OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' rating for the following bonds issued by the San Francisco Public Utilities Commission (SFPUC), CA on behalf of the electric power system:

--\$33.7 million power revenue bonds, series 2015A (Green Bonds);
--\$5.1 million power revenue bonds, series 2015B.

Proceeds from the series A bonds will finance a rewind of hydro-generating units at Moccasin Powerhouse and other generating facility improvements. Proceeds from series B bonds will finance rehabilitation of transmission and distribution lines. The bonds will be issued via negotiated sale the week of May 4, 2015.

The Rating Outlook is Stable.

SECURITY

Bonds are secured by a pledge of net revenues of the power system.

KEY RATING DRIVERS

VERTICALLY INTEGRATED SYSTEM: SFPUC operates Hetch Hetchy Power (power system), which is a vertically integrated, predominately hydroelectric generation-based power system that serves the City and County of San Francisco's (San Francisco) municipal buildings, city departments, airport, streetlights, and other retail users.

SOLID FINANCIAL POSITION: The system's financial profile is solid with low debt (91.6% equity to capitalization ratio) and healthy liquidity (560 days cash) ratios, but volatile financial margins that are driven by weather and water conditions. Cash levels are expected to remain sound, although persistent drought conditions could strain liquidity metrics more than expected.

SIGNIFICANT CAPITAL NEEDS: The system's significant 10-year capital plan includes large-scale projects affecting the system's aging infrastructure. Debt financing will support the bulk of the improvements (72.4%), sharply increasing the system's debt metrics and fixed costs over the next 10 years.
Projected financial results show debt service coverage levels declining to around 1.4 times (x) by 2025.

FAVORABLE POWER SUPPLY: The greenhouse gas (GHG) free and relatively low cost generation resources fully comply with California's renewable portfolio standard (RPS). However, the system's reliance on hydroelectric power exposes system operations and financial performance to on-going drought pressures.

RATE INCREASES EXPECTED: Rate increases have been adopted and are projected to continue through 2025 to support revenue needs in anticipation of a more capital intensive phase in the power system's business cycle. The rating presupposes that the proposed rate increases are adopted to maintain adequate financial metrics for the rating.

RATING SENSITIVITIES

PG&E DISPUTE: A dispute with PG&E regarding a successor to their existing interconnection agreement could result in a significant increase to the power system's annual costs, negatively pressuring the power system's financial performance and rating unless offset by additional rate increases.

SOLID LIQUIDITY: Fitch views the system's solid liquidity levels as providing an important cushion against hydro-variability as well as the system's significant capital needs. A weakening of cash balances below projected results could place negative pressure on the rating.

CREDIT PROFILE

The Hetch Hetchy Water and Power system, part of the SFPUC, manages the collection and conveyance of approximately 85% of SFPUC's water supply, as well as the generation and transmission of electricity from hydroelectric plants located along the water conveyance system and from local renewables.

The water and power operations within Hetch Hetchy Water and Power are accounted for separately, although the systems are jointly operated and share various assets. Hetch Hetchy Power provides approximately 17% of San Francisco's electric needs, with the bulk of the power delivered to a stable customer base consisting of municipal buildings, municipal departments, the San Francisco International Airport (SFO), city streetlights, and other retail customers within the city.

HYDROELECTRIC DEPENDENT POWER SUPPLY

The Power system benefits from a relatively low cost, GHG free power supply that is dominated by three hydroelectric generating plants located in the Hetch Hetchy watershed. While the system is run on a 'water first' standard, the constant delivery of water from SFPUC's primary water source allows for the consistent generation of relatively low-cost baseload power.

The system's heavy reliance on hydroelectric power produces a somewhat uneven but predictable energy output throughout the year. Higher water flows in the Spring generally produce excess power that gives way in late summer, requiring the utility to purchase power on the market to meet its needs. As such, market purchases fluctuate annually due to water conditions with a long-term average of 15% (about 150,000 MWh) of retail power needs being purchased in a normal year and 20% (200,000 MWh) in a dry year.

California's on-going drought, which began in 2011 and has not shown any signs of abating, has reduced the amount of energy produced by the hydroelectric plants, resulting in increased power purchases and decreased wholesale sales of surplus power. The cumulative effect has been a compression of financial margins.

SOLID FINANCIAL PROFILE

Liquidity levels for the system are solid with a fiscal 2014 year-end balance of \$138.1 million or 560 days cash on hand. Management's financial projections reflect decreased cash of approximately \$28.6 million combined in fiscals 2015 and 2016, which would leave the system's cash balances at still sound levels. Fitch views the maintenance of healthy reserve levels as important offsets to the financial risks of a largely hydroelectric dependent power supply and the significant capital investments expected to be made in the system over the next 10 years.

Operating margins have historically fluctuated with weather and water conditions. For example, under relatively wet conditions in fiscal 2011, the Power system's operating margin was 20.6%. In dry fiscal 2014, operating margins were a negative 2.3%. Fiscal 2014's performance was weaker than typical for a dry year due to the impact of the Rim Fire, which led to the temporary shutdown of the electric generation system, resulting in increased purchased power and other costs.

The Power system's debt service coverage levels are expected to gradually decline as additional debt is issued over the next 10 years. Fitch-calculated debt service coverage based on management's financial projections shows coverage of approximately 1.4x in 2025. The rating reflects the projected decline in coverage, which is expected to be offset by the maintenance of healthy reserves throughout the projected time period.

SIGNIFICANT CAPITAL NEEDS

The power system currently has limited leverage, with an equity to capitalization ratio of 91.6% at the end of fiscal 2014. However, the utility's significant \$759.8 million 10-year capital plan, which is expected to be 72.4% debt financed (approximately \$549.9 million), is expected to sharply increase the system's debt burden and fixed costs.

PG&E DISPUTE

The power system relies on PG&E's transmission and distribution system to serve its customers under an interconnection agreement that expires on July 1, 2015. Following the agreement's expiration, SFPUC expects to continue utilizing PG&E's system through an open access tariff.

Negotiations between PG&E and SFPUC to reach an agreement on the successor to the interconnection agreement have not yet been successful. Management reports that the most significant disagreement revolves around PG&E's non-rate terms that would require the power system to install intervening facilities to serve its customers. SFPUC filed a complaint with FERC although an expected final resolution may not be reached until January 2017.

The Power system will continue to utilize PG&E's transmission and distribution system to serve its customers through the open access tariff during and after the FERC process. However, it remains unclear whether or not the power system will be required to construct and install intervening facilities as part of serving its customers.

Management estimates that under a worst-case scenario where the Power system is required to construct intervening facilities as described in PG&E's proposal, the annual costs would range from \$20-\$60 million. These additional costs are not assumed in management's financial projections and could pressure future financial performance, if not offset by additional revenues or savings.