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Rating Action:

Moody's upgrades Vernon, CA's Electric Enterprise to Baa2; Assigns Baa2 to proposed 2020 Series A Electric System Revenue Bonds; outlook stable

20 Feb 2020

New York, February 20, 2020 -- Moody's Investors Service upgraded the rating on the City of Vernon, CA Electric Enterprise's (Vernon Electric, or the utility) Electric System Revenue Bonds to Baa2 from Baa3. Concurrently, Moody's assigned a Baa2 rating to the utility's proposed $156 million Electric System Revenue Bonds, 2020 Series A. The outlook is stable.

RATINGS RATIONALE

The rating upgrade and assignment are based on the positive reforms achieved by the utility and the city over the last several years; the nearing maturity of the utility's gas prepay obligation in April 2021; and the utility's improved financial position with strong liquidity averaging 456 days of cash over the last three years. The rating action recognizes the small size of the city and utility and its revenues from industrial and commercial customers. It also incorporates our expectation that the outcome of Vernon Electric's ongoing legal dispute with Bicent Power LLC will be credit neutral.

In 2019, Vernon Electric completed a multi-year process to eliminate the historic practice of large general fund transfers from the utility to the city. The city enacted a tax on industrial electric consumers to replace its previous practice of large general fund transfers in April 2018 and implemented rate increases that shift the tax burden to users from the utility in April 2019. The utility has also implemented rate restructuring measures to better reflect and more quickly pass through variable costs.

Vernon Electric strengthened its financial position during fiscal 2019 with a debt service coverage ratio (DSCR) of 1.3x, pension-adjusted debt ratio of 85% and a strong liquidity position with 405 days cash on hand as of the utility's June 30 fiscal year end. The proposed refinancing and nearing expiration of the utility's uneconomic natural gas prepay streamlines its capital structure.

While highly reliant on sales to industrial customers, Vernon's location is a key backstop supporting its credit quality. It enjoys a strong competitive position as a key industrial center adjacent to downtown Los Angeles with easy access to seaport and rail transportation. Its probusiness policies and unique positioning as a rare industrial haven in a major urban area helps Vernon maintain its value from a sustainability standpoint.

RATING OUTLOOK

Vernon Electric's stable outlook reflects the view that management will continue its efforts to improve governance practices and financial results while also complying with California's RPS goals. The stable outlook also incorporates expectations that the Bicent litigation will be resolved in a credit-neutral manner.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Steady improvement in debt service coverage ratios to above 1.5x and debt ratios below 80% on a sustained basis

- Demonstration that governance improvements are sustainable

- Improved competitive retail rates

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Resurfacing of governance or corruption issues at the utility or the city

- Deterioration of financial metrics including DSCR below 1.1x, debt ratio above 100% and days cash on hand below 90 days

- Multi-notch downgrade of counterparty rating of the Natural Gas Prepay supplier and guarantor or any weakening in the terms of the SMUD natural gas purchase contract

LEGAL SECURITY

Security provisions are satisfactory with net revenues of the electric system being the main revenue pledge in the bond security. The rate covenant requires that rates are set to provide net revenues equal to 1.1x debt service. Parity obligations may be issued if historical net revenues adjusted for rate increases are in place and additions to the system are funded by the new bonds, equal to 1.25x maximum annuals debt service. The debt service reserve fund is required to be funded at an amount equal to the least of 10% of the initial offering price of the bonds; the greatest amount of debt service on the outstanding bonds due at 125% average annual debt service as adjusted. A Reserve Financial Guaranty policy can be used in place of cash with the Trustee.

USE OF PROCEEDS

The proposed issuance will be used to refund the $58 million in debt outstanding on the Series 2009A Electric System Revenue Bonds and refund approximately $85 million on the Series 2015A Electric System Revenue Bonds. After the refunding, the Series 2009A bonds will no longer have debt outstanding, while the Series 2015A bonds will have approximately $25.7 million in debt outstanding. The remainder of the funds will be used to finance the utility's capital needs. The refunding is expected to result in an estimated net present value savings of $3.6 million.

PROFILE

Vernon is a small city located just south of downtown Los Angeles. It is almost exclusively industrial, with a private sector labor force of 55,000 and a residential population of 209. Demand for public utilities comes almost entirely from the business sector. In fiscal 2018, 99% of Vernon Electric's retail energy sales revenue came from industrial and commercial customers. The electric utility, which had $282.2 million of debt outstanding as of January 1, 2020, serves 1,915 customers with a heavy concentration in the food processing, chemical processing and container packaging sectors.

METHODOLOGY

The principal methodology used in these ratings was US Public Power Electric Utilities with Generation Ownership Exposure Methodology published in August 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Gayle Podurgiel
Lead Analyst
Project Finance
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Angelo Sabatelle
Additional Contact
Project Finance
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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