TEXT-Fitch revises Glendale Water and Power, Calif. outlook to negative

Tue Feb 26, 2013 1:27pm EST

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Feb 26 - Fitch Ratings assigns an 'A+' rating to the $23.69 million electric
revenue refunding bonds, 2013 series, to be issued by the city of Glendale, CA
(the city) on behalf of Glendale Water and Power (GWP), a department of the
city.

Bond proceeds will refund the series 2003 bonds for savings, the majority of
which will occur in fiscal years 2014 and 2015. The 2013 series will mature in
2032.

In addition, Fitch affirms the following ratings:

--$117.28 million electric revenue bonds, series 2003 (to be refunded), 2006 and
2008 at 'A+'.

The Rating Outlook is revised to Negative from Stable.

SECURITY

The bonds are special obligations of GWP payable solely from electric system net
revenues.

KEY RATING DRIVERS

LIMITED RATE FLEXIBILITY: The Negative Outlook reflects Fitch's view that the
utility may not have sufficient support from the city council to implement the
magnitude of rate increases that appear necessary to restore financial metrics
to historical levels. Although GWP management anticipates rate increases
beginning in fiscal 2014, prior projected increases have not materialized.

FINANCIAL PRESSURE: GWP's margins continue to decline in the absence of
anticipated rate relief and increasing costs. Large transfers to the city's
general fund, along with capital plan funding through operations and draws on
cash balances, continue to stress GWP's financial metrics.

STABLE SERVICE AREA: The city benefits from the diverse local economy and labor
market of the greater Los Angeles area. The service area and customer base are
mature, but have seen recent sales growth due to a more normal weather pattern
in fiscal 2012 and some economic growth.

POWER SUPPLY DIVERSIFICATION: GWP has a diverse power supply portfolio that
provides competitively priced energy. Recent investments in renewable projects
strengthen the utility's ability to comply with upcoming state renewable
portfolio standard (RPS) targets.

ADEQUATE BUT DECREASING LIQUIDITY: Cash and reserves provided an adequate 136
days cash on hand (DCOH) at fiscal year-end 2012; however, the continued decline
in liquidity amounts are a concern.

RATING SENSITIVITIES

INADEQUATE RATE RELIEF: Failure to secure adequate rate relief to stabilize
funds available for debt service (FADS) and restore financial metrics to
historical levels would likely result in a negative rating action.

CREDIT PROFILE

GWP is an enterprise fund of the city, providing service to all 85,358 electric
customers within the city's borders. The city is located adjacent to the city of
Los Angeles and benefits from its diverse economy. Energy sales rebounded in
2012, after three years of decline, due to a more normal summer weather-wise and
increased economic development.

GWP's power supply mainly consists of the utility's participation in various
joint action agencies, including the Intermountain Power Project (IPP) and the
Southern California Public Power Authority (SCPPA). Capacity of 496 MW
satisfactorily covers GWP's fiscal 2012 peak demand of 316 MW. Approximately 25%
of GWP's 2012 power supply was coal-based, which is relatively low compared to
other southern California municipal utilities. GWP has been actively
diversifying its generation portfolio and is well positioned to comply with the
RPS targets.

RATE INCREASE DELAYED

City council has the sole authority to revise rates, without oversight from any
state agency or regulatory board. GWP's previous financial projections assumed a
substantial electric rate increase would be in place by September 2012. The
increase has not been implemented and any consideration of an increase has been
postponed until summer 2013. A multi-year rate increase is proposed in
conjunction with a planned bond issuance, and would help to restore GWP's
financial margins and liquidity levels. However, in Fitch's view, the electric
system may not have sufficient support at the city council level to implement
the needed rate increases. Continued delays in timely rate recovery will put
further pressure on the rating.

FINANCIAL PRESSURE A CREDIT CONCERN

GWP's declining financial performance is a concern. Fitch-calculated debt
service coverage (DSC) was 4.13x in fiscal 2012. However, Fitch's focus is on
coverage after transfers. Factoring in the utility's large general fund
transfers, GWP's adjusted DSC falls to 1.04x. The transfer is legally
subordinate to debt service, however, the city's general fund is reliant on the
transfer to fund its operations.

Adjusted DSC (after transfers) is projected to fall below 1.0x in fiscal 2013
and GWP may rely on cash reserves to support the general fund transfer. The city
and GWP have agreed to a transfer decrease, but Fitch views the decrease as
credit neutral, given the minimal amount ($250,000 per annum).

Financial pressure should lessen over the next five years, assuming approval of
the rate increase. Thereafter, electric rates will need to adapt to GWP's
escalating debt service schedule as principal begins to amortize. GWP
anticipates issuing $60 million in new debt in fiscal 2014 to fund its capital
plan.

DECREASING LIQUIDITY

Electric fund unrestricted cash declined from $154 million at fiscal year-end
2008 to $64 million at fiscal year-end 2012. The spend-down has largely funded
capital projects. The potential use of liquidity balances to support general
fund transfers, is a concern.

CONCERNS WITH GOVERNANCE

Fitch has concerns regarding governance at GWP and delays in planned rate
requests and bonds issuances. Given the scale and pace of developments in the
California electric industry, the pursuit of a focused long-term business
strategy is one of Fitch's key rating factors for electric bonds. Recent
restructuring and a new management team at GWP indicate that going forward there
will be a more direct relationship between GWP and the city. Fitch is looking
for management stability to occur and consistency between planning and execution
throughout the various governance layers.

Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's
Revenue-Supported Rating Criteria, this action was additionally informed by
information from Creditscope.

Applicable Criteria and Related Research:
--'U.S. Public Power Rating Criteria', Dec. 18, 2012;
--'Revenue-Supported Rating Criteria', June 12, 2012.

Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
U.S. Public Power Rating Criteria
FILED UNDER:
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