Utility’s bond rating may drop

CITY HALL — A key bond-rating agency has warned that it will downgrade Glendale Water & Power’s market status if it doesn’t continue to raise water rates to make up for lost revenue brought on partly by customers using less.

The warning came in a report from Fitch Ratings, which revised the utility’s future outlook from “stable” to “negative,” citing diminished cash reserves, its multimillion-dollar annual transfer to the city’s General Fund and increasing obligations to pay back a $50-million bond issued in 2008.

The City Council in 2007 approved a 35% increase over a three-year period to help beef up the city’s rapidly depleting cash reserves.

But a $6-million drop in revenue during mandatory water conservation this year once again hit the utility’s reserves, which dropped to $3 million.

Fitch officials warned that if rate increases are not adopted, the utility’s AA bond rating could be downgraded, which would mean higher interest rates when borrowing for future capital projects.

“We would have to pay more money to borrow,” Assistant General Manager Peter Kavounas said Friday. “That’s the risk. That means the cost of doing business for GWP would be higher.”

Utility officials mentioned the report containing the warning during a special meeting Tuesday on a proposed 3.8% water rate increase to recoup lost revenue.

“The rates are [proposed] to go up for the simple fact that we haven’t been collecting enough money,” said Bill Fox, assistant general manager for financial planning and risk management.

Some council members have been skeptical of the proposed increase, which they say seems to penalize residents for an overwhelming response to the city’s mandatory conservation measures.

Utility bonds, a common way of financing large projects, are secured by pledges of future revenue from the utility’s operations. A downgraded bond rating for water operations would not affect the utility’s electric operations, which plan to issue bonds to help fund the smart-grid project, officials said.

While some council members expressed concern about the potential downgrading, others questioned whether the utility would even need to borrow for water projects in the next few years.

But on Friday, Kavounas said higher interest rates would make it harder to maintain the aging water system and implement a slew of capital projects outlined in the utility’s strategic plan.

The utility has already postponed a number of scheduled improvement projects in order to minimize the rate increase proposed for this year, he said.

The lack of rate increases for much of the last decade placed pressure on current ratepayers, he added.

“We went for six years without any rate increases in Glendale,” he said. “In a way we are kind of paying the price for that right now.”