Moody’s Investors Service affirmed its Aa3 rating and stable outlook on the Los Angeles Department of Water and Power debt ahead of a $520.9 million refunding on Friday.
The bonds will refund outstanding Series 2003A, Subseries A-1 and A-2. Bank of America Merrill Lynch and Morgan Stanley are co-lead managers on the deal.
The affirmation applies to $5.8 billion of senior-lien bonds. Moody’s also affirmed its Aa3/VMIG-1 rating on $969 million of outstanding variable-rate bonds.
Standard & Poor’s and Fitch Ratings both rate the bonds AA-minus.
One key ingredient in the utility’s strategy to meet renewable goals is the establishment of higher electricity rates, according to the Moody’s report.
LADWP’s board adopted a two-step 10.9% rate increase that went into effect November 2012.
“The rating considers the well-managed utility’s sound operating record, diverse and competitive resource mix, and consistently strong financial position,” Moody’s analysts wrote. “Additional leverage could create rate pressures as LADWP manages its transition to a less carbon based power supply.”
The department’s power supply is undergoing a major transformation that will eliminate its current 39% use of coal-fired generation by 2030.
According to analysts, the utility is also on track in meeting California’s goals of using 33% renewable energy.
Execution of its strategy to move away from coal will require major additional leverage, increasing the utility’s debt ratio not to exceed 68%, according to the report.
“This, along with enhancing transmission and distribution reliability, will preoccupy LADWP for the next decade,” the report said.
Moody’s analysts said there is notable execution risk in the strategy, but management leadership and a plan that appears to be flexible and manageable should permit continued financial stability.
