LOS ANGELES — Just a month before Lomita, Calif. executes a plan to bring a local water supply online after a two year delay, Fitch Ratings downgraded $7.2 million in debt related to the project to A from A-plus and gave the debt a negative outlook.

City officials shut down the local water supply two years ago, almost immediately after it opened, when complaints flooded in from residents about the taste and odor of the water, said Gary Sugano, the city’s assistant city manager.

“The water met state requirements,” Sugano said. “It was drinkable and safe, but since we had some complaints, we decided to stop operations and see if we could fix the problem.”

The bond proceeds from the water revenue bonds were used to rehabilitate a city well that fills a reservoir with water treated by a local water treatment plant.

Local water production, which was expected to begin in 2010, was delayed more than two years, resulting in higher than anticipated purchased water costs in fiscal 2011 and fiscal 2012, Fitch said.

The city spent $134,000 to rectify the problems replacing water lines and conducted a taste test in late 2012 with favorable results.

The City Council will vote on Monday whether to return to using water treated by the plant. If they vote in favor, city staff plan to have the treatment plant operating by late February.

“The delay resulted in increased water purchasing costs and lower debt service coverage levels, which fell to less than one times in fiscal 2012,” according to the Fitch report.

The water revenue bonds are the city’s only current debt, but based on the age of its distribution system, Fitch analysts said they anticipate the city will have sizable capital needs. It plans to spend $3 million over the next five years replacing the system’s pipes, which are more than fifty years old.

Currently, the city of 21,000 south of Los Angeles is 100% reliant on Metropolitan Water District of Southern California, which has raised rates nearly 70% per acre-foot since 2009, Fitch said.

The recently implemented five-year rate package should improve revenues to match expenditures and provide adequate debt service coverage, but it will increase rates that are already above Fitch’s affordability threshold, according to the rating agency.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.