LOS ANGELES — The Los Angeles Department of Water and Power is anticipating strong demand and tight spreads when it prices $322 million in power revenue bonds this month.
Retail pricing is slated for May 28 with institutional pricing to follow on May 29.
Barclays Capital will act as book runner with Morgan Stanley & Co. as co-senior. Co-managers are Citi, Cabrera Capital Markets, LLC, Loop Capital Markets LLC, Samuel Ramirez & Company, Inc., and U.S. Bancorp Investments, Inc.
Public Resources Advisory Group is financial advisor with Orrick, Herrington & Sutcliffe LLP as bond and disclosure counsel.
LADWP anticipates a strong reception from the market given the low supply of high-grade California paper in recent months, said Mario Ignacio, assistant chief financial officer and treasurer.
"There has not been a lot of long paper offered in the market and we are hoping there is pent-up demand for our structure, which has over half the bonds maturing in 2042 and 2043," Ignacio said.
Ahead of the deal, Moody's Investors Service has affirmed its Aa3 rating and Fitch Ratings affirmed its AA-minus rating. LADWP has $7.19 billion in outstanding power system revenue bonds.
The capture of around 50% of revenues through automatic cost recovery rate mechanisms partially mitigates Fitch's concerns "regarding the lengthy and politically charged rate environment for this utility," analysts said.
Moody's released a report on May 1 saying that a proposal by the Los Angeles 2020 commission calling for external rate regulation and greater oversight of the department would be a credit negative, if enacted. The commission report came out of a body formed by Los Angeles City Council President Herb Wesson in early 2013 to study and report on fiscal stability and job growth in the city. Changes to LADWP's rate review process would require a charter amendment.
In that report, Moody's said LADWP "has demonstrated an ability to navigate current procedures to produce sound financial metrics and security for bondholders."
Neither Fitch nor Moody's analysts were concerned over the impact of having a new general manager in Marcie Edwards, who assumed the leadership role in February. What ameliorated concerns for the rating agencies was Edwards extensive experience in the utility industry.
Edwards launched her career at LADWP at the age of 19 and rose through the ranks before leaving to work as Anaheim water and power utility's general manager for 13 years. She was working as Anaheim's city manager when Los Angeles officials approached her about working for LADWP.
"The resignation of the utility's general manager in January 2014 was potentially a credit risk, but an industry veteran with broad California municipal electric utility experience was installed as new GM in 2014," Moody's analysts said in their rating report.
Both Fitch and Moody's analysts cited stability at the senior staff level for partially mitigating concerns over turnover at the general manager level. Edwards replaced Ron Nichols, who had served as general manager for nearly three years. Prior to Edwards there had been significant turnover in the position over the previous five years.
The nation's largest municipal utility has some concerns on whether there might be a pullback in the municipal market given the steady rally in rates so far this year or a cheapening of ratios due to an influx of supply, Ignacio said.
"We hope that investors think about the amount of reinvestment flows over the next few months as they consider LADWP's offering," he said.
Additional offerings are predicated on decisions regarding the budget expected during upcoming budget talks, officials said. More bond offerings are planned on both the utility's power and water sides before the end of the calendar year.
Proceeds from this month's deal will help fund $7.5 billion in five-year capital improvements to the power system that began on July 1, 2013, according to preliminary forecasts. The offering completes the $522 million in debt planned for fiscal 2013-2014.
LADWP has a total of $4.3 billion tentatively planned for the power side through 2018 that includes debt issued this fiscal year. It has $2.9 billion planned to support water projects through 2018.
Part of the capital program may be financed through a yet-to-be-created joint powers authority authorized in Assembly Bill 850, which was signed by the governor in October 2013. It allows a JPA to issue "rate reduction bonds" for public utility projects in California.
Proceeds from those bonds would support water system-related projects and would be secured by a separate utility project charge imposed by the JPA on the department's customers.
