Fitch Rates Metro Water Dist. of Southern California Revs 'AAA'; Outlook Stable
Source: Business Wire
--$100,000,000 series 2010B rated 'AAA'.
The Rating Outlook is Stable.
The bonds will be issued as fixed-rate bonds and are expected to sell via negotiation on July 14, 2010. Proceeds will refund certain outstanding variable-rate demand bonds and fund costs of issuance. The bonds will not include the security of a debt service reserve fund.
At this time, Fitch also affirms the following ratings on the district's outstanding debt:
--$4.5 billion in outstanding water revenue and water revenue refunding bonds at 'AAA'.
The Outlook on the bonds is Stable.
RATING RATIONALE:
--As an essential service provider to a large and diverse regional area, and as a wholesaler, Metropolitan has strong pricing and supply control, enhancing financial flexibility.
--Metropolitan continues to have strong financial flexibility and a willingness to raise rates, as demonstrated by rate increases totaling 75% on a cumulative basis over six years through January 2012 and a deviation from its usual Jan. 1 schedule for rate changes, done in response to an unprecedented supply reduction. Although rates have not kept pace with actual cost increases in the past two years, these significant rate actions were done during an economic recession.
--While Metropolitan's current financial position is healthy, it has declined with a further reduction projected in fiscal 2010 as reserves and capital spending deferrals were used when rate increases were insufficient to balance operations. Recovery is projected in fiscal 2011 following approved rate increases and expenditure reductions.
KEY RATING DRIVERS:
--Continued ability to balance constrained water supplies and sales to members as the economy recovers and utilization rises.
--Recovery of financial performance to Board adopted minimum targets, as currently projected in fiscal 2011.
--Careful management and attention to increasingly complex debt portfolio.
--Participation in a long-term solution in the Bay-Delta, which will likely involve additional capital spending, paid for by Metropolitan's members.
SECURITY/STRUCTURE:
The water revenue bonds are secured by net operating revenues and other available funds of the district. The definition of revenues does not include transfers from the rate stabilization fund or subsidies from the federal government related to the build America bonds.
CREDIT SUMMARY:
The Stable Outlook reflects the stabilization of financial performance with recovery of debt service coverage levels projected in fiscal 2011 and resumption of sustainable capital spending supported from revenues. Financial recovery is supported by sizable rate actions adopted in the last two years, a decision to further cut expenditures in fiscal 2011 rather than the additional use of reserves, and Metropolitan's action to reduce regional water use in fiscal 2010 to lower the high cost of replacement water sources in light of reductions in its own supply.
Metropolitan provides between 40%-60% of Southern California's water, depending on water conditions, and is responsible for the development and acquisition of the long-term water supplies for the region. The service territory is vast and diverse, covering six counties and a population of 19 million people. Metropolitan 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 principal sources: Northern California's San Francisco Bay/Sacramento-San Joaquin River Delta water via the State Water Project (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%. Since 2007, the SWP supply source dropped considerably, supplying just over 30% of Metropolitan's water sales in 2008 and 2009. The remaining water supply was provided by the use of stored water, water transfers, exchanges, and water banking agreements (19%).
In response to this supply reduction, Metropolitan approved a water allocation plan in 2008 that dictated exactly how water would be allocated among members in the event of an extreme water shortage. In July 2009, a regional water shortage was declared and Metropolitan implemented the allocation plan at a level that required a 10% water use reduction. In order to recover lost revenues from lower sales and to fund expected higher water purchase costs (from regional water transfers), Metropolitan implemented a sizable 20% rate increase effective September 2009. This followed a 14% increase effective January 2009. The result was a preservation of financial performance in fiscal 2010, albeit with some weakening in debt service coverage to levels that are below Metropolitan's own formal targets. While water supply for the upcoming water year (calendar 2010 and fiscal 2011) should be slightly improved due to better hydrology conditions, the water year is only considered a 'dry water year' instead of a 'critically dry water year'. As a result, Metropolitan has kept its water supply allocation plan (with the 10% mandatory reduction) in place through June 2011. Metropolitan continues to implement substantial rate increases that will become effective January 2011 (7.5%) and January 2012 (7.5%). These actions are expected to improve Metropolitan's financial performance in fiscal 2011 to levels more in line with its own targets and Fitch's expectations at the 'AAA' rating level.
Debt service coverage in fiscal 2009 (June 30 year-end) was a good 1.79 times (x). This is in line with debt service coverage in the past few years but below Metropolitan's historical norms which exceeded Metropolitan's Board-approved target of 2.0x. Metropolitan projects that debt service coverage could decline to 1.52x in fiscal 2010 but then recover to 1.9x in fiscal 2011 and go above 2.0x in fiscal 2012. More importantly, fixed charge coverage is projected to decline to below 1.1x in fiscal 2010 before recovering to levels above the Board policy of 1.2x in fiscal 2011. Fixed charge coverage includes amounts paid to California Department of Water Resources (DWR) for capital costs associated with the SWP. Fitch believes fixed charge coverage more accurately reflects true cash flow debt service coverage, since the capital costs paid to DWR come from annual revenues, albeit on a subordinate basis. Planned rate stabilization fund transfers to support operations are projected to bring rate stabilization fund balances down to $276 million at the end of fiscal 2010, which is above the Board's adopted minimum target of $232 million. Unrestricted reserves are slightly higher, around $400 million.
For additional information about Metropolitan Water District, see Fitch Report 'Metropolitan Water District of Southern California', dated June 22, 2010.
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.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 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)
or
Cindy Stoller, +1-212-908-0526
(Media Relations, New York)
cindy.stoller@fitchratings.com
