Fitch Rates Los Angeles, California $445M Subordinate Wastewater Revs 'AA-'

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an underlying 'AA-' rating to the following City of Los Angeles, California wastewater system subordinate revenue bonds, variable-rate refunding:

--$85.0 million, series 2008-A

--$70.0 million, series 2008-B

--$50.0 million, series 2008-C

--$32.0 million, series 2008-D

--$10.1 million, series 2008-E

--$68.7 million, series 2008-F1

--$56.7 million, series 2008-F2

--$36.0 million, series 2008-G

--$36.0 million, series 2008-H

Fitch will assign long-term and short-term ratings on the bonds nearer the sale based on separate direct-pay letters of credit to be issued by The Bank of Nova Scotia, acting through its New York Agency, for the series A-E bonds and Bank of America, N.A. for the series F-H bonds. The bonds are variable-rate bonds and will be sold the week of April 28 via negotiation. Proceeds from the bonds, along with cash on hand and proceeds from a commercial paper issuance done concurrently with delivery of the bonds, will be used to current refund all of the city's wastewater system subordinate revenue bonds, variable rate refunding series 2001-A through 2001-D and series 2006-A through 2006-D. At this time, Fitch also affirms its 'AA' long-term underlying rating on the city's $1.0 billion of outstanding wastewater system revenue bonds, which are senior lien bonds, and its 'AA-' long-term underlying rating on the city's $603.7 million (net of refunding) of outstanding wastewater system subordinate revenue bonds. The Rating Outlook on all bonds is Stable.

The ratings reflect consistently sustained strong financial performance of the wastewater system (the system). Other credit considerations include the city's progress to date in meeting environmental mandates, the diverse service area, and reasonable rates, despite planned future increases. The capital improvement program (CIP) remains large and may rise in the future as a result of additional regulatory requirements, keeping leverage ratios somewhat elevated. However, the system should be able to absorb additional costs at the current rating level given the financial flexibility of the system.

Financial performance has been marked by sound liquidity levels and exceptional operating margins averaging over 50% since fiscal 2003. Likewise, annual debt service (ADS) coverage of senior lien debt has posted solid results, steadily rising from 2.1 times (x) in fiscal 2003 to 3.5x in fiscal 2007. Subordinate lien ADS coverage for the period, while somewhat diminished from senior lien margins, was still good at 1.7x ADS coverage in fiscal 2007. ADS coverage projections indicate similar results through fiscal 2012, although a slight softening at both lien levels over the next few years is forecasted before gradually ramping up to around 3.7x and 2.1x for senior and subordinate bonds, respectively. Nevertheless, the city typically has outperformed its financial estimates.

The $1.8 billion fiscal 2008-2012 CIP, while down from the $2.3 billion level a few years ago, remains significant and focuses on improving deficiencies in the city's collection system, including addressing requirements under a 10-year collection system settlement agreement (CSSA). To offset borrowing needs, as well as pay for rising debt service costs, the city consistently has implemented rate hikes of around 7% since fiscal 2005. Continuing this trend, the city is proposing additional annual 9.5% rate adjustments for fiscal 2009-2011, which will allow the city to increase its cash funding of capital outlays from nearly $90 million in fiscal 2008 to over $223 million by fiscal 2012. In total, the city estimates that around 46% of the five-year CIP will be derived from current revenues and other non-debt sources, which should ultimately reduce the system's moderately high leverage levels over the mid- and long-term.

Despite the recent, as well as anticipated, rate hikes, consumer charges appear reasonable and should remain within Fitch's affordability range through the forecast period. The system could face some pressure to its rate flexibility in the upcoming years if the city is forced to enhance treatment capabilities to meet permitted effluent discharge requirements or total maximum daily loading levels. But any additional requirements are likely to be funded over an extended period of time, lessening the impact to the system's fixed cost structure.

The system provides wastewater collection, treatment, and disposal services for an area of about 600 square miles, including most of the city. Normal drainage patterns, which do not generally conform to political boundaries, define the service area. As a result, other agencies serve some areas of the city and the city's system serves areas outside of the city. Customer levels have declined slightly from fiscal 2002-2007 with total connections at close to 641,000 for fiscal 2007. For the same period, the majority of connections, just over 90%, were residential in nature with commercial/industrial connections totalling 9%, and all other types of connections totalling less than 1%.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.