SAN FRANCISCO - The Los Angeles Department of Water and Power, the largest U.S. municipal utility, plans to sell $190 million of revenue bonds next week.

The bonds are the first of $1 billion of refunding bonds approved by the department's Board of Commissioners last year. The bonds will refund the $181 million Series 2001A-1, a term bond that matures in 2024 and is callable on July 1. The interest rate on the outstanding debt is 5%.

"We're going to save on a net present-value basis about $7.5 million," said LADWP chief financial officer Jeffery Peltola. The department is structuring the deal to carry the same 14.5-year maturity.

The bonds are rated Aa3 by Moody's Investors Service and AA-minus by Standard & Poor's and Fitch Ratings. The agency has about $5.2 billion of power system revenue bonds outstanding.

LADWP plans to be an active issuer of power revenue bonds over the next five years, as it spends $5.3 billion to improve system reliability and meet increasingly rigorous state and local greenhouse gas emission standards. It plans to debt finance about $3.8 billion of the capital improvement plan.

Among the biggest challenges facing the utility is the need to wean itself off coal, which provides 44% of its electricity. California law requires utilities to acquire 20% of their electricity from renewable sources by 2010 and 33% by 2020. LADWP is currently getting just 8% of its electricity from renewables.

All three rating agencies noted the system's rising leverage and falling debt service coverage ratios, but they said the department plans to keep its debt service coverage ratio at about two times. That coverage ratio is calculated after the utility's transfers to the Los Angeles general fund.

"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," Standard & Poor's analyst Peter Murphy said in a report.

The city's projected $530 million general fund budget deficit has meant increasing demands for revenues from the electric utility. The utility plans to transfer $230 million, or about 8% of its operating revenues, to the general fund in the upcoming budget year. That's up from a general fund subsidy of about $202 million, or 7% of revenues, in the current fiscal year.

But the system's rating is supported by its large debt reduction trust fund, which is expected to maintain a balance of about $600 million over the next several years, and by a history of "strong," "sound," or "healthy" financial performance.

The municipal utility also benefits from its freedom to raise rates without regulatory approval from the California Public Utilities Commission and its relatively low current rates.

"While its unregulated status is an important strength, LADWP's competitive position remains a major positive credit factor," said Moody's analyst Dan Aschenbach in a report. He said the municipal utility's rates remain "well below" the prices charged by Southern California Edison, an investor-owned utility in the region.

For the upcoming refunding, De La Rosa & Co. is senior manager in a syndicate that includes Citi, Fidelity Capital Market Services, Goldman, Sachs & Co., Loop Capital Markets, Morgan Stanley, Ramirez & Co., and Wachovia Bank.

Gardner Underwood & Bacon and Public Resources Advisory Group are the financial advisers. Orrick Herrington & Sutcliffe is bond counsel.

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