Fitch Ratings has assigned a 'AA-' rating to the following bonds issued by the
Approximately
In addition, Fitch has affirmed the following 'AA-' ratings:
Up to
Up to
Fitch has assessed
The Rating Outlook is Stable.
Proceeds will be used to retire approximately
RATING ACTIONS
Entity / Debt
Rating
Prior
LT
AA-
Affirmed
AA-
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VIEW ADDITIONAL RATING DETAILS
The affirmation of the 'AA-' ratings reflects the very strong financial profile of the Power Enterprise, factoring in sizable capex plans and debt issuance scheduled to occur over the next five years. System leverage, albeit higher, together with ongoing robust liquidity and adequate coverage levels should continue to remain consistent with the current rating, given the enterprise's strong revenue defensibility and low to midrange operating cost burden. Continued strong financial performance will depend heavily on planned rate increases.
The rating is constrained by the customer concentration in the SFPUC's unique service area. SFPUC provides service to certain customers within the city of
Fitch's analysis also takes into account an asymmetric risk factor stemming from
SECURITY
The power revenue bonds are payable from the net revenues of the SFPUC's Power Enterprise. While the Hetch Hetchy Water and Power system is operated on a coordinated basis, bondholders are only secured by net revenues of the Power Enterprise. The bank bond rating reflects the pledge securing the commercial paper notes if they become bank bonds and are payable from a subordinate lien on the net revenues of the Power Enterprise.
KEY RATING DRIVERS
Revenue Defensibility - 'a'
Concentrated Customer Base
SFPUC's revenue defensibility is driven by the Power Enterprise's strong revenue source characteristics, including revenues derived largely by enterprise energy sales to municipal customers and city of
Electric rates continue to experience annual increases needed to bring the majority of customers to a point where cost of service is recovered, and to fund large planned capital investments for the system. The most recent retail rate increase of 14% was implemented on
Operating Risk - 'a'
Increased Operating Cost Burden and Capex Spending
Operating cost burden is considered low, but recent inflationary cost pressures have moved it to borderline midrange/low. The operating cost burden increased to
SFPUC's resource portfolio is almost entirely comprised of hydroelectric generation, contributing to a weaker operating flexibility assessment due to a lack of resource diversity. However, this risk is offset by
Capital improvement spending is substantial with the most recent ten-year financial plan estimating
Financial Profile - 'aa'
Very Strong Financial Profile; Anticipated Leverage Increase
The system's financial profile is supported by robust liquidity and variable financial margins dependent on weather and water conditions. Significant debt issuance expected over the next 10 years is projected to compress coverage and increase leverage, but Fitch expects the financial profile to remain at the 'aa' assessment. Rate increases are needed to keep pace with debt-funded capex and to preserve the 'aa' financial profile assessment, while SFPUC plans to use fund balances to help meet higher costs through fiscal 2025 or 2026.
Fitch expects SFPUC's leverage ratio, measured as net adjusted debt-to-adjusted funds available for debt service (FADS), to spike above 6x over the next two or three years, before returning to below 6x by fiscal 2027 as rate increases begin to achieve full cost recovery.
Asymmetric Additional Risk Considerations
Wildfire Risk in
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Sustained leverage above 6x in Fitch's base and stress scenarios;
Failure to implement timely rate increases in support of bringing all customers to full cost recovery and to support the capital program;
Extraordinary wildfire liability that results in long-term dilution of SFPUC's financial profile.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade in the near term is considered unlikely given the level of customer concentration as well as the significant debt-financed capex plans.
PROFILE
Hetch Hetchy Water and Power is a department of the SFPUC that operates the collection and conveyance of approximately 85% of SFPUC's water supply and the generation and transmission of electricity by hydroelectric plants located along the water conveyance system. 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. Fitch's analysis is based on the Power Enterprise fund, which is the sole source of pledged funds to bondholders.
The Power Enterprise provides hydroelectric, solar, and other power, serving city municipal customers, the
Fitch considers the SFPUC Power Enterprise a related entity of the city and county of
Sources of Information
In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The ESG Relevance Score of '2' for GHG Emissions & Air Quality for
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.
Additional information is available on www.fitchratings.com
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