LOS ANGELES — Vernon, California's electric system revenue bonds were downgraded two notches and received a negative outlook.

Moody's Investors Service downgraded the Series 2008A, Series 2009A and Series 2012 A and B bonds to Baa3 from Baa1, citing chronically weak financial metrics

The rating action taken last week concluded a review on Vernon Electric initiated on August 19.

The industrial city, located southeast of downtown Los Angeles, provides services to 1,800 businesses that employ 55,000 people. It has a residential population of 112.

The city's small size creates unique governance challenges as the majority of its fixed costs are borne by commercial and industrial customers, which Moody's said was a factor in the rating.

The downgrade takes into consideration "chronically weak financial metrics including very low adjusted debt service coverage ratios, limited capacity to improve the metrics given the utility's size and the nature of the customer mix, as well as the continued and substantial reliance by the city's general fund on the utility for transfer payments," Moody's wrote.

A major portion of the utility's outstanding debt is related to a natural gas prepay transaction entered into during 2006 that holds significant risk to Vernon Electric and its utility ratepayers should the supplier and the guarantor not perform, Moody's said. The risk was a factor in the downgrade, analysts said.

While there is a low probability of these events occurring, the implications for Vernon Electric are material should parties not perform, analysts said.

Vernon Electric's negative outlook reflects the expectation for continued weak financial metrics, a constrained ability to appreciably raise electric base rates given current base rates among commercial and industrial customers, and an expectation that transfer payments to the city will continue to be material, Moody's said. Additionally, the negative outlook acknowledges the utility's risk tolerance and uncertainty about how the organization will be managed without external oversight that expires in 2017.

 

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