevant to the utility rating given the size of the annual transfers and past advances between the electric utility and the general fund.
The city provides retail electric service to over 300,000 people in the city of Riverside. The city is located 60 miles east of Los Angeles and about 90 miles north of San Diego. In fiscal 2012, the electric system generated about $333 million in revenues from service to 107,321 residential and commercial connections. A sizable share of revenues, around $107 million, is provided by industrial customers. The customer base has been relatively stable through the economic recession with modest declines in sales that are likely more related to weather conditions than a meaningful reduction in demand. The top ten customers represent 15% of electric revenues. Customer base concentration concerns are mitigated by the top four customers, which represented 10.1% of revenues in fiscal 2012 and are made up of city and county government, a school district, and a higher education entity.
POWER SUPPLY CHANGES REQUIRED
RPU’s power supply fuel diversity has been a credit strength including its participation in the Intermountain Power Agency (IPA) and Southern California Public Power Authority (SCPPA). Following the western energy crisis in 2000, RPU began adding local gas-fired resources within its service area to mitigate its reliance on imported power and market purchases for peaking needs. In order to supplement the 213.5 MW of capacity RPU has through long-term joint action agency agreements for coal-fired (137.1 MW of Intermountain Power Project), nuclear-fired, and hydroelectric power, RPU built or purchased 265 MW of local gas-fired generation in the last decade and 46 MW of geothermal power. Resources are still shy of meeting RPU’s peak load of 604MW but RPU provides the balance of supply through purchase power contracts, including additional renewable sources, and spot market purchases.
Long-term changes to RPU’s power supply portfolio are being implemented to comply with regulatory mandates created by state environmental regulations that will result in higher costs. RPU reached its 20% renewable target in calendar 2010 and should be well positioned to meet the state-mandated goal of 25% by 2015 and 33% by 2020 if investments in additional solar and wind purchased power contracts proceed as anticipated. RPU is positioned to participate in the cap and trade allowance auction that began in November 2012 with the free allowances it received to offset its current carbon emissions through 2020. The rules regarding auction allowance have not been determined yet after 2020.
SONGS OUTAGE CREATES POWER SUPPLY UNCERTAINTY
Uncertainty exists regarding SONGS. RPU is a minority owner with a 1.79% share of the two units. The majority owner and operator is Southern California Edison (SCE). The steam generators of both units were replaced in 2010 and 2011. Since January 2012, both units remain shut down after a leak was detected in one of the units.
According to filings by SCE, the damage in Unit 3 is worse than Unit 2. Restarting the units will require approval of the Nuclear Regulatory Commission (NRC). SCE has submitted a plan to the NRC for restarting Unit 2 at 70% capacity for a five-month period followed by a mid-cycle scheduled outage to inspect for repeat damages. A plan has not been submitted for Unit 3 where the damage was more extensive.
RPU has been able to purchase replacement energy for SONGS since the shut-down at favorable market prices, which has limited any operational cost pressure to the utility as a result of the outage to date. RPU has purchased energy and capacity needs in 2013 based on the assumption that Unit 3 will remain out of operation. RPU’s debt associated with SONGS matures in calendar 2013. However, the resource is a key non-carbon emitting, baseload supply for RPU with an operating license through 2022. RPU is anticipating incurring cost repairs to the units in order to return them to operation.
FINANCIAL MARGINS REMAIN SOLID; DEBT LEVELS HIGH
RPU has maintained solid financial metrics over the past few years, albeit with some decline in fiscals 2011 and 2012, as anticipated with increased expenditures and additional debt service costs. Debt service coverage in fiscal 2011 was 2.03x, or 1.37x after the transfer to the general fund. Based on unaudited 2012 performance, debt service coverage was 1.97x, or 1.38x after the transfer. Although the general fund transfer is legally subordinate to debt service, in practice, it is relied on by the city for operations and paid monthly much like any of the system’s other expenditures. Fitch’s analysis focuses on after-transfer debt service coverage as a measure of cash flow from the utility available to provide financial flexibility and reinvest in system capital.
Given RPU’s capital plans, transfers to the general fund, and no anticipated rate increases, DSC is expected to remain in a similar range to fiscal 2012 over the next few years. The debt service schedule offers some capacity beginning in fiscal 2015 when debt service costs on the existing long-term debt decrease but RPU also plans to fix-out its short-term loan used to purchase the Clearwater Project that will likely use that debt capacity.
RPU’s leverage profile is average at 5.9x debt to funds available for debt service (FADS). However, taking into consideration an additional $340 million in off-balance sheet take-or-pay obligations, debt to FADS increases to 7.0x in fiscal 2012. Debt per customer (based on meters served) was $9,094 in fiscal 2012 when including off-balance sheet obligations, a figure that is above average for the retail utility rating category medians.
Liquidity levels are strong even after a purchase of land assets from the city’s water fund in 2011 and a loan to the city of $5.6 million to be repaid over 20 years. Unrestricted cash reserves totaled $187.5 million at the end of fiscal 2012 or 297 days operating cash. The cash reserves will provide some funding flexibility for the city’s remaining capital needs, which are modest over the next five years. The largest capital need, other than potential SONGS repairs, is a second transmission interconnection, which has been in the planning stages since 2008 with delays related to siting concerns.