Fitch Removes Imperial Irrigation Dist (CA) from Watch Negative; Affirms Rev COPs & POBs at 'A+'
Source: Business Wire
--Approximately $62 million revenue certificates of participation (COPs), series 2004, affirmed at 'A+'
--Approximately $23.5 million revenue COPs, series 2002, affirmed at 'A+'
--Approximately $20 million revenue COPs, series 2000, affirmed at 'A+'
--Approximately $32 million pension obligation revenue bonds, series 2001, affirmed at 'A+'
The ratings have been removed from Rating Watch Negative and assigned a Stable Rating Outlook.
The return to a Stable Outlook reflects the failure of a rate protest under California's proposition 218 rules that sought to overturn a proposed rate increase of $3/acre foot (af) on irrigation water sold by IID and the potential revenue shortfall that was projected to occur if the protest was successful. In light of significant customer protest (protest notifications were received from over 40% of ratepayers), IID's Board of Directors adopted a modified schedule for the rate increase to phase in the $3/af increase over two years. Although the delayed timing of the rate increase left a budget gap between revenues and expenditures, IID was able to bridge this gap through the receipt of an additional $6 million in revenues that resulted from a settlement agreement with the San Diego County Water Authority (SDCWA). The settlement agreement should provide additional revenues in future years and thereby provide IID with the resources to produce financial metrics in line with an 'A+' utility.
RATING RATIONALE:
--Exceptionally superior water rights to a very large volume of the state of California's allocation of Colorado River water that is used to serve the region's irrigation needs.
--Diversity in revenues with around half of system revenues provided by IID's traditional irrigation customers and the other half provided by water transfer revenues and, in recent years, land sales.
--Very low water rates to the district's irrigation customers at $18 per acre-foot, increasing to $20 per acre-foot by 2011. However, IID appears to have very limited rate flexibility given the recent protest vote by its customers that exceeded 40% (50% is required by Prop 218 to block a rate increase).
--Favorable settlement agreement signed in December 2009 with San Diego County Water Authority (SDCWA) that increases rates paid by SDCWA for water purchased from IID; the result is a significant increase in projected revenues of the district, which will mitigate rate increases needed from the irrigation customers.
--The recent financial position has been strained with operating revenues that have been insufficient to cover operating expenditures without the revenues provided by one-time land sales. The settlement agreement should improve the financial position in fiscal 2010.
--Frequent management turnover at the district has been a credit concern given the long-term capital needs that are required to comply with the Quantification Settlement Agreement (QSA).
--The local economy relies heavily on agriculture and has been severely impacted by the current recession; unemployment rates in Imperial County are the highest in the state.
--Capital spending in next 10 years to build conservation projects is expected to be significant, which could place strain on the system's resources and financial position.
KEY RATING DRIVERS:
--Implementation of the final of three approved rate increases for irrigation customers and increasing water transfer revenues are projected to keep IID in compliance with its 1.2 times (x) rate covenant in the next few years.
--IID may issue bonds in fiscal 2010 to fund conservation projects that will generate the required water transfers. The lien, structure and amortization of the debt will likely impact financial margins for bondholders.
--IID's timing in implementing the conservation projects is important in that if conservation water is not available to meet required transfers, there will be less water available to serve customers, which could be highly unpopular and potentially damaging to the regional economy.
SECURITY:
Water revenue COPs are secured by net revenues of IID's water system. The pension obligation revenue bonds are secured by a net revenue pledge of IID's water and electric systems, but in practice are paid as operating expenditures from both systems.
CREDIT SUMMARY:
Imperial Irrigation District is located in southeastern California, near the borders of Mexico and Arizona. The district enjoys a 3.1 million acre-feet entitlement to flows from the Colorado River and delivers approximately 2.9 million acre-feet of raw water to irrigation customers in the Imperial Valley, where a tremendous amount of California's agricultural activity takes place. The district's water rights to a share of California's apportionment of the Colorado River are plentiful and superior to many in the state, including the water rights of Metropolitan Water District of Southern California, used to serve the Los Angeles and San Diego areas with retail treated water.
In a broad regional agreement signed in 2003 the QSA, the district agreed to execute substantial conservation projects that would generate water to be sold to other regional entities to meet population growth. In the interim period, the district is meeting initial water sales requirements through land fallowing programs with Imperial Valley farmers. However, it is poised to embark on a sizable capital program to implement the long-term conservation projects needed to meet the required deliveries that grow to 200,000 acre-feet by 2021. The QSA does not permit the use of fallowing for more than the interim period so IID must achieve the conservation programs outlined in its capital plan. Financial pressure could result in the interim period since IID must spend capital dollars to construct conservation projects, but the bulk of revenues from these projects will be generated a number of years after construction is complete. IID is expected to debt finance the majority of project costs and will additionally receive some up-front capital funds from its recent settlement agreement with the SDCWA.
IID is required as part of the QSA to transfer increasing amount of water to SDCWA. The transfers began in 2004 and ramp up to a flat annual level of 200,000 af in 2021. Transfers required in fiscal 2010 are 70,000 af. The transfers, as outlined in the QSA agreement, were to be sold at a rate tied, in part, to that of the region's largest wholesale water provider, Metropolitan Water District (MWD). MWD has experienced substantial price escalation and the rates for transferred water were poised to have a high degree of upward pressure. Given this potential and IID's more near term capital needs to fund conservation projects, both parties had some interest in reaching a negotiated agreement regarding current and future rate increases. IID gains more revenues upfront to fund capital while SDCWA receives some limitation on future rate escalation. In addition to the increase in the rate paid per af of water, the agreement provides $50 million in capital funds to IID to fund a portion of the needed conservation projects IID must build in order to be able to reach the required transfer of 205,000 af to SDCWA by 2021.
Importantly for IID's financial performance in fiscal 2009, the settlement agreement includes a true-up payment to IID for past water transfers in 2008 and 2009 of approximately $6 million. The receipt of this additional $6 million that was not budgeted, will more than make the district whole for the rate increase that was not implemented in fiscal 2009 and appears to have placed the district in compliance with its 1.2x rate covenant, based on unaudited financials. Future increases in revenues will improve the district's current financial forecast and debt service coverage is projected to be in excess of its rate covenant, assuming no additional debt issuance at the parity lien.
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.
Additional information is available at www.fitchratings.com.
Contact:
Fitch Ratings, New York
Kathy Masterson, +1-415-732-5622 (San Francisco)
Douglas Scott, +1-512-215-3725 (Austin)
Media Relations:
Cindy Stoller, +1-212-908-0526
cindy.stoller@fitchratings.com
