Fitch Affirms Pasadena, California's Electric System Revs at 'AA'

Fitch Ratings has affirmed the City of Pasadena, California's $150.8 million of outstanding electric system revenue bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first lien on net revenues of the Pasadena electric system.

KEY RATING DRIVERS

Stable, Mature Service Area: Pasadena is a mature city located within the greater Los Angeles region and exhibits strong economic indicators, a stable population base and a diverse economy.

Strong Financial Metrics: The city's retail electric system, operated by Pasadena Water and Power (PWP), generates consistently strong financial ratios. Although Fitch anticipates some decline with additional debt issuance in the next few years, debt service coverage is expected to remain above 1.9x.

Proactive Environmental Targets: PWP's integrated resource plan sets energy efficiency and conservation goals that are more aggressive than required state targets. PWP's efforts make it likely the utility will be in compliance with state mandates. That said, it also requires costly changes to PWP's power mix that could pressure electric rates.

Flexible Rate Structure: Rates include components to allow for the pass-through of increases in energy costs. Base rates were increased 2.3%, effective Jul. 1, 2012. Fitch anticipates slightly higher rate increases in the next few years.

Increasing Inter Fund Transfers: The city's charter allows up to 16% of electric system gross revenues to be transferred to its general fund. While PWP expects to adhere to a 9% policy going forward, Fitch notes that exceptions have been made to increase transfers to the general fund above budgeted amounts.

CREDIT PROFILE

Healthy Service Area

PWP is a retail electric system that provides service to all of the electric customers within the City of Pasadena's 23 square miles. PWP serves approximately 63,950 residential, commercial and industrial customers. A mature community located 10 miles northeast of downtown Los Angeles, the city possesses a diverse employment base with above-average wealth and education levels. With the exception of its unemployment rate, the city's economic indicators significantly outperform those of Los Angeles County, the State of California and the nation.

The majority of PWP's electric revenues are derived from residential (25.6%) and commercial and industrial customers (58.1%). Major commercial and industrial customers are diversified and encompass a range of industries. No one customer accounts for more than 3% of total electric revenues, with the top 10 only accounting for 13% of operating revenues. Retail sales have experienced slight declines of 2% and 5% in fiscal 2011 and 2010, respectively, due to cooler weather and conservation efforts.

Strong Historical Performance

The PWP electric system includes generation, transmission and distribution facilities. Combined rated net capacity of 347 MW is sufficient to serve PWP's system peak demand of 320 MW.

The majority of PWP's power supply is derived from its ownership participation in various joint action agencies. Rated net capacity includes 175 MW of PWP-owned steam and gas generation and 172 MW of long-term purchase arrangements from a variety of sources. This includes coal-fired, hydroelectric and nuclear generating units. PWP's largest energy source is Intermountain Power Agency, which accounted for approximately 46% of PWP's energy load in fiscal 2011.

The electric system continues to generate strong financial performance as illustrated by Fitch-calculated debt service coverage of 4.44x for fiscal 2011 and by the utility's sizable liquidity position, with 450 days cash on hand inclusive of the stranded investment reserve. Fitch-calculated debt service coverage decreases to a still strong 2.10x coverage if off balance sheet joint action agency debt is included. PWP's financial metrics compare favorably with both the nationwide 'AA' rated utility medians and the California municipal utility medians. In the next five years, Fitch expects debt service coverage to remain above 1.9x, or over 1.3x including off balance sheet obligations.

Increasing Cost of Environmental Regulation

In 2009 PWP implemented an aggressive integrated resource plan (IRP), which was adopted by city council and was vetted with the citizens and ratepayers of Pasadena. The IRP requires that PWP derive 40% of its power supply from renewable resources by 2020. This figure is more conservative than the California state energy mandate of 33%. The IRP also requires that PWP reduce its greenhouse gas emissions by up to 40% by 2020.

In order to comply with the IRP, PWP has been slowly acquiring renewable generating resources. As of Dec. 31, 2011, 21% of PWP's energy portfolio was renewable. Under the IRP, PWP is well-positioned to meet the state's initial compliance period requirement of 20% renewable energy by Dec. 31, 2013.

Increases in renewable energy resources to replace traditional non-green energy sources will increase costs. This could strain retail rate flexibility. Ratepayers and city council are supportive of the IRP and PWP's environmental goals and are expected to approve future rate increases in a timely manner.

Interfund Transfers

PWP makes annual transfers to the general fund. PWP nominally adheres to a general fund transfer policy of 8% of annual electric system revenues, while the city charter limits transfers at 16%. However, in three of the past four fiscal years (including fiscal 2012), transfers were above PWP's budgeted amounts for one-time general fund needs. Management projects transfers to remain at 9% of electric system revenues going forward. Fitch views the variance in transfers to the general fund as a credit concern.

PWP has also provided interfund loans to the city's water system, providing short-term loans to lessen mismatches in the water system's cash flow. All transfers between the electric and water funds must be repaid within a fiscal year (unless approved by city council).

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria, this action was informed by information from CreditScope.

Applicable Criteria and Related Research:

--'U.S. Public Power Rating Criteria' (Jan. 11, 2012).

Applicable Criteria and Related Research:

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=665815

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.

Contacts:

Fitch Ratings
Elizabeth Fogerty, [phone]
Media Relations, New York
[e-mail]
or
Primary Analyst:
Stacey Mawson, [phone]
Associate Director
Fitch, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst:
Kathryn Masterson, [phone]
Senior Director
or
Committee Chairperson:
Dennis Pidherny, [phone]
Senior Director