Fitch Affirms Glendale, CA's Water Revs at 'AA'; Outlook Revised to Negative
Source: Business Wire
The Rating Outlook is revised to Negative from Stable.
The Negative Outlook reflects downward pressure on financial margins at the utility and the absence of financial flexibility given the limited cash flow after the general fund transfer. The financial forecast relies on additional annual rate increases to maintain these slim margins and to support increasing debt service. Any further deterioration in margins, such that annual revenues do not fully support operations, debt service, and payment of the general fund transfer, could prompt a rating downgrade.
RATING RATIONALE:
--The city of Glendale is centrally located within the greater Los Angeles region and provides retail water service to a largely built-out service territory with a population of around 200,000.
--As is the case with much of southern California, water supply shortages have prompted mandatory cutbacks, but Glendale's rate structure has an adjustable component that recovers actual purchased water costs on a rolling six month basis.
--The city's administration approved significant multi-year rate increases effective Jan. 10, 2008 to rebuild reserves and recover costs. Base rates are expected to increase further to support capital spending and debt issuance, along with purchased water cost increases that are passed through in an adjustable component of retail rates.
--Financial performance has declined with further financial pressure on margins projected in the next few years even with assumed rate increases. Liquidity is modest.
--The utility transfers a sizable amount of revenues to the city's general fund at 11% of revenues in fiscal 2009, which directly decreases the availability of the cash flow generated by the utility to fund its own system needs.
WHAT COULD PROMPT A DOWNGRADE:
--Failure to adopt rate increases needed to support the proposed debt issuance and preserve healthy operating margins for bondholders;
--Reduction in cash reserves;
--An increase in the transfer to the city's general fund, which could further diminish the financial strength of the water system.
SECURITY:
The bonds are secured by a net revenue pledge of the City of Glendale's water enterprise fund.
CREDIT SUMMARY:
Glendale Water and Power, an enterprise of the City of Glendale, provides retail services to 33,407 water system customers, including approximately 96% of the city's residents. Since Glendale is largely built out, there is only slow expansion of its customer base.
The majority (64%) of the city's water supply is provided by the Metropolitan Water District, the regional wholesale provider of imported water to serve communities that do not have sufficient local water resources, such as Glendale. Due to critically dry hydrological conditions and reductions in its available supply, MWD implemented mandatory 10% reductions in deliveries to its members, including Glendale, effective July 1, 2009. MWD also raised rates to its members by 14% in January 2009 and 19.7% in September 2009. Glendale's customers exceeded expectations on the conservation targets, over 15%, although the revenues were protected at the lower consumption levels with base and adjustable component rate increases. The adjustable component in Glendale's rates recovers the imported water and pumping costs from MWD. Additional rate increases have been adopted by MWD of 7.5% in January 2011 and 7.5% in January 2012.
Glendale just implemented the third of a three-year rate increase package that was adopted by the city council in 2007. Base rates, that recover all costs other than those of Metropolitan, were increased 14% in January 2010 and 12% in January 2009. The city is conducting a rate study in 2010 but anticipates continued annual rate increases will be needed to fund ongoing capital needs, debt costs, and the sizable transfer to the general fund. Capital needs are estimated at $113 million over the next five years, which is a substantial amount of capital spending per customer.
Debt service coverage appeared high at 7.1 times (x) in fiscal 2009, or 4.3x after the transfer. However, this is because principal on the only outstanding series of bonds does not begin to amortize until fiscal 2013. The delay in amortization was designed to provide the city with relief on its debt repayment in order to rebuild its reserves. With additional debt issuance of $50 million expected in fiscal 2011, debt service coverage is expected to be much lower, depending on additional rate increases. The financial forecast projects debt service coverage of 1.95x in fiscal 2011, or 1.15x after the GF transfer. The result is that although debt service coverage hovers around 2.0x in the five year forecast, with annual assumed rate increases, cash flow available to the utility after payment of the transfer is slim. Although the transfer is legally subordinate to debt service, the funds are essential to city operations. While city charter permits the transfer to climb as high as 25% of revenues (it is currently 11%), management has indicated to Fitch that an agreement is in place with the city to fix the transfer at the fiscal 2009 level.
Reserve levels were intended to be rebuilt as a result of the rate increases and the delayed amortization of debt in the series 2008 bonds. While it has improved, liquidity is still low with $6.7 million in unrestricted reserves at the end of fiscal 2009, or 84 days cash. Based on the very slim cash flow, cash reserves are not expected to be rebuilt over the forecast period, unless higher rate increases are adopted.
These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following reports:
--'Revenue-Supported Rating Criteria', Dec. 29, 2009;
--'Water and Sewer Revenue Bond Rating Guidelines', Aug. 6, 2008.
Additional information is available at 'www.fitchratings.com'.
Contact:
Fitch Ratings, Austin
Gabriela Gutierrez, +1-512-215-3731
Steve Murray, +1-512-215-3729
Media Relations:
Cindy Stoller, +1-212-908-0526 (New York)
cindy.stoller@fitchratings.com
