2009-11-10 22:34:02 -
Fitch Ratings has assigned its 'A+' rating to the $27.8 million City of Roseville electric system revenue refunding certificates of participation (COPs), series 2009A. Fitch also affirms the 'A+' rating on approximately $267 million of outstanding electric system revenue COPs. Proceeds from the fixed-rate series 2009A certificates will refund outstanding series 2002 certificates that are currently outstanding as variable-rate demand
obligations, pay the costs associated with terminating the 2002 swap agreement, fund a debt service reserve fund, and pay costs of issuance. The series 2009 certificates are expected to price on Dec. 2, 2009, depending on market conditions. The Rating Outlook is Stable.
The 'A+' rating reflects the following credit characteristics.
--A power supply portfolio that is reliant on natural-gas fired generation and subject to single asset risk with one generation facility providing 52% of its energy.
--Roseville Electric appears to be positioned to meet the state's increasing environmental standards regarding renewable energy and greenhouse gas reductions with 9% renewable energy in its current portfolio, expected to increase to 17% by 2010.
--Rates are competitive in the region and a series of rate increases needed to close a budget gap and replenish reserves have been adopted.
--Financial performance has been steady, albeit with some pressure in the last two years related to purchased power and fuel costs. Reserves have been used to cover the expenditure increases but are projected to be replenished beginning in fiscal 2011.
--There is concern over the overall leverage position, which is largely due to the ramp-up in debt in 2005 related to the new generating facility. The high debt levels should decrease since capital needs and planned additional debt issuance is limited.
--The service territory continues to grow even through the current economic recession, resulting in load growth and new customers for the electric utility. The customer base exhibits some customer concentration.
The City of Roseville owns and operates the electric distribution system serving all customers within the city's boundaries. Roseville Electric has historically supplied power to its residential and commercial customers from a combination of power received under its long-term contracts with Western Area Power Administration (WAPA), entitlements to a percentage of capacity from various Northern California Power Agency (NCPA) projects and open market purchases. However, in October 2007, the utility began commercial operation of its new natural gas plant, which now generates 52% of the utility's power requirements. The significant debt burden at the utility is associated with construction of this facility. Future capital needs are modest and relate primarily to load growth and required investment in renewable energy.
Financial performance has experienced cost pressure in the last two years as a result of lower than average hydro conditions (budget is based on average water) and higher than budgeted purchased power costs.
In addition, debt service costs related to the Roseville Energy Park are beginning to amortize. Debt service coverage fell to 1.3 times (x) in fiscal 2008 and is projected at 1.64x in fiscal 2009, based on unaudited financial results. Management projects that future debt service coverage will remain in the range between 1.8x and 2.1x. Fitch's rating assumes that following fiscal 2010, the rate increases will have taken effect and will provide the utility with sufficient revenues to meet expenses, which will allow replenishment of the rate stabilization fund to its minimum target of 40% of operating expenses by fiscal 2013.
Electric rates were most recently increased 6% in February 2009. In October 2009, the City Council adopted a rate ordinance that included a package of base rate increases - three 6.2% increases effective January 2010, July 2010, and January 2011. The rate increases are needed to replenish the rate stabilization fund and maintain sufficient cash flow.
In July 2009, the City Council implemented the use of an automatic hydroelectric adjustment designed to recover the additional purchased power costs incurred in low water years, as was the case in both fiscals 2008 and 2009. The adjustment factor is expected to provide management with a mechanism to recover the additional costs other than reliance on transfers from the rate stabilization fund. As a result, the city has also lowered its targeted balance in the rate stabilization fund to 40% of expenditures from 60%.
The system's service area is approximately 36 square miles and is coterminous with the city's borders. In 2009, the system served 51,891 customers. Sales growth decreased slightly in fiscal 2008 with a less than 1% decline but load growth recovered slightly with a modest 2% increase in fiscal 2009.
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Fitch RatingsKathy Masterson, 415-732-5622, San FranciscoChristopher
Jumper, 212-908-0594, New YorkorMedia Relations:Cindy
Stoller, 212-908-0526, New YorkEmail:
cindy.stoller@fitchratings.com : mailto:cindy.stoller@fitchratings.com
