Fitch Rates Contra Costa Water District (California) Notes 'AA'
Source: Business Wire
--Approximately $132 million water revenue notes, series A and B, rated 'AA'.
The notes are expected to sell via negotiation the week of June 14. Proceeds will be used to refund all of the district's outstanding tax-exempt commercial paper, fund capital expenditures, and pay costs of issuance.
At this time, Fitch also assigns an initial rating to the district's outstanding senior lien debt as follows:
--$434.7 million in outstanding water revenue bonds, rated 'AA+';
--$32.4 million in outstanding Contra Costa Water Authority water treatment revenue refunding bonds, series 2002A, rated 'AA+'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The district's financial metrics are strong, although revenue pressures over the near term are expected to lower margins somewhat and reduce annual debt service (ADS) coverage to modest levels.
--Planning efforts and policies are very good, providing a stable operating environment.
--Capital needs are manageable, which offsets some concerns related to an elevated debt profile.
--The district has developed a diverse supply portfolio sufficient to meet customer demands through build-out.
KEY RATING DRIVERS:
--Maintenance of a strong financial profile in a challenging revenue environment will be key to preserving the current rating level.
--Rising debt levels beyond amounts currently planned over the near term would be a concern as it could weaken operating performance.
SECURITY:
The bonds are senior lien obligations payable from net revenues of the district's water system. The notes are mezzanine obligations payable from net revenues on a basis subordinate to the bonds.
CREDIT SUMMARY:
The district provides both retail and wholesale water service to around 550,000 people in the central and northern parts of Contra Costa County. Water supplies are derived from the Sacramento River-San Joaquin River Delta in which the district has acquired various water rights and also has contracted for water from the U.S. Bureau of Reclamation via the Central Valley Project. Based upon existing resources, as well as source water development projects contained in the district's 10-year fiscal 2011-2020 capital improvement program (CIP), supplies are expected to be sufficient to meet customer demands through ultimate build-out of the service area.
Capital needs are manageable but will accelerate over the next couple of years as the district completes a major water supply project: the expansion of the district's Los Vaqueros Reservoir. Thereafter, annual capital costs are expected to fall significantly and focus more on renewal of system assets. Capital costs for the five-year fiscal 2011-2015 period total around $330 million, with borrowed sources accounting for just 34%, including the new money portion of the notes. While planned debt to equity funding of the CIP is favorable, prior issuances by the district have led to elevated debt ratios. However, the district's debt is amortized relatively quickly, which should allow the district's debt profile to improve over the medium term.
The district's financial performance has been strong and stable as a result of significant planning efforts, comprehensive policies regarding reserve levels, and consistent annual adjustments to rates necessary to support operations. ADS coverage has tracked closely with previous financial projections, part of the district's annually updated 10-year CIP, averaging 2.2 times (x) and 2.1x on a senior and all-in basis, respectively, over the last three fiscal years. Reserves are fully funded and for fiscal 2009 the district maintained almost 630 days cash and 825 days of working capital. For the same period, surplus cash flows equaled an impressive 276% of depreciation for the year.
Despite historical financial performance, the district is projecting more modest results over the next few years as sales lag from drought conservation efforts and a weak economic environment. The district's governing body remains committed to small steady annual rate hikes, but the decline in sales volume is expected to adversely impact margins and reduce total ADS coverage in fiscal 2011 to just 1.25x before steadily improving to match historical levels in the fiscal 2013-2014 timeframe. Fitch considers the expected near-term ADS coverage performance weak, but believes the district's diminishing capital pressures, flexibility from reserves, and its ability to fund ongoing depreciation from existing cash flows is sufficient to support operations at the current level over the next few years as sales conditions improve.
Applicable criteria available on Fitch's website at 'www.fitchratings.com' include:
--'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
Doug Scott, +1-512-215-3725 (Austin)
Kathy Masterson, +1-415-732-5622 (San Francisco)
Media Relations:
Cindy Stoller, +1-212-908-0526 (New York)
cindy.stoller@fitchratings.com
