Fitch Ratings assigns an 'AA-' unenhanced long-term rating to Los
Angeles, California's (the city) outstanding $315.8 million of
wastewater system subordinate revenue bonds, variable rate refunding,
consisting of:
--$118.4 million series 2006-A;
--$71.1 million series 2006-B-1;
--$27.6 million series 2006-B-2;
--$49.3 million series 2006-C;
--$49.3 million series 2006-D.
Fitch also upgrades to 'AA' from 'AA-' its rating on $1.0 billion of
outstanding wastewater system revenue bonds and upgrades to 'AA-' from
'A+' its rating on $892.8 million of outstanding wastewater system
subordinate revenue bonds. The Rating Outlook is Stable.
The upgrades on the city's senior and subordinate lien bonds reflect
consistently sustained and improving financial performance that has
surpassed previous projections. Other credit considerations include the
city's progress to date in meeting environmental mandates, the diverse
service area, and reasonable rates, despite planned 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 increased
financial flexibility of the system.
Financial performance has been favorable, 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 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 will require additional
leveraging. 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 totaling
9%, and all other types of connections totaling 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.
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