Proceeds of the series 2014C bonds will refund outstanding series 2005A bonds for savings. Savings are expected to be taken up front, primarily in fiscals 2017 and 2018. Final bond maturity will not be extended. The 2014C bonds are expected to price on
In addition, Fitch affirms its 'AA-' ratings on the following outstanding parity debt:
--Bank note rating associated with commercial paper (CP) program;
--Bank bond rating associated with outstanding series 2001B and 2002A variable rate bonds.
The Rating Outlook is Stable.
The bonds are special obligations of LADWP payable solely from power system revenues. LADWP's power system bonds do not have a debt service reserve fund.
KEY RATING DRIVERS
STRONG SERVICE AREA: LADWP's greater
FAVORABLE RATE STRUCTURE ELEMENTS: The capture of around 50% of revenues through automatic cost recovery rate mechanisms partially mitigates Fitch's concerns regarding the lengthy and politically charged rate environment for this utility.
FINANCIAL MARGIN IMPROVEMENT: Financial margins were healthy in fiscal 2013 due to a mid-year rate increase and are expected to remain in line with the rating category.
MANAGEMENT STABILITY: Management stability at the senior staff level partially mitigates concern over turnover at the general manager level and appears to provide LADWP with a level of operational continuity.
EVOLVING POWER SUPPLY:
STRONG CAPITAL INVESTMENT: Capital investment in the system has been strong in recent years, at over 200% of depreciation. LADWP projects high levels of investment will continue to be funded from a healthy mix of revenues and debt.
HIGH DEBT LEVELS: LADWP's anticipated debt issuance to fund its very large
POTENTIAL LACK OF RATE SUPPORT: Failure to receive approval of future rate increases needed to offset the department's expected higher operating and capital costs could pressure financial margins and potentially the rating.
STRONG SERVICE AREA
GENERAL MANAGER TURNOVER
RATE ACTION DELAYED
LADWP's last rate case occurred in the fall of 2012, when it received approval to increase power rates in the remaining months of fiscal 2013 (4.9%) and fiscal 2014 (6.0%). At that time, additional base rate increases were contemplated to occur in fiscals 2015 and 2016. Given the implementation difficulties with a new billing system that began in fiscal 2014, LADWP now expects to resolve these issues prior to seeking additional base rate increases.
Mitigating concerns regarding a base rate delay are LADWP's cost-adjustment factors that recover over 50% of electric revenues and will increase automatically with increased costs. Fitch views the use of the adjustment factors as a positive credit factor in that these variable costs or designated capital costs require only Board approval and are not subject to the system's lengthy base rate approval process.
POWER SUPPLY REFORMATION REQUIRED; LADWP MAKING PROGRESS
Long-term changes to LADWP's power supply portfolio are required to meet
IMPROVED FINANCIAL PERFORMANCE
Financial performance in fiscals 2011 and 2012 was mixed with a tightening of margins. Although net revenues stayed flat in the absence of any rate increase, debt service has increased by
Fitch also evaluates LADWP's coverage metric including payment of the 8% of revenue transfer to the general fund debt service coverage after transfers was 1.8x in fiscal 2013. Liquidity at the end of fiscal 2013 remained strong with
SIGNIFICANT CAPITAL NEEDS AND HIGH DEBT LEVELS
For more information, see the Fitch report, 'Los Angeles Department of Water and Power - Power Revenue Bonds'
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria, this action was informed by information from CreditScope.
--'Revenue-Supported Rating Criteria',
--'U.S. Public Power Rating Criteria',
--'U.S. Public Power Peer Study',
U.S. Public Power Peer Study --
U.S. Public Power Rating Criteria
Revenue-Supported Rating Criteria
Source: Fitch Ratings
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