Fitch Rates Pasadena, CA's Electric System Rev Bonds 'AA'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'AA' rating to the following bonds issued by Pasadena, CA on behalf of Pasadena Water and Power (PWP):

--Approximately $120 million electric revenue refunding bonds, 2016A series.

Bond proceeds will be used to fund approximately $30 million of the system's capital needs, refund an estimated $47 million in outstanding 2008 bonds for savings, refinance a $60 million line of credit and pay costs of issuance. Bonds are expected to price via competitive sale on Nov. 7, 2016.

In addition, Fitch affirms its 'AA' rating on the following outstanding parity bonds:

--$186.9 million electric revenue bonds (pre-refunding).

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

MATURE SERVICE AREA: PWP provides retail electric service to 65,318 customers within the city of Pasadena. The service area is located within the greater Los Angeles region and exhibits strong economic indicators and ongoing in-fill development.

STRONG FINANCIAL PERFORMANCE: The electric system utility generates consistently strong financial metrics. Although debt service coverage (DSC) is expected to decline in fiscal 2018 related to a scheduled increase in debt service, DSC should remain above a healthy 2.5x coverage level.

ADAPTIVE RATE STRUCTURE: Retail rates include components to allow for the pass-through of energy and transmission costs (around 65% of electric revenue captures through adjustable mechanisms), which provides flexibility to adapt to unexpected cost pressures. In addition, the city council has shown support for base rate increases in fiscals 2015-2017.

REQUIRED POWER SUPPLY CONVERSION: PWP is well positioned to meet California's renewable mandate and greenhouse gas legislation that require PWP to shed its predominately coal-based power supply by 2026 and meet a 50% renewable portfolio supply by 2030. However, PWP will need replacement energy and/or capacity to replace its coal resource.

LIMITED CAPITAL; LOW DEBT: Following completion of the 71 MW GT5 repowering project in 2016, PWP's capital needs are moderate and limited to distribution system investments until a decision is made regarding the replacement of IPA capacity. PWP's low direct debt burden and robust reserves, including the stranded investment reserve, should provide financial flexibility to accommodate the next generation investment.

INCREASED TRANSFERS: Transfers to the city's general fund (GF) have been steadily increasing and reached 10% of revenue beginning in fiscal 2015, which is somewhat high compared to peers. City charter caps the transfer at 16%.

RATING SENSITIVITIES

MAINTENANCE OF FINANCIAL MARGINS: Pasadena Water and Power's ability to maintain strong financial margins and liquidity during fiscals 2018-2022 during a period of scheduled increases to debt service and city transfers totaling 10% of revenue will be key to maintain the rating.

CREDIT PROFILE

PWP is a retail electric system serving over 65,000 residential, commercial and industrial customers within the City of Pasadena's 23-square mile area. Located 10 miles northeast of downtown Los Angeles, Pasadena (IDR 'AA+') possesses a diverse employment base with above-average wealth and education levels.

The majority of PWP's energy sales are derived from residential (30%) and commercial and industrial customers (69%). Historical energy sales exhibit an average annual decline over the past five years of 1% as a result of industry advances in energy efficiency and well as the city's own programs to promote conservation.

POWER SUPPLY CONVERSION IN PROCESS

The electric system is fully integrated and includes generation, transmission and distribution facilities. In addition to its owned and operated generating units, PWP receives a majority of its total energy needs through ownership participation in various joint power agency agreements. Of 327 MW of non-renewable generation capacity, approximately half is local gas generation and the other half is long-term purchase arrangements from a variety of generation sources, including coal-fired, hydroelectric and nuclear-generating units. PWP also has 36 MW of renewable project capacity under contract in 2015 with additional solar projects coming on-line in 2016. PWP was an early adopter of renewable energy with a municipal renewable target that, until 2015, was more ambitious than the state target.

The Intermountain Power Project (IPP) is PWP's largest source of power (107 MW share), and accounted for approximately 36% of PWP's energy resources in 2015, but it is also the utility's largest source of carbon emissions. The IPP agreement is set to expire in 2027 and California mandate prohibits renewal if the resource continues to be coal-fired generation. The 35 project participants have agreed to a process by which the project will be repowered, or rebuilt, as a gas-fired generation project. PWP is evaluating its options as to whether it will participate in the repowering but has initially indicated its intent to participate for a maximum of 40 MW. PWP estimates that it will require a smaller share than its current 107 MW due to increased renewable purchases.

The GT5 Repowering Project will be completed in 2016, which provides PWP with a new, efficient 71 MW (68 MW net) combined cycle plant to replace the existing Broadway 3 steam plant. The $135 million project was built within budget, with commercial operation originally expected in May 2016 but now expected by the end of the calendar year. Construction is complete and final testing is in progress.

STRONG FINANCIAL PERFORMANCE

Financial metrics have been strong at PWP, albeit with some level of variability. Fitch calculated 7x and debt service coverage (DSC) has ranged between 2. 4.9x over the past five years. Fiscal 2015 DSC of 4.4x was up from 2.7x in fiscal 2014 as a result of the D&C charge increase implemented in 2015. The variation in coverage has resulted from higher power expenses in fiscals 2012 and 2013 and increased debt service. The variation is not a credit concern given the strong coverage provided in all years. PWP's large GF transfer of 10% brings coverage of full obligations down to a still strong 1.8x in 2015.

Projections show DSC remains relatively stable until 2018 when a large increase in direct debt service costs from around $18 million to $23 million is scheduled. Projected DSC in fiscal 2018 and beyond is projected to remain above 2.5x, or 1.7x after the general fund transfer. Projections assume continued minimal declines in energy sales and the final 2.2% base rate increase in fiscal 2017.

PWP maintains substantial liquidity, as shown through unrestricted funds totaling $179 million at year-end 2015, or 442 days cash on hand (DCOH). Unrestricted funds include the utility's stranded investment reserve (SIR), totaling $68 million, which is reserved for potential costs associated with IPP, and separate action of the City Council is required if the SIR is to be repurposed. Without the SIR, DCOH total a still strong 274 days. Unrestricted funds, not including the SIR, should remain strong and stay above $100 million.

The utility has limited capital needs until the potential IPP repowering and a moderate debt burden with around $203 million of direct debt at the end of fiscal 2015. Direct debt will increase with the approximately $30 million in new money debt in the 2016A bonds. Leverage, as calculated by debt/funds available for debt service (FADS), was 3.4x at the end of fiscal 2015, compared with Fitch's rating category median of 5.7x. Including off-balance sheet obligations, PWP's debt/FADS is still manageable at below 6.0x.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

U.S. Public Power Rating Criteria (pub. 18 May 2015)

https://www.fitchratings.com/site/re/864007

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013463

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013463

Endorsement Policy

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT 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.

Copyright (c) 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

View source version on businesswire.com: http://www.businesswire.com/news/home/20161020006638/en/

Fitch Ratings
Primary Analyst
Kathy Masterson
Senior Director
+1-512-215-3730
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Matthew Reilly, CFA
Director
+1-212-908-7572
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• Caspian Therapeutics Unveils KO-7246 at EASD as a Potential Best-In-Class Menin Inhibitor for Diabetes
• Teads and Koddi Announce Global Partnership to Advance Programmatic Access to Retail Media
• AvandaGame Expands Browser Game Catalog to More Than 22,000 Titles