Fitch Rates Glendale, CA's Elec Rev Bonds 'A+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned a 'A+' rating to the following electric system revenue bonds issued by the City of Glendale, CA on behalf of Glendale Water & Power (GWP):

--$75.5 million electric revenue bonds, refunding series 2016.

Proceeds of the series 2016 bonds will refund outstanding series 2006 and 2008 bonds for savings and pay costs of issuance. The 2016 bonds are expected to price on May 4, 2016 via competitive sale.

In addition, Fitch has affirmed the 'A+' rating on the following outstanding parity debt:

--$166.4 million (pre-refunding amount) electric revenue bonds, series 2006, 2008, 2013 and refunding series 2013.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

MATURE SERVICE AREA: Glendale benefits from the diverse local economy and labor market of the greater Los Angeles area. The service area and customer base are relatively stable with limited growth.

IMPROVED FINANCIAL MARGINS: Financial margins improved in fiscals 2014 and 2015 with rate increases implemented in those years. Debt service coverage levels are strong and cash flows after payment of the general fund transfer restored cash reserves to a healthy level. This follows a recent period where financial margins were constrained.

POWER SUPPLY DIVERSIFICATION: GWP has been diversifying its power supply portfolio towards renewable energy and away from coal-fired generation, as required by state legislation. Recent investments have reduced GWP's energy supply from coal-fired generation to less than 4% in 2015 while renewables provided approximately 30%.

POTENTIAL GAS GENERATION INVESTMENTS: GWP is considering the replacement of its local 238 MW Grayson power plant with new, more efficient gas-fired generation capacity. The Grayson repowering decision is expected to occur in the next couple of years, at the same time GWP considers whether it will take an allocation of the proposed gas-fired repowering at the Intermountain Power Agency (IPA) project in Utah.

ADAPTABLE RATE STRUCTURE: Retail rates include adjustable components to allow for the pass-through biannually of changes in projected purchased power, fuel or regulatory expenses and a revenue decoupling element to protect GWP's revenues from volumetric sales risk.

RATING SENSITIVITIES

UNFUNDED CAPITAL SPENDING: Capital spending at Glendale's electric utility that proceeds without a corresponding funding source, could deplete liquidity to a point that would place downward pressure on the rating.

CREDIT PROFILE

The city of Glendale, operating through GWP, provides retail electric service to 86,782 customers within the city's borders. The city is adjacent to Los Angeles and benefits from a diverse employment base although wealth levels are below the state average. Retail sales have been relatively flat over the past five years with some variability related to weather. The system load factor is low (below 40%) although sales among residential, commercial and industrial customer classes are relatively balanced. The utility has a sizable amount of wholesale activity, which accounted for 39% of kWh sales in fiscal 2015.

POWER SUPPLY DIVERSIFICATION

The electric system is fully integrated and includes generation, transmission and distribution facilities. GWP owns or has secured through purchased power agreements, 466 MW of generation capacity that is ample to meet GWP's 337 peak demand in 2015. Much of the capacity is secured through participation in two joint power agencies (JPAs) - the Southern California Public Power Authority (SCPPA) and IPA. Of the 466 MW of capacity, 220 MW is locally-owned steam and gas generation units at the Grayson Power Plant. These units are older, inefficient units and only 8.8% of the energy supply in fiscal 2015. Lower cost generation available through market purchases has provided much of the energy supply in recent years.

GWP has made significant progress in recent years to reduce energy provided by coal-fired resources and increase renewable generation, as required by California legislation. In 2015, coal-fired generation had already declined to 4% of energy supply from 29% in 2013. Renewable energy had increased to 30% in 2015. GWP is well positioned to meet California's most recent legislative increase in the renewable portfolio standard to 50% by 2030, which is required of all retail utilities in the state.

GWP's coal-fired resources include the IPA project located in Utah (GWP's share is 38 MW) and the San Juan Project in New Mexico (20 MW). GDWP is pursuing strategies to mitigate the carbon impacts of both resources in order to comply with California's greenhouse gas reduction legislation, including the planned divestiture of its share of the San Juan Project in 2017.

POTENTIAL NATURAL GAS INVESTMENTS

GWP and other project participants are planning to rebuild the IPA project as a gas-fired generation project in order to comply with California state law. GWP has not made a final decision and has until 2019 to decide how much, if any, capacity of the repowered IPP it will purchase. GWP is under no obligation to participate in the repowered project. Debt obligations with its share of the existing IPA plant will be repaid by 2027.

GWP is also considering the rebuilding of the Grayson Power Plant as a modern natural-gas cycle plant, consisting of both a combined cycle component and two simple cycle units for a combined total of 250 MW. City council has authorized funding for initial design studies on the project but has not yet determined whether or not the rebuild will occur. Very early estimates are approximately $450 million ($1,800 per MW installed capacity), which could represent a large addition to GWP's debt position.

FINANCIAL PERFORMANCE STABILIZING

GWP's financial performance improved in the last two years. This followed a period in fiscals 2010-2012 when rate increases and planned debt issuance did not occur due to lack of support at City Council but capital spending at the utility was not revised to reflect the lack of funding. As a result, financial margins after the city transfer dropped below 1.0x in fiscal 2012 and cash reserves declined.

Following average retail 8% and 7% rate increases implemented in fiscals 2014 and 2015, respectively, debt service coverage exceeded 6.5x in the last two years, or 3.6x after the transfer to the city's general fund. Fitch's analysis focuses on coverage after the utility's large general fund (GF) transfer (9.2% in fiscal 2015). Although the transfer is legally subordinate to debt service, the city's general fund is reliant on the transfer to fund its operations. Two legal cases are pending regarding the city's legal ability to transfer utility revenues to the general fund. Fitch does not view the litigation as a credit concern for the electric utility at this time.

Strong financial performance has restored unrestricted cash reserves to healthy levels of $108.7 million at year end fiscal 2015, or 256 days cash on hand. An additional average 6% rate increase occurred in fiscal 2016 so cash balances are expected to continue to be robust.

Revenue variability has occurred from wholesale market sales, both as a result of volume and market price fluctuations. GWP's wholesale revenues, both from firm market sales to other utilities and short-term market sales, have ranged between $14 million and $42 million over the past five years, or 8% to 21% of operating revenues. Forward wholesale sales have been conservatively projected in management's financial forecast.

Strong overall financial performance is expected to continue based on the revenue protection offered by Glendale's adjustable electric rate components, additional 2% base rate increases already approved in fiscals 2017 and 2018 and level debt service on outstanding debt. The magnitude of the potential cost of the Grayson repowering is large but GWP should have the debt capacity to finance such a large project, depending on the timeliness of corresponding funding that would need to accompany a capital project of that magnitude. Other than Grayson, GWP's capital needs are relatively modest and are expected to be funded from ongoing revenues.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Public Power Rating Criteria (pub. 18 May 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1003161

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003161

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Kathy Masterson
Senior Director
+1-512-215-3730
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78746
or
Secondary Analyst
Matthew Reilly, CFA
Director
+1-415-732-7572
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Kathy Masterson
Senior Director
+1-512-215-3730
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78746
or
Secondary Analyst
Matthew Reilly, CFA
Director
+1-415-732-7572
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com