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

--Up to $90 million commercial paper notes (power series) series A-1 (bank notes).

The bank bond rating is assigned to the series A-1 notes but will only become applicable if the notes are purchased by the bank providing the liquidity facility. The rating is based on the underlying long-term rating of the power system.

The new facility will be with Bank of America, N.A. (BANA, rated 'A+/F1'/Stable Outlook).

In addition, Fitch affirms the 'AA-' rating on the following bonds issued by the SFPUC on behalf of the electric power system:

--$32 million power revenue bonds, series 2015A (Green Bonds);
--$7.5 million power revenue bonds, series 2015B.

The Rating Outlook is Stable.

SECURITY

The commercial paper notes have a subordinate pledge on the net revenues of the Power system.

KEY RATING DRIVERS

VERTICALLY INTEGRATED SYSTEM: SFPUC operates the Hetch Hetchy Power System (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 (82.9% equity to capitalization ratio) and healthy liquidity (614 days cash) ratios but with volatile financial margins 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 investments in 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, which is reflected in the rating.

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: The San Francisco Public Utilities Commission's 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.

SOLID FINANICAL PERFORMANCE IN 2015

The power system reported solid financial metrics in fiscal 2015. Debt service coverage and coverage of full obligations were 5.88x and 5.09x, respectively. While currently high for the rating, coverage levels are expected to gradually decline as additional debt is issued over the next 10 years to address the system's significant capital needs. Fitch-calculated debt service is expected to decline to around 1.4x in 2025, which is reflected in the rating.

The system's solid liquidity position remains an important credit strength. At the end of fiscal 2015, the system retained approximately $153.8 million or a healthy 614 days cash on hand. Fitch views the maintenance of above average liquidity as an important offset to the system's hydro-variability exposure, significant capital needs, and expected decline in debt service coverage levels.