When City Manager Scott Ochoa warned bond-rating agencies were watching Glendale closely earlier this month, he was right.
Fitch Ratings on Wednesday gave the city's most recent bond issuance of $35 million for the water side of Glendale Water & Power an A+ rating with a negative outlook, citing the utility's narrow financial margins to support debt payments next year.
“GWP has no liquidity and a large liability to retire,” according to Fitch.
The bonds, approved by the City Council earlier this month, are set to cover five years of capital improvements, including replacing miles of decades-old pipes. The A+ rating, while not the best in Fitch's book, is still far from junk status.
Glendale Water & Power implemented the first of four years of water rate increases this year, but most of the new revenue will go to pay back the roughly $23 million it borrowed from the electricity side. That money was mostly spent on large capital improvements such as the Diederich Reservoir, which serves half of the city's population.
Officials don't expect to see a positive cash flow for the water side until fiscal 2017, but by next year, the utility will begin to make principal payments on $50 million in bonds issued in 2008.
That will increase debt payments from $2.3 million to $3.5 million “at a time when financial margins will likely be slim,” Fitch stated.
The agency also affirmed its A+ rating of the 2008 bonds, which dropped from a previous AA rating in July due to similar financial reasons.
Glendale Public Works Director Steve Zurn, who was also appointed this year to simultaneously serve as general manager of the city-owned utility, said in a statement Friday that Glendale Water & Power has a “solid plan and excellent staff,” and that he was “completely confident we will achieve our objectives and, with that, future ratings will improve as well.
“We have a lot of work ahead of us to get the water operation back in a positive position, and we are well on our way to doing that, but it isn't something that will happen in a month or year, or even two years. It will take some time.”
Glendale Water & Power found itself in a financial bind after continuing to spend on capital improvements even though the money to fund the projects wasn't there and extra bonds were blocked by council members averse to more debt.
The lack of spending restraint and delays in planned rate requests concerned Fitch.
It took the City Council months to approve the most recent round of water rate increases — which will affect customers differently depending on how much water they use, as well as the size of their meters.
But officials have said with new management and a conservative spending plan, the utility is righting itself. Capital improvements have been curtailed this year to a minimum spending plan, and the proposed $46 million in work over the next five years will focus on “bread and butter” projects, officials have said.
“Fitch is looking for management stability to occur and consistency between planning and execution,” according to the ratings report.