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
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