OREANDA-NEWS. Fitch Ratings assigns an 'AA-' rating to the following power system revenue debt issued by the Los Angeles Department of Water and Power, CA (LADWP):

--Approximately \$485 million power system revenue bonds, series 2015A.

Proceeds of the series 2015A bonds will refund outstanding bonds for savings. The 2015A bonds are expected to price during the week of March 2, 2015.

In addition, Fitch affirms its 'AA-' ratings on the following outstanding parity debt:

--\$8.12 billion power system revenue bonds;
--Commercial paper (CP) loan notes (bank note);
--Series 2001B and 2002A (bank bonds).

The Rating Outlook is Stable.

SECURITY

The bonds are special obligations of LADWP payable solely from power system revenues. LADWP's power system bonds do not have a debt service reserve fund.

KEY RATING DRIVERS

STRONG SERVICE AREA: LADWP's greater Los Angeles service territory is broad, mature and diverse with stable customer growth. Load growth has historically been steady and is expected to remain flat through 2020, offset by energy efficiency investments.

FAVORABLE RATE STRUCTURE ELEMENTS: The capture of around 45% of revenues through automatic cost recovery rate mechanisms partially mitigates Fitch's concerns regarding the lengthy and politically charged rate environment for this utility. Management expects to consider the next base rate increase in 2015.

STRONG FINANCIAL MARGINS: Financial margins for bondholders are strong with over 2x debt service coverage of revenue bonds. Remaining cash flow after debt payment provides capacity to support the 8% transfer of a portion of the system's large capital needs. Liquidity is healthy with 203 days operating cash.

EVOLVING POWER SUPPLY: California legislation requires costly changes to LADWP's power supply mix, in both operating and capital costs. LADWP continues to invest in generation resources and is well positioned to comply with the state's environmental goals.

STRONG CAPITAL INVESTMENT: Capital investment in the system has been strong in recent years, at over 200% of depreciation. LADWP projects high levels of investment will continue to be funded from a healthy mix of revenues and debt.

HIGH DEBT LEVELS: 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.

RATING SENSITIVITIES

POTENTIAL LACK OF RATE SUPPORT: 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.

CREDIT PROFILE

STRONG SERVICE AREA

Los Angeles is the commercial and cultural center of a very large, diverse economy. LADWP provides retail electric service in the city of Los Angeles to 1.5 million customers, or a population of 3.9 million. The system had a peak of 6,396 megawatts (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.

RATE ACTION DELAYED

LADWP's last power system base rate case occurred in the fall of 2012, when it received approval to increase power rates in the remaining months of fiscal 2013 (4.9%) and fiscal 2014 (6%). At that time, additional base rate increases were contemplated for fiscals 2015 and 2016. Given the implementation difficulties with a new billing system in fiscal 2014, LADWP now expects to resolve these issues prior to seeking consideration of additional base rate increases in spring 2015 for implementation beginning in fiscal 2016.

Mitigating concerns regarding a base rate delay are LADWP's cost-adjustment factors which recover 45% of electric revenues and will increase automatically with increased costs. Fitch views the use of the adjustment factors as a positive credit factor as recovery of these variable and designated capital costs require only Board approval and are not subject to the system's lengthy base rate approval process. However, much of the future planned capital spending will require rate increases to fund the related costs.

POWER SUPPLY REFORMATION REQUIRED; LADWP MAKING PROGRESS

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 located 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.

STRONG FINANCIAL PERFORMANCE

Fitch calculated debt service coverage in fiscal 2014 was 2.58x and 2x after factoring in the transfer equal to 8% of utility revenues to the city's general fund. This performance is in line with strong historical financial performance at the utility but was bolstered by debt restructurings in recent years that provided upfront savings and debt service relief. Financial margins benefitted from relatively level expenditures, the 6% base rate increase in fiscal 2014, and cost recovery adjustments in the rate structure.

Liquidity at the end of fiscal 2014 was strong, with \$1.27 billion (or 203 days of operations) in unrestricted cash, including \$497 million in the debt reduction fund. Liquidity as of Aug. 31, 2014 grew to \$1.5 billion in unrestricted cash, including \$497 million in the debt reduction fund.

Debt service is anticipated to grow to over \$700 million by fiscal 2019 from \$436 million in fiscal 2014. LADWP's financial policies include a debt service coverage target of 2.25x (before transfer), a fixed charge debt service target of 1.7x, a minimum unrestricted cash reserve equal to 170 days cash, and debt-to-capitalization of less than 68%. Fitch views the policies as an evolving indication of LADWP's goals for rate setting.

SIGNIFICANT CAPITAL NEEDS AND HIGH DEBT LEVELS

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 views LADWP's maintenance of a healthy portion of revenue-supported capital spending as a key component of the utility's financial flexibility.