Fitch Rates San Diego County Water Auth Financing Agency (CA) $639MM Water Revs 'AA'
Source: Business Wire
AUSTIN--Fitch Ratings takes the following actions on San Diego County Water Authority Financing Agency, California:
--$102 million water revenue bonds, series 2010A (Non-AMT tax-exempt);
--$537 million water revenue bonds, series 2010B (Taxable Build America Bonds).
The bonds are scheduled to sell via negotiation as early as the week of Jan. 18, with proceeds to be used to finance various improvements to the San Diego County Water Authority's (SDCWA) system and to refund a portion of SDCWA's outstanding parity debt. At this time Fitch also takes the following action:
--$1.43 billion in currently outstanding SDCWA parity certificates of participation (COPs), affirmed at 'AA'.
The Rating Outlook is Stable.
RATING RATIONALE:
--SDCWA's financial performance remains strong and stable.
--SDCWA adheres to prudent financial management practices and engages in comprehensive long-term planning aimed at securing an adequate and reliable water supply.
--The service area is large and diverse, although some weakening has occurred with the recession.
--The capital improvement plan (CIP) is substantial, necessitating increased leveraging over the near term.
KEY RATING DRIVERS:
--Cost containment of the CIP will be key given that current planned leverage will have a major impact on future fixed costs.
--Management of rate impacts resulting from operating and capital cost pressures will be important given that charges already are moderately high.
SECURITY:
The bonds are secured by a pledge of net revenues of SDCWA's water system, on parity with SDCWA's outstanding COPs.
CREDIT SUMMARY:
The 'AA' rating reflects SDCWA's prudent management practices, long-term planning to secure an adequate and reliable water supply, and stable financial performance. SDCWA has been working to diversify and supplement its long-term water supply portfolio, including water transfers from the Imperial Irrigation District, as well as transfers of conserved water resulting from the lining of the All-American and Coachella canals. Other credit considerations include SDCWA's rising operating cost pressures and rising fixed cost structure resulting from SDCWA's large CIP.
Organized in 1944 to import water to augment local supply, SDCWA now imports around 80% of the region's water supply annually on behalf of its 24 member agencies, which provide water to approximately three million residents. SDCWA currently purchases the majority of its water from the Metropolitan Water District of Southern California (MWD; revenue bonds rated 'AA+' by Fitch). But management's strategic planning has enhanced the outlook for an increasingly diverse long-term water supply sufficient to meet projected population growth.
To develop additional supplies, improve system reliability through storage and seismic improvements, and construct local treatment facilities, SDCWA is in the midst of a very large $3.8 billion 30-year CIP, of which approximately $2.4 billion has yet to be expended. The five-year fiscal 2010-2014 CIP, which totals $1.1 billion and is a subset of the 30-year CIP, will be funded predominantly from this and future debt issuances. Given the size and cost of the CIP, Fitch considers SDCWA's ability to manage escalating construction costs as one of the key credit drivers. However, SDCWA has been successful at controlling capital costs as a result of detailed cost reliability modeling and participation in a multi-agency regional procurement committee.
SDCWA's financial performance has been favorable, and cash reserves provide a more than adequate cushion against weather- or conservation-based variation in demand and revenue. Fitch expects SDCWA's prudent long-term planning efforts to position it to meet the challenges noted above. Financials for fiscal year 2009 were sound with SDCWA posting senior lien debt service coverage of 1.5 times (x) and all-in debt service coverage of 1.4x; current projections indicate continuance of these levels through at least fiscal 2014. Rates to SDCWA's 24 member agencies are expected to continue to increase annually as a result of cost increases from MWD and capital costs associated with SDCWA's own CIP and could ultimately become an affordability issue. However, Fitch expects that timely cost recovery will allow SDCWA to maintain its financial performance and that price pressures will be relatively similar for other southern California issuers.
These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following reports:
--'Revenue-Supported Rating Criteria', (Dec. 29, 2009);
--'Water and Sewer Revenue Bond Rating Guidelines', (Aug. 6, 2008).
Considerations for Taxable/Build America Bonds Investors
The following sector credit profile is provided as background for investors new to the municipal market.
Water and Sewer Utility Revenue Bonds:
Municipal water and sewer utilities in the U.S. are enduring natural monopolies that typically have autonomous rate setting ability and provide highly essential services. The bonds are secured by a pledge of net revenues generated by the water and/or sewer system; and typically include structural legal protections such as rate covenants, debt service reserve requirements, and anti-dilution tests. As such, the sector exhibits extremely strong credit characteristics with minimal defaults. Reflective of this strong performance, the average water and sewer revenue bond rating is 'A+' with 53% at or above 'AA-' and approximately 6% rated 'BBB+' or below. Those with low investment-grade or below-investment-grade ratings generally have substantial capital programs, a high degree of leverage or weak financial flexibility as reflected in low cash levels, narrow debt service coverage and/or limited rate-raising flexibility.
Additional information is available at 'www.fitchratings.com'.
Contact:
Doug Scott, +1-512-215-3725, Austin
Robert Sakai, +1-415-732-5628, San Francisco
Media Relations:
Cindy Stoller, +1-212-908-0526, New York
cindy.stoller@fitchratings.com
