LOS ANGELES — The Los Angeles Department of Water and Power comes to market mid-week with a couple of wins under its belt.
The department plans to price $550 million in Series A water revenue bonds with a retail order period on Wednesday and institutional sales on Thursday. It will follow with a $333 million Series B bond sale on May 26.
Standard & Poor’s raised LADWP’s water revenue bond rating a notch to AA-plus from AA on March 31.
Moody’s Investors Service and Fitch Ratings affirmed their ratings at Aa2 and AA.
All assign stable outlooks.
The ratings upgrade comes two weeks after the Los Angeles City Council approved a five-year water and power rate increase.
“We are investing in the Department of Water and Power by pushing through something nobody likes to do, which is raising rates, because we don’t want to see pipes burst,” Los Angeles Mayor Eric Garcetti said at the city’s investor conference last week.
The mayor was referring to an incident that occurred July 2014 that resulted in 20 million gallons of water flooding the University of California, Los Angeles campus and nearby streets in Westwood.
The increases for water and power services that take effect on April 15 will result in an additional $234 million in water revenues and $720 million in power revenues.
The average annual rate increases are 3.86% for power and 5.26% for water over five years.
The water and power utility benefited from a change in criteria that S&P made in January, but S&P Credit Analyst Paul Dyson also cited the rate increase for the upgrade in an interview.
The ratings committee felt that the rate increase means the department has ratemaking ability, because the rate increase was approved through 2020, Dyson said.
The increase means that it will reduce the variation between budgeted debt service coverage and actual debt service coverage, he said.
The series 2016A bond proceeds will be used to fund $200 million in capital improvement projects, refund about $197 million in series 2006A bonds outstanding, and repay $250 million borrowed from its water system revolving loan. The series 2016B bonds are being issued to fund $148 million in capital improvement projects and refund about $185 million in series 2006A bonds outstanding.
S&P’s change in rating criteria put a greater emphasis on the fact that utilities that operate in large metropolitan areas can benefit from economies of scale not available for smaller utilities.
LADWP’s almost 900,000 accounts also means that a small rate change can bring in several millions of dollars without causing a steep hike to users’ utility bills, Dyson said.
The utility is the largest in the U.S. serving 3.9 million residents in Los Angeles County.
It has $4.6 billion in outstanding debt, of which 87% is fixed-rate and 13% variable rate bonds.
Wells Fargo is book runner and Bank of America Merrill Lynch is co-senior manager. Legal counsel is provided by Orrick, Herrington & Sutcliffe as bond counsel and Kutak Rock LLP as disclosure counsel. Rounding out the finance team is KPMG LLP as the independent auditors and Public Resources Advisory Group as financial advisor.