July 6, 2016 - 12:46 PM EDT
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Fitch Affirms Roseville Electric, CA's Electric System Rev. Bonds at 'A+'; Outlook Stable

Fitch Ratings has affirmed its 'A+' rating on the following bonds issued by the Roseville Finance Authority on behalf of Roseville Electric (Roseville), a department of the city of Roseville, CA (the city):

--$123.7 million of outstanding Roseville Finance Authority electric system revenue bonds, series 2010, 2013, 2014;

--$18.2 million of outstanding certificates of participation (COPs), series 2004 and 2009.

The Rating Outlook is Stable.

SECURITY

The bonds and COPs are secured by a pledge and lien on the net revenues of the electric system.

KEY RATING DRIVERS

VERTICALLY INTEGRATED RETAIL SYSTEM: Roseville provides retail electric service to a growing customer base of 56,524 within the city. Customer concentration is moderate with the top 10 customers accounting for approximately 24% of MWh sales and 19% of revenues in fiscal 2015.

STRONG FINANCIAL METRICS: Roseville's financial performance continues to improve and the utility's financial metrics compare favorably to Fitch's medians for similarly rated systems. Fitch-calculated debt service coverage and coverage of full obligations were 3.69x and 1.70x, respectively, in fiscal 2015. Liquidity levels are strong at 306 days cash on hand. Financial performance is projected to remain positive in fiscal 2016.

COMPETITIVE RATES; NO ADJUSTOR MECHANISM: Roseville's rates are competitive and the utility is increasing its fixed charge to reduce revenue volatility, which are credit positives. However, the overall rate structure lacks an automatic adjustment mechanism for purchased power costs and fuel, which exposes the utility to potential lags in cost recovery given the system's significant power purchases under short-term contracts and reliance on natural gas-fired generation.

DIVERSE POWER SUPPLY: Power supply needs are met through owned natural gas-fired generation, long-term purchase power agreements for hydroelectric and renewable resources, and relatively short-term contracts for market purchases. An extensive risk management program reduces the system's financial exposure to market volatility to some extent.

INCREASED CAPITAL SPENDING: Roseville plans to increase capital investment following several years of reduced spending. The five-year, $103.3 million improvement program is expected to be funded entirely from operations and construction development fees without the issuance of additional debt. Roseville's direct and adjusted debt metrics are generally in line with Fitch's rating medians.

RATING SENSITIVITIES

SUSTAINED FINANCIAL METRICS: Roseville Electric's ability to maintain coverage and liquidity metrics at levels similar to fiscal 2015 through effective power cost management and rate increases could result in positive rating action.

CREDIT PROFILE

The city owns and operates the electric system, serving all customers within the city's 43 square miles. The utility served 56,524 customers in fiscal 2015, a 1.7% increase over 2014. Despite the growing customer base, MWh sales declined modestly in both fiscal 2014 and 2015 with a cumulative 1.3% reduction in sales due to mild weather and the increasing penetration of distributed generation within the service area.

STRONG FINANCIAL PERFORMANCE

Roseville's financial metrics have steadily improved over the past few years, driven largely by a series of rate increases and effective management of power supply costs. Financial metrics in fiscal 2015 were strong and generally in line with or better than rating category medians. Fitch calculated debt service coverage and coverage of full obligations was 3.69x and 1.70x, respectively, in fiscal 2015.

Roseville's liquidity position has also steadily improved, rising to 306 days cash at the end of fiscal 2015 from 125 days at the end of fiscal 2012. Cash balances are expected to increase in fiscal 2016 to approximately $101.3 million from $91.5 million at the end of fiscal 2015.

The utility's projections through fiscal 2021 show relatively stable financial performance. Utility calculated debt service coverage is expected to stay around 2.5x through fiscal 2020 before declining to 2.13x in fiscal 2021. Cash balances are projected to increase modestly over the projected timeline.

DIVERSE POWER SUPPLY

Roseville operates and manages a diverse resource mix that includes city-owned and jointly owned resources, along with market purchases. While the utility's power supply requires active management, Fitch views the resource mix favorably, as it provides balance between fuel types, inclusive of hydro, natural gas and geothermal, and balance between ownership structures.

The utility's power supply strategy is to balance its owned resources with market purchases, depending on pricing and the most cost-effective approach. Market purchases and energy from the Roseville Energy Park - a city-owned natural gas-fired combined cycle power plant - have increased recently as a percentage of the utility's power supply in response to low market prices for natural gas, low market power prices, and the reduction in hydroelectric generation as a result of California's drought conditions.

INCREASED CAPITAL SPENDING

Roseville's five-year, $103.3 million capital improvement plan includes the rehabilitation of two existing substations, construction of one new substation, the installation of smart meters, Roseville Energy Park maintenance, and other improvements. Roseville's capital expenditures/depreciation ratio has remained relatively low since 2009, reaching a recent high in fiscal 2015 of 62.3%. Fitch views a sustained trend of capital spending that is less than annual depreciation as potentially signaling underinvestment in the system, which could result in more significant future costs and capital needs.

Management stated that the general trend of reduced capital investment since fiscal 2009 reflected weak economic conditions that have generally passed, decisions to defer some investments, and the system's relatively new infrastructure from its recent build-out. The updated plan will improve the system's capital renewal process and address some of the deferred capital issues.

Roseville's debt metrics compared favorably with similarly rated systems, with 3.9x debt/FADS and an equity/capitalization ratio of 55.5%. Direct debt metrics are expected to remain low with no planned issuances over the medium term.

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=1008500

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008500

Endorsement Policy

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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:
Alyssa Castelli, New York, +1 212-908-0540
Email: [email protected]


Source: Business Wire (July 6, 2016 - 12:46 PM EDT)

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