Two large city-run utilities in Los Angeles and Long Beach, CA, drew “AA-” credit ratings from Standard & Poor’s Ratings Services (S&P) Tuesday on more than $1.7 billion of revenue bonds they collectively are preparing to offer. Both utilities are viewed as strong with “stable” outlooks by S&P, which generally views double-A ratings as “very strong” and only slightly lower than its highest rating..

In the case of the Long Beach Utility Department’s Bond Finance Authority and its $1.1 billion planned offering of tax-exempt revenue bonds (Series 2007A, B, C and D), the rating is based on Merrill Lynch & Co. Inc.’s credit rating. Merrill is the natural gas supplier for the muni’s natural gas distribution utility and the city’s power plant supplying electricity to its municipal facilities.

“The rating is preliminary and subject to final documentation,” said S&P analyst Leo Carrillo. “All other transaction counterparties, their guarantors or surety policy providers are expected to be initially rated [the same AA- or better], but their ratings could subsequently vary subject to certain minimum ratings and collateral requirements.”

S&P gave AA- ratings to the Los Angeles Department of Water and Power (LADWP) for $550 million in fixed-rate power system revenue bonds and for another $125 million of auction-rate power system varibale-rate revenue bonds.

Proceeds are slated to be applied to LADWP’s growing, multi-billion-dollar capital program, which may experience increasing pressure in the wake of widespread, if sporadic, electricity outages during the Labor Day heat wave that hit California.

“The stable outlook [for LADWP] reflects our expectation that the recently implemented variable-cost pass-through mechanism will address cost pressures that led to some erosion of financial metrics in recent years,” said S&P analyst David Bodek. “While the pass-through mechanism is an important tool, the addition of substantial debt and fixed contractual commitments in response to capital needs will also necessitate adjustments to base rates.”

Changes in rate coverage on base rates that hurt financial margins could in turn hurt LADWP’s credit quality, S&P said.

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