Fitch Ratings has affirmed the following ratings for the city of Roseville, CA:
--$55.8 million of outstanding Roseville Finance Authority electric system revenue bonds at 'A+';
--$198.9 million of outstanding certificates of participation (COPs) at 'A+'; and
--$90 million bank bond rating on COPs, series 2008A at 'A+'.
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. The bank bond rating on the series 2008A is applicable only if those variable rate bonds become bank bonds held with the liquidity provider.
KEY RATING DRIVERS
GROWING SERVICE AREA: Roseville Electric continues to benefit from a growing service area (approximately 3% population growth per year), despite the economic downturn. The customer base exhibits some customer concentration in manufacturing; however, load and usage patterns of the largest customers remain intact.
IMPROVING FINANCIAL METRICS: Fiscal 2011 and preliminary fiscal 2012 results have improved and shown signs of financial recovery. The electric system's operating performance was weak in fiscal 2007 through 2010, forcing reliance on the rate stabilization fund (RSF) to bolster debt service coverage (DSC) levels.
LOW LIQUIDITY: Unrestricted cash balances have declined in recent years and are below median levels. Additionally, the RSF balance has declined below targeted amounts, due to substantial draws. Replenishment of the RSF to targeted amounts is projected to occur by fiscal 2014.
AMPLE RATE FLEXIBILITY: Rates compare favorably with neighboring electric systems. While the utility does not anticipate increasing rates beyond fiscal 2013, rate flexibility exists to absorb increases if needed.
MANAGEMENT OF POWER SUPPLY: Roseville's approach to power supply requires active management. The utility purchased 55% of fiscal 2012 power supply, benefiting from low market power prices, as compared to using gas-fired capacity at the Roseville Energy Park.
MANAGEABLE CAPITAL PROGRAM: Roseville Electric's capital plan totals $61 million over the next five years, a portion of which will be funded by construction development fees. There are no plans to issue additional debt, which should help strengthen the utility's balance sheet ratios.
CREDIT PROFILE
The city of Roseville owns and operates the electric distribution system, serving all customers within the city's boundaries. In 2011, the system served 53,457 customers. Preliminary fiscal 2012 figures show a 1.2% increase in customers to 54,116 and a 2.3% increase in megawatt hour sales (mWh), representing the first increase in energy sales since fiscal 2008.
Roseville has moderate customer concentration, with its 10 largest customers accounting for 27% of energy sales and 19% of total operating revenue for fiscal 2011. One of Roseville's larger customers is experiencing financial issues and there is uncertainty as to whether its Roseville plant will remain operational at its current capacity. Fitch does not view the possible closure or cutback of the plant as a major credit concern, given that the utility has been adding new customers, the lack of customer concentration, rate flexibility and the adaptable power supply.
POWER SUPPLY
Roseville Electric's power supply in 2011 was provided from a combination of output from its owned natural gas plant (22%), power received under long-term contracts with Western Area Power Administration (13%) and Northern California Power Agency (10%) and open market purchases (55%). Market purchases increased in fiscal 2012, due to low electric spot market prices. This resulted in a significant decrease in Roseville Energy Park generation, an increase in net market purchases and also resulted in cost savings to Roseville Electric. Combined generation capacity of 391 MW is more than sufficient to serve its preliminary fiscal 2012 peak load of 312 MW.
Roseville Electric is positioned to meet the state's energy mandate of 33% renewable resources by 2020. The utility is negotiating a long-term contract to purchase renewable energy from Santa Clara and will purchase RECs for the remainder of renewables needed. For compliance period 1 (2011-2013), the utility is 88% to target (54% for compliance period 2 and 38% for compliance period 3).
RETAIL RATES
The utility's current retail electric rates are comparable to other retail electric rates charged in the Sacramento region. In January 2011, Roseville Electric increased rates on average 6.2% for all customers. This followed two previous 6.2% rate increases in January and July of 2010. Additional rate increases after 2013 are not anticipated. Roseville Electric's competitive rates and proactive approach to rate increases should provide future rate flexibility when needed.
FINANCIALS
In fiscal 2008 through fiscal 2010, Roseville experienced weakened financial performance and metrics, largely due to rising costs and decreased energy consumption. Overall operating performance was weak and largely supported by transfers from the rate stabilization fund.
Fiscal 2011 and preliminary fiscal 2012, results show signs of a turnaround, due to the effects of lower fuel costs and rate increases in fiscal 2010 and 2011 that allowed the utility to increase its coverage and cash position. Fitch-calculated DSC for fiscal 2011 and preliminary 2012 was 2.00x and 2.32x, respectively, an increase from 1.06x DSC in fiscal 2010. Unrestricted cash, while low for the rating category, increased from $16 million at fiscal year-end 2010, or 39 days cash on hand, to $44 million at fiscal year-end 2012, or 139 days cash on hand. The utility's projections show continued improvement in operations and liquidity. Overall power supply costs and load growth are assumed to remain flat.
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, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria', Jan. 11, 2012;
--'Revenue-Supported Rating Criteria', June 12, 2012;
--'U.S. Public Power Peer Study', June 18, 2012.
Applicable Criteria and Related Research:
U.S. Public Power Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=665815
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
U.S. Public Power Peer Study -- June 2012
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681449
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