Fitch Affirms Modesto Irrigation District Fin Auth, CA Water Revs at 'A+'; Outlook Stable
Source: Business Wire
--Approximately $160 million water revenue bonds, series 2007F and 1998D, affirmed at 'A+'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The rating reflects the credit quality of the City of Modesto's water system and the city's obligation to make payments sufficient to cover debt service requirements if delivery of water is received from the Modesto Irrigation District (MID). The rating additionally reflects the operational risk of Modesto Irrigation District's ownership and operation of the water treatment plant.
--The 'domestic water project' requires MID to treat and provide water to the City of Modesto (the city); the project is an essential component of the city's overall water supply portfolio.
--The city began raising water rates in fiscal 2005 in anticipation of the additional costs associated with the domestic water project expansion. However, additional rate increases are needed by fiscal 2011 to absorb the full debt costs once capitalized interest is expended.
--Historical financial performance has been healthy and consistent to projected levels, although debt service coverage is expected to decline once the full debt costs begin to amortize.
--The service territory is struggling with high unemployment and declines in housing values.
KEY RATING DRIVERS:
--Fitch's rating reflects the expectation the rate increases will be implemented to provide debt service coverage at or above the city's internal policy of 1.5x by fiscal 2011 when the full impact of debt payments occurs.
--The city's water system is highly leveraged. Future capital needs are expected to be modest following the large investment made to increase the water treatment capacity at the treatment plant operated by MID.
SECURITY:
The bonds are secured by payments made by the City of Modesto's water enterprise system according to a treatment and delivery agreement between MID and the City of Modesto (the city).
CREDIT SUMMARY:
The rating reflects the credit quality of the City of Modesto's water system, given its unconditional obligation under its Treatment and Delivery Agreement with MID to make payments sufficient to cover all project costs, including debt service, as long as water is delivered. The rating also reflects MID's obligations as the project owner and operator to deliver water to the city in order for payment to be made.
The city's water system has approximately 77,000 water customers with historically modest growth rates, although system growth has been flat with the economic recession and collapse of home prices in California. The agreement with MID relates to the Domestic Water Project, which went into commercial operation in 1995 and provides a surface water supply source to the city to supplement its groundwater supply. The groundwater supply still provides the majority of water to the city. However, an expansion of the Domestic Water Project treatment plant to 72 MGD from 36 MGD began in 2007 and is expected to be complete in April 2010, which will allow the city to limit it use of groundwater supplies to peak summer periods. The groundwater basin is being depleted faster than its replenishment rate and water quality is poor in a few wells.
The city adopted a package of four annual rate increases that became effective in fiscal years 2005 through 2009 to increase revenues to support the additional cost of the Domestic Water Project expansion. Additional rate increases are anticipated. The city is in the process of a water rate study that will incorporate the significant increase in debt costs that will occur in fiscal 2011 in the city's payments to MID and the developments in consumption levels and revenues resulting from the city's installation of new meters across its service territory.
Financial performance has been consistent with Fitch's expectations to date with debt service coverage in fiscal 2009 of 2.9 times (x). Debt service coverage, based on conservative financial projections with no additional rate increases, could fall to 1.3x in fiscal 2011. However, the city's intent is to adjust rates to achieve its minimum internal debt service coverage target of 1.5x and provide sufficient cash flow for operations and future capital needs. Future capital needs are modest, around $10 million in the next few years. The city's debt levels are high for the water system. Liquidity is strong with $72.4 million in unrestricted reserves at the end of fiscal 2009, or 758 days operating cash.
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,' dated Dec. 29, 2009;
--'Water and Sewer Revenue Bond Rating Guidelines,' dated Aug. 6, 2008.
Additional information is available at 'www.fitchratings.com'.
Contact:
Fitch Ratings
Kathy Masterson, +1-415-732-5622 (San Francisco)
Robert Sakai, +1-415-732-5628 (San Francisco)
Brian Bertsch, +1-212-908-0549 (Media Relations, New York)
brian.bertsch@fitchratings.com
