Moody’s Investors Service revised its outlook to stable from positive Tuesday on the Los Angeles Department of Water and Power’s Aa2-rated water system revenue bonds.
“The trajectory for credit quality improvement has slowed due to the DWP’s modestly weaker current and projected debt service coverage and somewhat lower levels of projected ongoing cash balances versus previous expectations,” Moody’s said in its release.
The action came ahead of this week’s pricing of $310.1 million of 2011 Series A water revenue bonds.
Standard & Poor’s affirmed its AA rating and stable outlook ahead of the deal. Fitch Ratings affirmed its AA-plus rating and stable outlook.
LADWP has projected rate increases of 30% over the next five years that will have to be approved by the Los Angeles City Council and the LADWP board of commissioners, according to the Standard & Poor’s report.
Standard & Poor’s analyst David Bodek said in an interview that analysts will watch to see if the city agency maintains an alignment of revenue, expenses, and debt services consistent with what happened in the past. The city agency received high marks in the Standard & Poor’s report for maintaining consistency in terms of financial metrics.
The bond issuance is a refunding designed to take advantage of market opportunities available to capture more favorable rates, Bodek said.
Though the department needs to upgrade systems to meet new environmental laws over the next several years, which will require significant capital spending, Bodek said water rates in Los Angeles are competitive with other California cities and would remain so even if the proposed rate increase were implemented.
“In terms of financial performance, we have seen that they have the capacity to meet their debt obligations,” Bodek said.
If the rate increases are not adopted, however, Standard & Poor’s could change its view down the road on the soundness of the utility, he said.
LADWP officials declined to be interviewed. In preliminary retail pricing Wednesday, yields ranged from 1.55% with a 4.00% coupon in 2017 to 4.25% with a 5.00% coupon in 2036. Debt maturing in 2041 was not offered to retail.
Citi ran the books on the deal. Public Resources Advisory Group was financial advisor.