OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' rating to the approximately \$89.3 million qualified obligation revenue refunding bonds series 2015-B issued by the California Municipal Finance Authority (CMFA) on behalf of Anaheim Public Utilities (APU).

The bonds are scheduled to price June 29, 2015. Proceeds will be used to: i) refund all or a portion of the outstanding series 1999 and series 2007 revenue bonds, ii) finance a portion of the utility's capital improvement plan, iii) fund the debt service reserve fund for the bonds, and iv) pay cost of issuance.

The Rating Outlook is Stable.

SECURITY

The CMFA qualified obligation bonds are parity obligations and secured by a pledge of net revenues of APU.

KEY RATING DRIVERS

MATURE SERVICE AREA, SOME GROWTH: APU provides retail electric service to 115,474 customers within the city of Anaheim. The electric system was noticeably affected by the recession, however recent years show signs of recovery, as evidenced by growth in retail energy sales, somewhat tempered by weather-related fluctuations.

STRONG RATE FLEXIBILITY: Management maintains the authority to employ timely rate adjustments, which provides flexibility to adapt to unexpected cost pressures. In addition, there is a history of unanimous support for base rate increases at the city council level, when requested.

IMPROVED FINANCIAL PERFORMANCE: Financial margins and Fitch-calculated debt service coverage (DSC) have improved in recent years, due to base rate and automatic cost adjustment increases taking effect, coupled with prudent management of expenses. DSC is still low compared to the rating category median, but is expected to approximate 2.0x.

INCREASING LIQUIDITY BALANCES: Unrestricted reserve levels have strengthened and improved ahead of schedule, but are still somewhat below pre-recession levels. Stronger than anticipated financial performance in 2013 helped bolstered reserves earlier than planned, but levels remain below the 'AA-' rating category median.

HIGH DEBT LEVELS: APU's debt levels are high compared with similarly rated entities, especially after including off-balance sheet joint action agency debt. While the utility is working to accelerate debt repayment, leverage is expected to remain at an elevated level due to APU's upcoming capital needs.

CHANGING POWER SUPPLY: The state's renewable mandate and greenhouse legislation require APU to implement changes to its predominately coal-based power supply. The rating reflects Fitch Ratings' expectation that the cost of power supply transition will be absorbed by ratepayers and will not result in weaker financial metrics.

RATING SENSITIVITIES

COMMITMENT TO RATE INCREASES: An unwillingness by Anaheim Public Utilities to supplement the historical use of rate stabilization adjustments (RSAs) with periodic base rate increases to cover rising costs, and to sustain the utility's improved financial profile and increase unrestricted fund balances, would result in negative rating pressure.

CREDIT PROFILE

APU is an enterprise system of the city that provides both retail electric and water service within the city limits of Anaheim. The systems are operated separately and not obligated to each other. The city's economy is largely dependent on tourism and the electric system has substantial sales to industrial and commercial customers (approximately 44% of total energy sales in 2014). There is some customer concentration, with the ten largest customers accounting for 20% of 2014 MWh sales.

APU has historically issued the majority of its debt through APFA, but will be issuing the 2015B bonds through CMFA. The new money portion of the bond issuance will help fund APU's capital plan, which focuses on transmission and distribution upgrades and system undergrounding. In addition, the Series 2015B bonds will refund all or a portion of the outstanding series 1999 and 2007 bonds for savings and will repay the refunded series approximately 3 years earlier than scheduled. Fitch views APU's strategy to lessen its debt burden prior to anticipated capital plan funding as prudent.

FINANCIAL CONDITIONS IMPROVE

The electric system was noticeably affected by the recession, given the city's dependence on tourism and the utility's large concentration of industrial and commercial customers. However, fiscal years 2012 through 2014 showed strong signs of recovery, as evidenced by strengthening financial metrics and retail energy sales growth. Fitch-calculated DSC was 1.83x in fiscal 2014, and a strong 1.48x factoring in the utility's modest transfer to Anaheim's general fund. DSC in 2013 and 2014 has been well above APU's historical average of 1.60x.

Unrestricted reserve levels have started to strengthen as well and show substantial improvement from the low reached at fiscal year-end 2011. Unrestricted reserves have increased more quickly than anticipated, as previous projections did not show any meaningful increase until fiscal years 2014-2015.

APU's financial profile and metrics, while stronger than historical performance, are still below the median levels for the 'AA-' rating category. The somewhat weaker financial metrics are partially mitigated by APU's rate flexibility supported by two adjustable components in the rate structure that allow for timely recovery of additional cost components. These adjustment factors, in addition to the use of regular base rate increases, provide timely rate recovery, which Fitch believes is critical as APU implements changes to its power supply.

RENEWABLE INVESTMENTS ONGOING

APU operates and manages a resource mix that is made up of city-owned and jointly-owned resources, along with transmission and distribution facilities. The current resources are predominately coal-based, which accounted for 46% of energy supplied in 2014. The remainder of 2014 energy supply was natural gas (21%), renewable (25%), large hydro (1%) and market purchases (7%).

Management has been focused on diversifying its resource mix since 2007, when APU sold its 70-MW interest in the San Onofre Nuclear Generating Station. Diversification emphasis has been on increased generation from natural gas and various renewable resources. The utility anticipates a new biomass contract should come online in early 2016. APU will enter a 20-year agreement to purchase the full output from a 20 MW renewable energy plant being built at the county landfill in Irvine, CA. APU has added 31 MW of renewable power over the past two years and the baseload biomass contract is part of the utility's long-term plan to move away from its coal reliance.