Fitch Rates Glendale Water and Power, CA's Electric Rev Rfdg Bonds 'A+'; Outlook Revised to Negative
Fitch Ratings assigns an 'A+' rating to the $23.69 million electric revenue refunding bonds, 2013 series, to be issued by the city of Glendale, CA (the city) on behalf of Glendale Water and Power (GWP), a department of the city.
Bond proceeds will refund the series 2003 bonds for savings, the majority of which will occur in fiscal years 2014 and 2015. The 2013 series will mature in 2032.
In addition, Fitch affirms the following ratings:
--$117.28 million electric revenue bonds, series 2003 (to be refunded), 2006 and 2008 at 'A+'.
The Rating Outlook is revised to Negative from Stable.
The bonds are special obligations of GWP payable solely from electric system net revenues.
KEY RATING DRIVERS
LIMITED RATE FLEXIBILITY: The Negative Outlook reflects Fitch's view that the utility may not have sufficient support from the city council to implement the magnitude of rate increases that appear necessary to restore financial metrics to historical levels. Although GWP management anticipates rate increases beginning in fiscal 2014, prior projected increases have not materialized.
FINANCIAL PRESSURE: GWP's margins continue to decline in the absence of anticipated rate relief and increasing costs. Large transfers to the city's general fund, along with capital plan funding through operations and draws on cash balances, continue to stress GWP's financial metrics.
STABLE SERVICE AREA: The city benefits from the diverse local economy and labor market of the greater Los Angeles area. The service area and customer base are mature, but have seen recent sales growth due to a more normal weather pattern in fiscal 2012 and some economic growth.
POWER SUPPLY DIVERSIFICATION: GWP has a diverse power supply portfolio that provides competitively priced energy. Recent investments in renewable projects strengthen the utility's ability to comply with upcoming state renewable portfolio standard (RPS) targets.
ADEQUATE BUT DECREASING LIQUIDITY: Cash and reserves provided an adequate 136 days cash on hand (DCOH) at fiscal year-end 2012; however, the continued decline in liquidity amounts are a concern.
INADEQUATE RATE RELIEF: Failure to secure adequate rate relief to stabilize funds available for debt service (FADS) and restore financial metrics to historical levels would likely result in a negative rating action.
GWP is an enterprise fund of the city, providing service to all 85,358 electric customers within the city's borders. The city is located adjacent to the city of Los Angeles and benefits from its diverse economy. Energy sales rebounded in 2012, after three years of decline, due to a more normal summer weather-wise and increased economic development.
GWP's power supply mainly consists of the utility's participation in various joint action agencies, including the Intermountain Power Project (IPP) and the Southern California Public Power Authority (SCPPA). Capacity of 496 MW satisfactorily covers GWP's fiscal 2012 peak demand of 316 MW. Approximately 25% of GWP's 2012 power supply was coal-based, which is relatively low compared to other southern California municipal utilities. GWP has been actively diversifying its generation portfolio and is well positioned to comply with the RPS targets.
RATE INCREASE DELAYED
City council has the sole authority to revise rates, without oversight from any state agency or regulatory board. GWP's previous financial projections assumed a substantial electric rate increase would be in place by September 2012. The increase has not been implemented and any consideration of an increase has been postponed until summer 2013. A multi-year rate increase is proposed in conjunction with a planned bond issuance, and would help to restore GWP's financial margins and liquidity levels. However, in Fitch's view, the electric system may not have sufficient support at the city council level to implement the needed rate increases. Continued delays in timely rate recovery will put further pressure on the rating.
FINANCIAL PRESSURE A CREDIT CONCERN
GWP's declining financial performance is a concern. Fitch-calculated debt service coverage (DSC) was 4.13x in fiscal 2012. However, Fitch's focus is on coverage after transfers. Factoring in the utility's large general fund transfers, GWP's adjusted DSC falls to 1.04x. The transfer is legally subordinate to debt service, however, the city's general fund is reliant on the transfer to fund its operations.
Adjusted DSC (after transfers) is projected to fall below 1.0x in fiscal 2013 and GWP may rely on cash reserves to support the general fund transfer. The city and GWP have agreed to a transfer decrease, but Fitch views the decrease as credit neutral, given the minimal amount ($250,000 per annum).
Financial pressure should lessen over the next five years, assuming approval of the rate increase. Thereafter, electric rates will need to adapt to GWP's escalating debt service schedule as principal begins to amortize. GWP anticipates issuing $60 million in new debt in fiscal 2014 to fund its capital plan.
Electric fund unrestricted cash declined from $154 million at fiscal year-end 2008 to $64 million at fiscal year-end 2012. The spend-down has largely funded capital projects. The potential use of liquidity balances to support general fund transfers, is a concern.
CONCERNS WITH GOVERNANCE
Fitch has concerns regarding governance at GWP and delays in planned rate requests and bonds issuances. Given the scale and pace of developments in the California electric industry, the pursuit of a focused long-term business strategy is one of Fitch's key rating factors for electric bonds. Recent restructuring and a new management team at GWP indicate that going forward there will be a more direct relationship between GWP and the city. Fitch is looking for management stability to occur and consistency between planning and execution throughout the various governance layers.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria', Dec. 18, 2012;
--'Revenue-Supported Rating Criteria', June 12, 2012.
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
U.S. Public Power Rating Criteria
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