Fitch Affirms Alameda Municipal Power, CA's Bonds at 'A+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the 'A+' rating on the following bonds issued by the Alameda Public Financing Authority, CA (APFA) on behalf of Alameda Municipal Power (AMP):
--$28.6 million series 2010A and 2010B bonds (taxable).
The Rating Outlook is Stable.
The bonds are secured by installment payments from AMP to APFA, pursuant to an installment sale agreement dated Aug. 1, 2010. AMP's installment payments are secured solely by a pledge of the electric system's net revenues. AMP's payments to APFA are absolute and unconditional.
KEY RATING DRIVERS
RETAIL ELECTRIC SYSTEM: Alameda Municipal Power (AMP) is a retail electric system serving a largely residential and commercial customer base in an economically solid service area. Customer concentration is moderate with the top 10 customers accounting for 21.8% of MWh sales in 2015 with no single customer representing more than 4.4% of MWh sales.
FINANCIALLY SOLID: AMP maintains a solid financial profile with Fitch-calculated debt service coverage, adjusted to remove temporary revenues from surplus renewable energy sales, of 3.63 times (x) and coverage of full obligations of 1.26x in fiscal 2015. Liquidity levels are strong at 310 days cash on hand.
RATE INCREASES OFFSET SALES DECLINE: A multiyear trend of decreasing MWh sales has been offset financially by the Board's continued willingness to increase and restructure rates to include higher fixed charges. The rating reflects Fitch's expectation that the board will continue to manage any further sales declines with rate increases.
RENEWABLE POWER SUPPLY: AMP benefits from a diverse mix of mostly renewable resources and is well positioned to exceed the state's environmental mandates. California's drought and AMP's sale of surplus renewable energy drove an increase in short-term market purchases that is expected to return to historical levels with improved water conditions and the expiration of the renewable power sales contract.
MODERATE DEBT BURDEN: AMP's direct debt burden is relatively low at approximately $862 per customer and 1.8x funds available for debt service (FADS). However, AMP's total debt burden is modestly above that of similarly rated entities when adjusted for off-balance sheet debt, which increased AMP's debt-to-FADS ratio to 6.5x. Additional debt plans are limited and not expected to significantly affect the utility's leverage metrics.
Solid Financial Performance: Alameda Municipal Power's ability to preserve its solid financial performance despite declining MWh sales and the expiration of a favorable renewable power sales contract is key to supporting the current rating.
The city of Alameda is a 22.8 square mile island located in the San Francisco Bay. AMP provides retail electric service to 34,525 (2015) primarily residential and commercial customers. Residential customers accounted for approximately 37% of energy sales in fiscal 2015.
DECLINING MWh SALES TREND
AMP's MWh sales have exhibited a persistent downward trend, with fiscal 2015's sales approximately 13% lower than in fiscal 2008. Management attributes the ongoing sales decline to increased energy efficiency, customer installation of solar units, and relatively mild winters in recent years.
Financial performance has remained relatively stable despite the decline in MWh sales due to the Alameda Public Utilities Board's demonstrated willingness to increase and restructure rates. Annual rate increases from fiscal 2011 through 2016 have ranged from 2% to 5% with the most recent, implemented in fiscal 2016, at 4.6%. An additional rate increase of 5% has been approved and will take effect on July 1, 2016. Importantly, rate action in the last three years included the gradual increase of a fixed charge on residential bills.
SOLID FINANCIAL PROFILE
Financial performance remained sound in fiscal 2015 with Fitch-calculated debt service coverage of 3.63x and coverage of full obligations at 1.26x. Including temporary revenues of around $6.2 million (10.5% of total revenues) from the contracted sale of surplus renewable energy and approximately $640,000 from the sale of surplus greenhouse gas emission allowances, debt service coverage increased to 6.19x and coverage of full obligations to 1.89x in fiscal 2015. The contract for the sale of surplus renewable energy expires at the end of calendar 2016. Forecasted financial performance is expected to be in the range of AMP's financial performance without these revenues.
AMP maintains strong liquidity levels with 310 days cash on hand or approximately $36 million in unrestricted funds at fiscal year-end 2015.
DIVERSE, RENEWABLE POWER SUPPLY
AMP purchases 100% of its power requirements from a variety of suppliers under long-term contracts. With the exception of market purchases, AMP's resources are carbon-free and primarily renewable (geothermal, wind and landfill gas). Its largest power supply provider is Northern California Power Agency (NCPA), a joint power agency. AMP is a member and participant in multiple NCPA generation projects pursuant to long-term, take-or-pay purchase power contracts.
NCPA's geothermal project (rated 'A+' by Fitch) has historically provided the largest component of AMP's power supply, approximately 30%. In 2013 AMP began selling some of its excess renewable power, including its geothermal energy, under contract to the California Department of Water Resources (CDWR). The contract expires on Dec. 31, 2016. Management reported that approximately 72% of its energy in 2015 would have qualified as renewable under California's renewable portfolio standard, if the contract with CDWR had not been in place.
AMP's market purchases to meet native load are coordinated by NCPA and increased substantially since 2013 due to the sale of its excess renewable energy and declines in energy received from AMP's hydro resources. However, market purchases are expected to return to historical levels beginning in fiscal 2017 with improved water conditions and the expiration of the renewable power sales contract.
Proposition 26 Challenge
A lawsuit challenging the legality of AMP's transfer to the city's general fund has been filed. Similar lawsuits have been filed in other California cities claiming that utility transfers to a city's general fund constitutes an impermissible non-voter approved tax under California's Proposition 26 (2010). The city is defending the lawsuit, but may also submit a ballot measure to the voters to authorize the transfer in the November election. Fitch views the outcome of the ballot measure as neutral to the rating as the cost savings from the transfer's elimination would likely be returned to ratepayers through reductions in future rates or by other means.