LOS ANGELES — The Los Angeles Department of Water and Power received across the board AA-minus rating affirmations ahead of a $450 million power system revenue bond pricing.
RBC Capital Markets is bookrunner and J.P. Morgan is co-senior manager.
The 2014 Series D bonds are slated for retail sales Oct. 8 followed by institutional pricing on Oct. 9. Maturities range from 2019 to 2034 on the serial bonds. Term bonds will sell in two tranches: $136 million with a July 1, 2039 maturity, and $144 million with a July 1, 2044 maturity.
Fitch, rating the bonds AA-minus, said the capture of around 45% of revenues through automatic cost recovery rate mechanisms partially mitigates its concerns about LADWP's lengthy and politically charged rate environment.
LADWP's last power system base rate increase was in the fall of 2012, when it received approval to increase power rates in the remaining months of fiscal 2013 by 4.9% and fiscal 2014 by 6%, according to Fitch.
At that time, additional rate increases were contemplated for fiscal years 2015 and 2016, but were postponed as the system grappled with billing issues brought on by a new computer system. Now, the DWP plans to wait until spring 2015 to seek rate increases, Fitch said.
Management stability at the senior staff level partially mitigated Fitch analysts' concerns over turnover at the general manager level, they said.
Marcie Edwards, the general manager, was appointed in March. Her predecessor, Ron Nichols, served in the position nearly three years, but prior to Nichols the position had turnover almost annually for a five year period.
Fitch said the stable senior staff provides LADWP with a strong level of operational continuity and long-range financial and power supply planning although the turnover in the general manager position raises concerns, because of the "magnitude of issues facing both water and power utilities in California."
Fitch raised concerns that the $8.6 billion capital plan will increase leverage from already high levels, but said the financial margins are healthy at over 2.2 times debt service coverage.
The department plans to fund $3.4 billion of its five-year $8.6 billion capital improvement plan using cash and the remainder by issuing bonds, according to preliminary offering documents.
Board guidelines require that the debt-to-capitalization rate stay under 68%.
S&P, for its AA-minus rating, cited the department's large base of more than 1.4 million customers providing a diverse and stable revenue stream.
"In part, the ratings reflect our assessment of sound financial metrics after accounting for direct debt and off-balance-sheet financial commitments, and the financial flexibility that competitive retail electric rates provide," said S&P analyst David Bodek.
Moody's Investors Service rates the debt Aa3.
LADWP has $7.6 billion in outstanding power revenue bonds of which 78% are fixed rate, 15% are variable rate, 4% are fixed rate notes and 3% are commercial paper. It has no interest rate swaps. It also has $2.6 billion in take-or-pay debt related to jointly-owned generation and transmission facilities, but $803 million of that is prepaid.
The DWP plans to spend roughly $1.9 billion over the next five years to expand its renewable portfolio, said John Dennis, managing director of power planning, during the department's roadshow presentation on munios.com.
The expansion of the renewable portfolio, which includes increasing the system's use of wind, thermal and natural gas, is manageable given the size of the power budget, Dennis said.
The exit from coal should also reduce the department's exposure to the cap and trade market, Dennis said.
