Correction - Fitch Rates Metro Water Dist of Southern California $226MM SIFMA Index Notes 'F1+'
Source: Business Wire
Fitch Ratings assigns an 'F1+' rating to Metropolitan Water District of Southern California's (Metropolitan) $226 million water revenue refunding bonds, series 2009A-1 and 2009A-2 being issued as SIFMA index notes. Proceeds will be used to refund a portion of Metropolitan's outstanding variable-rate debt. The notes are secured by a net operating revenue pledge that is on parity with Metropolitan's outstanding water revenue bonds. In addition, Fitch affirms its long-term rating on Metropolitan's outstanding $4.36 billion of outstanding water revenue bonds at 'AA+'. The Rating Outlook on the long-term bonds is Negative. The series 2009A-1 and 2009A-2 bonds are expected to price during the week of May 18, 2009.
The change to the transaction structure consists of the addition of an 'Index Mode Scheduled Mandatory Tender' on the scheduled termination date, whereas previously, the structure contemplated allowing for an 'Index Mode Optional Tender' by bondholders (with 30 days prior notice) at the scheduled termination date. This change now will require bondholders to tender the bonds at the scheduled termination date and does not allow them to hold the bonds into the next tender period. No change was made to Metropolitan's option to force an 'Unscheduled Mandatory Tender' at any time after the call protection date and prior to the scheduled termination date. Metropolitan's intent to exercise the unscheduled mandatory tender is important to the credit rating in that by exercising this option, Metropolitan does not intend to ever reach the scheduled termination date and a scheduled mandatory tender.
The 2009A-1 and 2009A-2 bonds will be issued in the index mode. The rating does not cover the potential conversion to another interest rate mode. The index mode will pay bondholders a rate equal to the SIFMA Average Index Rate (SIFMA) and a fixed index spread that will be calculated at the time of pricing and will be in place through the initial tender period, which is expected to be established at pricing at approximately 12 months from the bond closing. A failure by Metropolitan to provide sufficient proceeds to pay the purchase price of the bonds at the tender date would constitute an event of default under the 2009A-1 and 2009A-2 paying agent agreement but would not constitute an event of default under Metropolitan's master resolution governing its other revenue bonds.
The 'F1+' rating on the SIFMA index notes reflects:
--Metropolitan's stated intent to exercise its option to force an unscheduled mandatory tender of the bonds prior to the end of the tender period. In the event of a failed remarketing under this unscheduled mandatory call scenario, Metropolitan should have sufficient time to execute an interest rate mode conversion on the bonds or a take-out financing.
--Proven ability to access the bond market in the event of a remarketing. Market access is implied by Metropolitan's long-term credit rating of 'AA+'.
--Demonstrated ability to execute a refunding transaction within a 30 day period (as Metropolitan did in March 2008) and prior Board authorization to execute refunding transactions, given the 30 days notice period for bondholders to tender the bonds.
--Significant liquidity position at Metropolitan with short-term investments in excess of the par amount of the outstanding notes. As of March 31, 2009, Metropolitan maintained a short-term investment portfolio of $517 million.
--The relatively small (10%) portion of the overall variable rate debt portfolio that is represented by the SIFMA notes, with no current plans to expand this program.
The 'AA+' long-term rating continues to reflect an extremely large and diverse customer base of 18 million in southern California, strong management and planning practices, a high degree of political support for Metropolitan's regional role as the wholesale water provider, and strong Board leadership. Various projects at Metropolitan, the California Department of Water Resources (DWR) which operates the State Water Project (SWP), and the member level are underway to increase existing supplies or develop new ones. The upcoming two to three years appear to be the period of the greatest water supply challenge until such time as certain new projects become operational.
The Negative Outlook reflects increasing pressure on Metropolitan's water supply and cost structure. Rating triggers that could prompt a downgrade include:
--Continued declines in financial performance, including annual debt service coverage and reserves;
--Inability to procure replacement water supplies sufficient to meet projected sales levels; and
--Difficulty adopting rates that accomplish cost recovery in a timely manner.
Metropolitan's Board of Directors took significant actions in April 2009 to manage Metropolitan's lower than expected water supply. The Board enacted its Water Supply Allocation Plan and called for mandatory 10% water reductions from its water purchasers in addition to eliminating any sales for water replenishment and 25% reductions to agricultural customers. The reductions should assist Metropolitan in allocating its lower water supply due to reduced flows from the State Water Project (SWP). In order to manage its reduced revenues from lower water sales and higher water purchase costs for water to replace a portion of the reduced SWP flow, the Board enacted a 19.7% rate increase effective Sept. 1, 2009. Although not yet approved, the rate increase was accompanied by projections that the next rate increase needed in January 2011 would be 21.5%. Although the Board delayed full cost recovery until the January 2011 expected rate increase, its decision to accelerate the effective date of the 19.7% rate increase to Sept. 1 (from its typical cycle of Jan. 1 rate increases) was a significant departure and gives an indication of the Board's willingness to implement necessary rate increases to its customers in a difficult economy.
Metropolitan ended fiscal 2008 with $1.1 billion in operating revenues. Debt service coverage in fiscal 2008 (June 30 year-end) was 1.76 times (x). Currently, Metropolitan projects that senior-lien ADS coverage will fall to around 1.50x in fiscal years 2009 and 2010. More importantly, fixed charge coverage is projected to decline to 1.0x in fiscal 2010 before recovering to levels above the Board policy of 1.2x in fiscal 2012. Transfers from reserves are expected to fund the difference between revenues and expenditures in fiscals 2009 and 2010, as was done in 2008. Fixed charge coverage includes amounts paid to DWR for capital costs associated with the SWP. Fitch focuses on the fixed charge coverage because it more accurately reflects a true cash flow debt service coverage since the 'capital costs' paid to DWR are paid from annual revenues, albeit on a subordinate basis. Planned rate stabilization fund transfers to support operations will bring reserve balances below the Board's adopted minimum target of around $250 million. The rate stabilization fund may dip as low as $100 million in the next two years. Capital spending from cash flow has been temporarily reduced from the planned $95 million annually to $30 million-$40 million in fiscals 2008-2010. The Negative Outlook reflects Fitch's concern that Metropolitan's has already exercised much of its financial flexibility, which is not typical for 'AA+' rated entities.
Metropolitan provides between 40%-60% of the service area's water, depending on water conditions, and is responsible for the development and acquisition of the long-term water supply for the region. The district consists of 26 member public agencies, including 14 cities, 11 municipal water districts, and one county water authority. Member agencies purchase water from Metropolitan to supplement local supplies and then resell it on a wholesale or retail basis to more than 300 cities and numerous unincorporated communities in the district's service area. Metropolitan's supply is derived from two sources: Northern California's San Francisco Bay/Sacramento-San Joaquin River Delta water via the SWP, which provided approximately 75% of its water supply in 2007, and the Colorado River via the Colorado River Aqueduct, which provided the remaining 25%. The SWP supply source dropped considerably in 2008, supplying only 30% of Metropolitan's water sales. The remaining water supply was provided by the Colorado River (33%); storage (18%); and transfer, exchanges, and water banking agreements (19%).
For more information about Metropolitan's water supply situation and its credit ratings, see Fitch's Report dated Jan. 12, 2009.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Contact:
Fitch Ratings
Kathy Masterson, +1-415-732-5622 (San Francisco)
Doug Scott, +1-512-215-3725 (Austin)
Cindy Stoller, +1-212-908-0526
(Media Relations, New York)
cindy.stoller@fitchratings.com
