Bangkok--11 Aug--Standard & Poor's
Standard & Poor's Ratings Services has assigned its 'AA-' long-term rating to Los Angeles Department of Water and Power (LADWP), Calif.'s power system revenue bonds, series 2010C. At the same time, Standard & Poor's affirmed its 'AA-' long-term and underlying ratings on the department's parity power system revenue bonds and its 'A-1+' short-term rating on the utility's $200 million power system revenue commercial paper (CP) notes. The outlook on the long-term ratings is stable.
"The utility's large base of 1.4 million customers provides what we view as a diverse and stable revenue stream," said Standard & Poor's credit analyst Peter Murphy.
LADWP officials plan to issue the 2010C as federally taxable Build America Bonds (BABs), in which the department will receive a subsidy from the U.S. Treasury equal to the lesser of interest due, or 70% of the tax credit bond rates as determined by the U.S. Treasury. The U.S. Treasury will pay the subsidy for BABs, if issued, directly to the LADWP. The subsidy does not constitute security for the payment of principal or interest on the 2010C bonds. We understand the department is issuing the 2010C bonds to fund its wind and solar generation projects, furthering Los Angeles' renewable energy goals.
LADWP exhibits what we believe to be sound financial metrics after accounting for direct debt and off-balance-sheet financial commitments. However, the utility is projecting that $5.3 billion of 2011-2015 capital needs and rising operating costs will place pressure on financial margins. The department is to finance about $3.2 billion of the capital program with debt; we believe moderate additional rate increases could preserve financial metrics.
The utility's financial flexibility comes from retail electric rates that we believe exhibit a significant competitive advantage relative to its neighboring investor-owned utility. However, we believe that some of that advantage might erode as rates incorporate rising variable costs and debt service tied to capital spending.
The stable outlook reflects our assessment of base-rate adjustments and the variable cost pass-through mechanism's capacity to address cost pressures. However, LADWP projects that substantial additional debt and fixed contractual commitments needed to meet generation and system capital needs will continue to pose a challenge to maintaining historically strong financial margins at levels that we believe are only adequate for the rating.
RELATED CRITERIA AND RESEARCH
USPF Criteria: Electric Utility Ratings, June 15, 2007
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Media Contact:
Ana Sandoval, New York (1) 212-438-5095,
[email protected]
Analyst Contacts:
Peter V Murphy, New York (1) 212-438-2065
David Bodek, New York (1) 212-438-7969