New York, Jan. 7, 2002 – The Los Angeles Department of Water and Power’s stable outlook on its Aa3-rated revenue debt comes from its control of resources to generate and to transmit electrical power and maintenance of healthy reserves for financial and operational flexibility, Moody’s Investors Service says in a soon-to-be released in-depth analysis report.
LADWP’s flexibility has helped it endure California’s power crisis and, more recently, avoid exposure to the Enron collapse.
That flexibility stems from the utility’s “role as a major unregulated municipal utility with governance and operational powers derived from the city’s charter and as a strong presence in the western electricity’s markets with its significant transmission and power resources,” says analyst Dan Aschenbach, author of the report.
LADWP owns 28% of California’s transmission capacity, and although it can set its own rates, it has not increased them since 1992 and has no plans to do so within the next five years.
The utility also has diverse power resources, strong power-resource reserves, ample liquidity, and significantly reduced generation-related debt ($1.02 billion at Nov. 30, 2001, down from $4.3 billion in 1997).
However, potential increased pressure on LADWP to raise the amount of its general fund transfers to the city reflects a credit weakness. Another weakness is its exposure to natural gas-price volatility, as it tries to diversify its power resources further and to create more efficient generation technology to meet stricter environmental standards.
Indeed, “LADWP’s fuel mix will shift more toward natural gas, with about 35% of total resources from natural gas-fired generation in 2010, up from 19% in 2001,” says Aschenbach.
To meet its power diversity plans, LADWP has diverted funds intended for debt reduction. Before the power crisis, the utility had planned to retire its generation debt by 2003 and to lower its retail rates (currently at 9.6 cents per kilowatt-hour compared with the median of 14 cents).
Overall, “LADWP’s financial ratios compare favorably with those of the 25 largest municipal electric utilities with generation assets and with other Aa-rated municipal electric utilities,” says Aschenbach. “Strong coverages have provided LADWP with comfortable liquidity levels and the financial flexibility to withstand the commodity price spikes affecting both the wholesale electricity and natural gas markets.”
LADWP’s stable credit outlook, therefore, “reflects its strong management, record of positioning itself well for industry changes, sound financial condition, strong resource balance, and competitive cost structure,” Aschenbach concludes.