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Fitch Rates Silicon Valley Power (Santa Clara, CA) Series 2008B Bank Bonds 'A+'; Stable Outlook

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings assigns a bank bond rating of 'A+' to the following City of Santa Clara, CA electric system bonds:

--$79.19 million variable rate demand electric revenue bonds, series 2008B.

The ratings are being assigned in connection with the remarketing of the 2008B bonds due to the expected substitution of the letter of credit (LOC) provided by Bank of America, N.A. (rated 'A/F1';Stable Outlook by Fitch) with a three-year LOC provided by the Bank of Tokyo-Mitsubishi UFJ, Ltd. (rated 'A-/F1';Stable Outlook by Fitch) this month.

The bank bond rating is applicable in the event the 2008B bonds cannot be remarketed and are purchased by the LOC provider. Fitch believes the terms governing the bank bonds (i.e., interest rate, default, and amortization schedule) are manageable given Silicon Valley Power's (SVP) strong financial profile and implied access to the debt market if necessary.

The Rating Outlook is Stable.

SECURITY

The electric revenue bonds are secured by a pledge of adjusted net revenues of the electric system. Adjusted net revenues include (for indenture coverage purposes) net operating revenues plus all unrestricted cash balances. Any payments by the City of Santa Clara to the LOC provider, as reimbursement for a draw upon the bank facility, would rank on par with outstanding electric system debt payments.

KEY RATING DRIVERS

RATING UPGRADE MARCH 2012: Fitch's recent upgrade of Santa Clara's electric system (to 'A+' from 'A'), trademarked SVP, is supported by sizeable rate increases (2010-2011), significant improvement in operating cash flow and higher debt service coverage. Additionally, no withdrawals from the cost reduction fund (CRF) are expected in fiscal year (FY) 2012 or beyond.

DIVERSE POWER SUPPLY: The rating is further based upon the system's diverse power supply, sufficient resource capacity and a renewable portfolio accounting for 30% of the energy mix, well in excess of the state mandate of 20% for 2014.

COMPETITIVE RATES: SVP's rates are among the lowest in California. While the utility does not have an automatic fuel cost adjustment in its rate structure, this risk is somewhat mitigated by strong liquidity and demonstrated willingness of the Santa Clara City Council to increase rates as needed.

RECENT RATE ADJUSTMENT: SVP raised rates by 14% over the previous two calendar years (2010-2011) with a goal to replenish the CRF to its target level of $120 million by 2014 and produce sufficient debt service coverage from operating cash flow. Rates are expected to remain flat through calendar year 2012.

INDUSTRIAL CUSTOMER BASE: SVP maintains a largely industrial customer base, accounting for 87% of kWh sales in 2011, with the two largest users accounting for 5.2% and 5.7% of revenues respectively. This industry and customer concentration is somewhat mitigated by the functional diversity of the customer base, the multiyear nature of power supply contracts with the large users, and the relatively stable kilowatt-hour (kWh) sales through the current recession.

OFF BALANCE SHEET OBLIGATIONS: SVP's direct debt is relatively low, accounting for 27% of total capitalization in fiscal 2011, but it increases to 56% after including off-balance sheet debt, which SVP is obligated to pay via take-or-pay contracts.

WHAT COULD TRIGGER A RATING ACTION

MATERIAL DECLINE IN FINANCIAL METRICS: Attainment of projected financial metrics is important given SVP's industrial customer base and the absence of a fuel and purchased power adjustment clause in its rate structure. Fitch will be monitoring SVP's ability to achieve projected operating cash flow sufficient to cover debt service and replenish the CRF to its target of $120 million by 2014.

CREDIT PROFILE

SVP provides electric service to 52,495 customers within the city of Santa Clara, CA. The retail electric utility is composed of generation, transmission, and distribution facilities, serving a population of 118,169. SVP also participates in projects developed by joint power agencies (JPAs) and receives a significant share of its energy through these relationships.

SVP's rates are still the lowest in the region, despite increases totaling 20% over the previous four calendar years, with a 14% increase coming in the previous two calendar years. As a result, SVP's dependence on the CRF declined significantly in fiscal 2010 and was eliminated in 2011.

Correspondingly Fitch calculated debt service coverage in 2011, after payments to the city in lieu of taxes (PILOT), at 2.73 times (x) is better than the 2010 coverage of 1.13x and significantly higher than prior years when SVP relied on the CRF to meet debt service. SVP is forecasting to maintain the recently improved coverage and liquidity, as rates are now set at a level sufficient to provide adequate cash flow for debt service coverage and replenishment of the CRF.

For additional information on SVP, please see the full rating report dated April 16, 2012 on Fitch's website.

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:

--'Revenue-Supported Rating Criteria', June 12, 2012;

--'U.S. Public Power Rating Criteria', Jan. 11, 2012;

--'U.S. Public Power Peer Study', June 18, 2012.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=665815

U.S. Public Power Peer Study -- June 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681449

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Fitch Ratings
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Kathryn Masterson, +1 415-732-5622
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Source: Fitch Ratings