Published: July 28, 2011
Fitch Affirms Glendale Water & Power, CA Water Rev at 'AA'; Outlook Negative
SAN FRANCISCO - (BUSINESS WIRE) - In the course of routine surveillance, Fitch Ratings affirms the
following ratings for the Glendale Water & Power, California (GWP):
--$50 million water revenue bonds, series 2008 affirmed at 'AA'.
The Rating Outlook is Negative.
KEY RATING DRIVERS
--NEGATIVE OUTLOOK: The Negative Outlook reflects GWP's lack of
liquidity and likely pressure on financial margins over the next few
years that may be amplified by an additional debt issuance in fiscal
2012, depending on potential rate increases and/or the debt structure.
--TIGHTENING FINANCIAL MARGINS: Strong debt service coverage levels will
decline as principal related to the 2008 bonds begins to amortize in
fiscal 2013. Liquidity levels declined for four consecutive years to a
very low 29 days operating cash by fiscal 2010 and management projects
ending fiscal 2011 with $0 in unrestricted cash.
--TRANSFER TO GENERAL FUND ELIMINATED: Previously sizeable transfers to
the city's general fund are being eliminated, but other costs will
absorb much of the non-transferred revenues.
--DECLINING WATER SALES: As is the case with much of southern
California, water supply shortages followed by cooler, wet weather have
resulted in lower sales but sizeable multi-year rate increases have
muted the impact to revenues.
--RISING IMPORTED WATER SUPPLY COSTS: Water supply availability
challenges and cost pressures result from a dependence on imported water.
--DEBT FINANCED CAPITAL NEEDS: Capital spending should decline to more
moderate levels over the next few years, although an upcoming planned
issuance will elevate leverage ratios considerably.
--STABLE SERVICE AREA: The water system (the system) provides retail
water service to a largely built-out service territory within the city
of Glendale (the city), which has a population of around 200,000 and is
centrally located within the greater Los Angeles region.
WHAT COULD TRIGGER A RATING ACTION
--Failure to adopt rate increases needed to preserve healthy operating
margins for bondholders.
--Material weakening from the projected financial margins as a result of
a planned issuance in fiscal 2012.
--Ongoing delays in restoring liquidity levels.
SECURITY
The 2008 bonds are secured by a pledge of and first lien on net revenues
of the system.
CREDIT PROFILE
GWP, an enterprise of the city, provides retail services to 33,509 water
system customers within the city limits. The city is a mature community,
northeast of downtown Los Angeles. Water sales declined the past four
years, consistent with other regional utilities, initially as a result
of the economic recession and water shortages but more recently because
of very cool, wet weather conditions over the past year. Typical demand
growth is manageable since the city's service territory is built out.
The majority of the city's water supply is provided by the Metropolitan
Water District of Southern California (MWD), the regional wholesale
provider of imported water to communities that do not have sufficient
local water resources, such as Glendale. In typical years, MWD provides
around 70% of GWP's water supply, but this fell to 63% in fiscal 2010 as
a result of lower customer demand. Prior to this, MWD implemented
mandatory 10% reductions in deliveries to its members, including GWP,
effective July 1, 2009 as a result of critically dry hydrological
conditions and reductions in MWD's own available supply in the years
2007-2009. Glendale's customers exceeded expectations on the
conservation targets, achieving an 18% reduction.
GWP curtails its purchases from MWD first since it is a more expensive
water source than the local supply. In addition, the cost of MWD
supplies has been increasing; MWD has raised its rates 75% on a
cumulative basis over six years. The adjustable component in Glendale's
rates recovers the imported water and pumping costs from MWD. More
importantly, base rate increases have been enacted by GWP to compensate
for the loss in revenues related to lower sales.
GWP raised base rates most recently in December 2010 by over 15% to
compensate for lower revenues. This follows implementation of
substantial base rate increases of 14% in January 2010 and 12% in
January 2009. The annual rate increases were put in place to fund
ongoing capital needs, debt costs, and the sizable transfer to the
general fund. However, their impact has been mitigated by the declining
water sales during this same period. Additional rate increases are
included in management's five year forecast and appear to be required to
preserve financial margins.
GWP has been investing heavily in rehabilitation of its existing
infrastructure in the past few years, spending approximately $25 million
annually. However, projected capital spending over the next five years
should taper down as total costs are estimated at $73 million. GWP
projects issuing an additional $60 million in debt in fiscal 2012, which
could put a strain on financial ratios if additional revenue increases
or expenditure reductions are not implemented to accommodate the
additional debt service costs. Some cash flow relief will be provided by
the city's action to eliminate the $4.1 million transfer from the water
fund to the city's general fund beginning in fiscal 2012. However, GWP
anticipates an increase of $2 million in cost allocations to the water
system that were previously paid by the electric system and in fiscal
2012 will begin repayment to the city of $1 million annually for its
share of a legal settlement, negating much of the reduction from the
elimination of the transfer.
Debt service coverage appeared high at 6.3 times (x) in fiscal 2010, or
3.3x after the transfer. However, this is because principal on the only
outstanding series of bonds does not begin to amortize until fiscal
2013, at which time debt service coverage is projected to decline to
1.7x with additional assumed rate increases and a 5% increase in water
sales assumed in fiscal 2012. With additional debt issuance expected,
debt service coverage is expected to be much lower, depending on
additional rate increases and the structure of the additional debt.
Management's financial forecast projects debt service coverage dropping
to a low of 1.5x over the next five years. Reserve levels declined again
in fiscal 2010 to a low of $2.3 million in unrestricted reserves, or 29
days cash. Management's initial indication, based on unaudited financial
results, is that unrestricted reserves are expected to decline further
in fiscal 2011, ending the year with $0. The city's minimum target is
$11.3 million, or 140 days cash, which may be difficult to achieve over
the near term.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 20, 2011;
--'Water and Sewer Revenue Bond Rating Guidelines', July 26, 2011)
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
Water and Sewer Revenue Bond Rating Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=395918
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE.
Fitch Ratings
Primary Analyst
Kathy Masterson, +1-415-732-5622
Senior
Director
Fitch, Inc.
650 California Street
San Francisco,
CA 94010
or
Secondary Analyst
Andrew Ward, +1-415-732-5617
Associate
Director
or
Committee Chairperson
Douglas Scott,
+1-512-215-3725
Managing Director
or
Media Relations:
Cindy
Stoller, +1-212-908-0526
Email: cindy.stoller@fitchratings.com
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