Vernon, California, electric revenue bonds upgraded despite lawsuit

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The electric system revenue bonds of the largely industrial city of Vernon, California, received a one-notch upgrade to Baa2 from Moody’s Investors Service, which said it expects the city’s lawsuit with electric provider Bicent California Malburg LLC to be resolved in a credit neutral manner.

The outlook is stable.

The upgrade came Thursday ahead of the city’s plans to issue $156 million in electric system revenue bonds, primarily for a refunding with $13 million in new money to finance the utility’s capital needs, according to Moody’s.

“We weighed the potential that it would go poorly for Vernon versus the possibility that it would go positively for Vernon, and both outcomes fell within the Baa2 rating range,” said Gayle Podurgiel, a Moody’s analyst.

Though Podurgiel would not reveal an amount, she said the city told Moody’s what the potential cost to the city could be from a settlement agreement.

Bicent, controlled by Beowulf Energy Co., claimed in a suit filed in March 2019 that Vernon had failed to maintain its distribution system harming the Malburg Generating Station that produces power for the city. The city disputes the claim.

Finance director Scott Williams could not be immediately reached for comment.

The city of 209 where about 55,000 private sector employees work was nearly legislated out of existence in 2011 before it accepted a series of reforms to keep state lawmakers from following through on disincorporation legislation.

It was pronounced scandal-free by John Van de Kamp, the former state attorney general turned independent reform monitor, in a January 2017 report.

Positive reforms achieved by the utility and city over the past decade were cited by Podurgiel for the upgrade as was the city’s improved financial position with strong liquidity indicated by more than a year’s worth of cash on hand over the past three years and the nearing maturity of the utility’s gas prepay obligation.

“The most significant reform is that in April 2019 they approved a rate increase for the next three years that will cover the cost of the tax on industrial users,” Podurgiel said. That tax “will replace the general fund transfer that occurred between the utility and city.”

One of the things Moody’s monitors when it looks at utility credits is transfers between the utility and the general fund she said.

“The proposed refinancing and nearing expiration of the utility's uneconomic natural gas prepay streamlines its capital structure,” Moody’s analysts wrote in the report.

Vernon had struck the prepaid gas agreement before it sold the plant to Bicent. It could only use the tax-free gas when the plant was run by a public entity. It has never been able to use the pre-paid gas and has been selling to the Sacramento Municipal Utility District at a discount since 2005. Bicent and Vernon buy gas on the open market, Podurgiel said.

“While highly reliant on sales to industrial customers, Vernon's location is a key backstop supporting its credit quality," Moody's analysts wrote. "It enjoys a strong competitive position as a key industrial center adjacent to downtown Los Angeles with easy access to seaport and rail transportation.”

The city’s “probusiness policies and unique positioning, as a rare industrial haven, in a major urban area” were also viewed favorably by Moody’s.

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Ratings Litigation Municipal utility districts California