July 2 - Fitch Ratings affirms at 'A+' the following Alameda Public Finance Authority (APFA), CA's Alameda Municipal Power (AMP) refinancing revenue bonds: --$8.700 million series 2010A; --$22.985 million series 2010B (taxable). The Rating Outlook is Stable. The 2010 bonds are issued by the APFA, a financing conduit for various departments within the city of Alameda, including AMP's Bureau of Electricity. SECURITY The bonds are secured by installment payments from AMP to APFA, pursuant to an installment sale agreement dated August 1, 2010. AMP's installment payments are secured solely by a pledge of the electric system's net revenues. AMP's payments to APFA are absolute and unconditional. KEY RATING DRIVERS REFOCUSED ON CORE ELECTRIC BUSINESS: AMP returned to the more traditional (less risk) public power role of providing retail electricity service in 2009, with the sale of the telecommunications division. FINANCIALLY SOUND ALTHOUGH SALES LOW: Electric sales have declined by 2.6% since 2008. Financial performance, however, has remained solid due to the implementation of annual rate increases that began in 2010 and extend to 2015. Coverage is projected to remain in excess of 2.4x prospectively following AMP's 2010 debt restructuring. SOLID LIQUIDITY AND LOW LEVERAGE: AMP's annual rate increases are generating added cash flow as exhibited by the rising days operating cash to 272 days at fiscal year-end 2011. Leverage is modest, at 2.9x debt to FADS for fiscal year 2011, compared to the rating category median of 3.9x. No additional debt anticipated through 2016. FAVORABLE POWER SUPPLY: As a power purchaser, AMP benefits from a diverse mix of mostly renewable resources, accounting for about 80% of power supply in 2011. AMP's largest concentration of power supply is derived from Northern California Power Agency's (NCPA) geothermal project (36% of power supply). AMP is well positioned to exceed the renewable and greenhouse gas reduction targets in the state. COMPETITIVE RATES: AMP's average electric rates are in-line with neighboring utilities, both public and corporate. AMP's rates are 15%-20% lower than its nearest competitor - Pacific Gas & Electric Co. AMP's customers should retain their rate advantage with modest rate increases planned for the foreseeable future. EXPRIRING PURCHASE POWER CONTRACT: AMP has an expiring, low-cost purchase power contract with Morgan Stanley Capital Group, which terminates Dec. 31, 2014. This contract represents 16% of AMP's power supply. AMP recently purchased a replacement contract, but at 20% higher cost and relatively short duration of 2 years. BOARD WILLINGNESS TO RAISE RATES: A key credit strength is the Public Utility Board's willingness to moderately but regularly raise rates in advance of projected cost increases. Rising expenses are mainly due to lower kWh sales, higher purchased power and transmission costs, and pay-as-you-go capital expenditures. WHAT COULD TRIGGER A RATING ACTION FAILURE TO MAINTAIN SOLID FINANCIAL METRICS: The adoption of adequate annual rate increases -- particularly if kWh sales continue to be sluggish -- is essential to meeting AMP's projected financial performance and maintaining the current rating level. MATERIAL ADVERSE DECISION IN PENDING LITIGATION: The sale of the telecom system resulted in litigation by investors in the system. Two lawsuits are outstanding which could result in legal damages to be paid by the electric system even though the telecom debt obligations were not secured by electric system revenues. Fitch believes the potential costs should be manageable by AMP, but it remains an ongoing credit concern. CREDIT PROFILE AMP provides electric distribution service to the entire city of Alameda, a 22.8 square mile island across the bay from San Francisco. AMP serves a population base of just under 75,000, primarily residential and commercial users. ADEQUATE POWER SUPPLY AMP does not own any generation, but purchases 100% of power requirements from varied suppliers of largely renewable resources (geothermal, hydro, wind, and landfill gas). As a result, AMP is well ahead of the state's renewable and greenhouse gas reduction targets through 2020. Its largest power purchase (48% of net power supply) is from NCPA, a joint power agency. AMP is a member and participant in most of NCPA's generation projects pursuant to long term, take-or-pay purchase power contracts. AMP's power supply is sufficient to meet load forecasts at least through 2017. However, AMP will be replacing an existing power supply contract (15 MW from Morgan Stanley Capital Group) that is expiring in 2014, with a shorter duration (2 years) higher cost contract through NCPA's market purchase program. FINANCIAL PERFORMANCE SINCE LAST REVIEW Fitch upgraded AMP's rating in 2010 to 'A+' for several reasons including: the sale of the underperforming telecom system; the restructuring of their debt profile (which advance retired portion of debt and lowered annual debt service payments); the board's conceptual approval of a 5-year rate increase plan; management's adoption of stronger financial targets; and stronger projected financial performance. Each of the rating upgrade factors noted above have been attained with the exception that projected debt service coverage levels are somewhat lower than originally expected primarily due to unanticipated decline in kWh sales in fiscal years 2010 and 2011. AMP is currently projecting debt service coverage will fall to 2.49x in fiscal 2013, as opposed to remaining above 3.0x in the prior rating review, due to revised lower kwh sales forecast. Coverage is projected to return to 3.0x or better in the following fiscal year.