AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns the following ratings to the city of Los Angeles, California (the city):
--Approximately $350,000,000 wastewater system revenue bonds, series 2013-A and 2013-B rated 'AA+';
--Approximately $350,000,000 wastewater system subordinate revenue bonds, refunding series 2013-A rated 'AA'.
The subordinate lien bonds are scheduled to sell via negotiation the week of May 6 while the senior lien bonds are scheduled to sell via negotiation the week of May 20. The bonds are being issued to refund a portion of the city's wastewater system (the system) debt for interest savings and desired debt restructurings, pay for system capital costs, fund a deposit to the debt service reserve fund for the senior lien bonds, and pay costs of issuance.
At this time Fitch also affirms the following ratings on the system's outstanding debt (pre-refunding):
--$1.1 billion in outstanding senior lien bonds at 'AA+';
--$1 billion in outstanding subordinate lien bonds at 'AA'.
The Rating Outlook Stable.
SECURITY
Senior lien bonds are secured by net revenues of the system after the payment of operations and maintenance (O&M) expenses. Subordinate lien bonds are secured by net revenues of the system after payment of O&M expenses and all senior lien requirements pursuant to the senior lien general resolution.
KEY RATING DRIVERS
SOLID FINANCIAL PERFORMANCE: The system exhibits sound financial metrics, despite some weakening in debt service coverage (DSC) the last few years. DSC is expected to show gradual improvement through the fiscal 2017 forecast period and be more in line with historical norms.
SIGNIFICANT RATE COMMITMENT: The mayor and city council recently passed an unprecedented 10-year rate package that should enhance system financial performance over the long term and provide a sizeable source of equity funding for capital needs.
HIGH LEVERAGE: Debt levels remain elevated and planned capital expenditures continue to be large. However, the capital improvement program (CIP) remains well below that from a few years ago and is more focused on renewal of system assets as opposed to addressing regulatory deficiencies.
EXPANSIVE SERVICE TERRITORY: The service area is large with diverse economic underpinnings, despite recessionary pressures.
RATING SENSITIVITIES
IMPROVING FINANCIAL METRICS: It will be important for the system to generate improved financial margins over the coming years in order to generate increased net revenues for pay-go capital and alleviate ongoing debt pressures.
CREDIT PROFILE
SOME WEAKENING IN DEBT SERVICE COVERAGE
Financial performance historically has been good and has yielded solid DSC and sound liquidity. However, the system has experienced recessionary pressures coupled with water conservation measures that reduced flows in recent years leading to annual declines in DSC since fiscal 2009. For unaudited fiscal 2012, senior DSC remained a strong 2.3x but total DSC was a relatively weak 1.3x based on Fitch-calculated DSC. Despite the drop in DSC, liquidity metrics have remained favorable and relatively constant, posting 215 days cash and 195 days of working capital for unaudited fiscal 2012.
ADOPTED RATES A MAJOR POSITIVE
The declining DSC results are a credit concern, but the recent 10-year rate package approved unanimously by the mayor and city council in 2012 should lead to enhanced financial results through the fiscal 2017 forecast period and beyond. The rate plan calls for 4.5% annual increases for fiscals 2012-2014 followed by 6.5% yearly adjustments for fiscals 2015-2021. The fiscal 2012 increase became effective in April 2012, while the fiscal 2013 hike was enacted at the beginning of the fiscal year (July 1); all subsequent adjustments will also be enacted at the beginning of each fiscal year. No additional action is required prior to the rate hikes taking effect.
ELEVATED LEVERAGE TO STABILIZE
In addition to the expectation for improved financial performance, the rate adjustments should provide for an increasing annual level of equity capital funding, alleviating leverage pressure over time. Currently, debt ratios are high relative to other comparably rated utilities and will increase further over the fiscal 2013-2017 CIP horizon. However, no material weakening of the system's debt profile is expected over the CIP timeframe.
CIP costs in general have declined in recent years to the current $1.3 billion level. The lower costs are partially the result of completion of mandated regulatory projects, particularly those associated with a 10-year collection system settlement agreement (CSSA) signed in 2004 between the city and regulators. While CSSA required projects are nearing completion, the CIP continues to allocate significant funding to pipeline renewal in order to address aging infrastructure and ensure continued system performance.
VAST SERVICE TERRITORY STILL RECOVERING
The system provides wastewater collection, treatment, and disposal services for an area of about 600 square miles, including most of the city and certain neighboring municipalities. Customer levels have remained virtually flat over the last five fiscal years and currently number around 657,000 accounts.
The city experienced widespread job loss through the current economic downturn and unemployment remains elevated at 11.3% for December 2012 despite some year-over-year improvement. Service area wealth levels are around 20% lower than the state but on par with the national average. Despite the approved rate package, residential customer charges are expected to remain within or near Fitch's 1% of median household income affordability benchmark.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 12, 2012;
--'U.S. Water and Sewer Revenue Bond Rating Criteria', August 3, 2012;
--'2013 Water and Sewer Medians', dated Dec. 5, 2012;
--'2013 Outlook: Water and Sewer Sector', dated Dec. 5, 2012.
Applicable Criteria and Related Research
2013 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695755
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684901
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=788978
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