Fitch Upgrades Lynwood Utility Authority, California Revs to 'A-'; Outlook Stable
Source: Business Wire
Lynwood has additional parity debt outstanding (series 2008 and series 2009A) which is not rated by Fitch.
The upgrade to 'A-' from 'BBB' reflects significant rate increases at the utility that began in fiscal 2007 to support needed reinvestment in the water and sewer systems and have resulted in stronger financial margins for bondholders. The upgrade also considers the absence of additional debt issuance by the water and wastewater system, as contemplated in 2003, to fund general city-wide capital projects.
The 'A-' rating reflects the sound financial position of the utility and positive credit factors of a water supply that is primarily supplied by local groundwater (which accounted for approximately 85% of supply in 2008) and limited operational risk of both the water and wastewater systems, which consist primarily of distribution pipes. Lynwood is required to do minimal treatment of its groundwater supply and as such does not operate a water treatment plant. Collection of wastewater is transferred to the Los Angeles County Sanitation District No. 1 for treatment. Credit concerns relate to cost pressure on the imported water supply and escalating debt service payment in future years that result from a 2009 refunding of series 1999 bonds in which the majority of the savings were taken in the first five years to provide some relief to the system's financial position.
Although Lynwood only purchases a portion of its water supply (15% in 2008) from Metropolitan Water District of Southern California (Metropolitan) it is projected to increase in time since any increased usage by customer or growth must come from imported supply. Metropolitan has announced a 20% rate increase effective September 2009 and projects another similarly sized rate increase in January 2011, which will result in increased costs to Lynwood that were not anticipated with the current package of five annual rate increases were adopted in 2006. The rate increases span fiscal years 2007-2011 with the two final rate increases scheduled to become effective July 1, 2009 (5%) and July 1, 2010 (5%). The rate increases were approved in conjunction with an overall water/sewer plan that led to the issuance of approximately $4 million in new debt in 2008 to fund a variety of capital projects; the 2008 issuance also included $2 million that was used to reimburse the general fund for past expenditures incurred by that fund on behalf of the water and sewer system. A new city council is in place after those rate increases were approved following a recall of the entire city council in 2007. While the turnover appears to be positive from a credit standpoint, this council's approach to rate recovery and protection of financial margins for bondholders will likely become evident in the next few years as costs increase and additional rate increases potentially are needed.
Financial performance in the past two years has been bolstered by the sizable rate increases implemented in fiscals 2007 and 2008 (30% and 15%, respectively). Debt service coverage in fiscal 2008 was 4.0 times (x). However, the issuance of $6 million in new debt in 2008 will result in lower debt service coverage in the future. This was partially mitigated by a recent debt restructuring in 2009 of the series 1999 bonds (the 1999 bonds will be refunded June 1) in which the savings from the refunding were structured in the next five years with escalating debt service in future years. Debt service coverage in the next five years is projected to remain above 1.7x.
Lynwood is a primarily a built-out community located between the cities of Los Angeles and Long Beach. Lynwood has approximately 9,000 water customers and 10,000 wastewater customers. The service area is characterized by very low economic indicators and a weak property market as evidenced by high foreclosure rates and declining home prices.
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.
Contact:
Fitch Ratings, San Francisco
Kathy Masterson, +1-415-732-5622
Robert Sakai, +1-415-732-5628
Media Relations, New York
Cindy Stoller, +1-212-908-0526
cindy.stoller@fitchratings.com
