Fitch: Los Angeles municipal readies $8.6bn capital spend over next five years

Fitch Ratings on Feb. 24 assigned an ‘AA-‘ rating to power system revenue debt issued by the Los Angeles Department of Water and Power (LADWP), which Fitch said is making progress in revamping its power generating portfolio.

In addition, Fitch affirmed its ‘AA-‘ ratings on outstanding parity debt for LADWP. The Rating Outlook is Stable.

California legislation requires costly changes to LADWP’s power supply mix, in both operating and capital costs, Fitch noted. LADWP continues to invest in generation resources and is well positioned to comply with the state’s environmental goals, it added.

LADWP’s anticipated debt issuance to fund its very large $8.6 billion capital plan is significant at an additional $4.5 billion over the next four years. The planned debt will increase leverage from already high levels. Failure to receive approval for future base rate increases needed to offset the department’s expected higher operating and capital costs could pressure financial margins and potentially the rating, Fitch said.

The LADWP system had a peak of 6,396 MW in September 2014. The customer base is extremely diverse, with a strong commercial presence. However, retail sales have been flat in the past five years with the weak economy, conservation efforts, and energy efficiency investments. Energy sales are projected to continue to be flat through 2020 with planned additional investment in energy efficiency programs.

LADWP has spent the last decade adopting long-term changes to its power supply portfolio which are required in order to meet California’s legislative environmental agenda. LADWP’s coal-fired resources include the Intermountain Power Project in Utah (LADWP’s share is 1,116 MW) and the Navajo Generating Station in Arizona (477 MW). LADWP is pursuing strategies to mitigate the carbon impacts of both resources in order to comply with state legislation. In addition, LADWP reached its 20% renewable target beginning in 2010 and increased renewable energy sources to 23% of its power supply in calendar 2013. LADWP is well positioned to meet the state-mandated goal of 33% by 2020 if investments in solar, geothermal and energy efficiency continue to proceed as outlined in the integrated resource plan, Fitch wrote.

The sizable $8.6 billion five-year capital plan is being driven by LADWP’s reinvestment in infrastructure to preserve reliability and generation development. LADWP estimates it will issue an additional $4.5 billion in debt to fund a portion of the capital plan. The utility’s increasing debt needs could constrain financial flexibility. Fitch said it views LADWP’s maintenance of a healthy portion of revenue-supported capital spending as a key component of the utility’s financial flexibility.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.