An increased reliance on natural gas-fired generation by A-credit-rated Silicon Valley Power (SVP) caused Fitch Ratings Wednesday to lower from “positive” to “stable” the outlook for the City of Santa Clara, CA-run electric utility. Fitch affirmed the “A” credit rating on $235 million of outstanding subordinate electric revenue bonds.

SVP’s less bullish outlook is caused by its switch to more dependence on natural gas in the midst of the current global wholesale price volatility, and its resulting $50 million increased annual operating costs as a result. When federal hydroelectric suppliers — Bonneville Power Administration (BPA) and the Western Area Power Administration (WAPA) — had to cut back on supplies, the Santa Clara utility was forced to build its own new 147 MW gas-fired generating facility, and that shift came with a price tag.

As a result, since the Donald Von Raesfeld generating station fired up commercially a year ago, SVP’s dependence on gas-fired power has gone from 8% to 38% in one year, Fitch said in announcing its latest ratings and outlook.

“Although cost pressures attributed to currently elevated natural gas prices will be partially offset by strong hydro flows this year, [SVP] management projects additional budget shortfalls in the near term, even when considering the $18 million in supplemental revenue generated from two 5% rate increases, effective this year,” Fitch said. “It is unclear at this time whether the utility will phase in subsequent rate increases, or continue to run at an operating deficit, which would require an accelerated draw-down of the utility’s substantial cash reserves.”

Fitch said the Silicon Valley muni has maintained more than $400 million in unrestricted cash, equivalent to 865 days of cash-on-hand, and it noted this “unusually strong liquidity position has enhanced the utility’s ability to manage market risks and its capital planning process.”

Fitch also noted the 50,000-customer city-run utility’s historic dependence on a relatively large industrial load of electricity-dependent high-tech firms representing 85% of the utility’s revenue stream, but it noted that the dot-com bust of 2000 has turned around somewhat. “Within the last year, the high-tech business base appears to have stabilized, following a protracted period of economic slowdown in Santa Clara,” Fitch said.

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