SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned the following bank bond ratings:
--$250.94 million water revenue refunding bonds, series 2008A-1 'AAA';
--$250.365 million water revenue refunding bonds, series 2008A-2 'AAA'.
Metropolitan expects to reoffer the bonds on March 8, 2011 in the weekly mode.
In addition, Fitch affirms the following ratings:
--$4.5 billion in outstanding water revenue and water revenue refunding bonds at 'AAA'.
The Rating Outlook 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 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. Although rates have not kept pace with actual cost increases these significant rate actions were done during an economic recession.
--While Metropolitan's current financial position is healthy, it has declined for a number of years with a further reduction projected in fiscal 2011. Lower than budgeted water sales in fiscal 2011 will prompt additional use of reserves and delay capital spending for another year.
KEY RATING DRIVERS:
--Further actions to balance revenues and expenditures for the water system in fiscal 2012 will be needed if water sales do not recover to modest projected amount of two million acre feet (MAF) per year.
--Recovery of financial performance to Board-adopted minimum targets.
--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:
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, 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 calendar years 2008 and 2009. The remaining water supply was provided by the use of stored water, water transfers, exchanges, and water banking agreements (19%).
In July 2009, a regional water shortage was declared and Metropolitan implemented an 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 has implemented a series of sizable rate increases, although it has also spent down reserves and reduced pay-as-you-go funding of capital in the past three years. Although rates were set by the Board to achieve financial recovery in fiscal 2011, cooler weather in the summer of 2010 may reduce water sales below budgeted levels, resulting in reduced financial performance for another year.
Debt service coverage in fiscal 2010 (June 30 year-end) was modest for the rating category at 1.60 times (x). This is in line with debt service coverage in the past few years but below Metropolitan's historical norms of debt service coverage levels that exceeded Metropolitan's Board approved target of 2.0x. Metropolitan planned this decline below its targeted level in light of the significant ongoing supply challenges and steep rate increases imposed on customers. Metropolitan management projects that debt service coverage will likely remain at this level in fiscal 2011 due to the lower sales and is projecting a recovery to 2.0x in fiscal 2012. However, the fiscal 2012 projection is based on a return to sales of 2.0x million acre feet, as compared to the 1.77 MAF estimated to be sold in fiscal 2011. Should the recovery in sales not occur, financial performance could be worse than projected if additional revenue or expenditure actions are not taken. Fixed charge coverage was 1.1x and 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. Reserves will be used in fiscal 2011 to support operations, with some possibility that reserve levels could fall below the Board's adopted minimum target of $218 million. Unrestricted reserves were $297 million at the end of fiscal 2010.
For additional information about Metropolitan Water District, see Fitch Report 'Metropolitan Water District of Southern California', dated June 24, 2010.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
'Revenue-Supported Rating Criteria', dated Oct. 8, 2010.
'Water and Sewer Revenue Bond Rating Guidelines', dated Aug. 6, 2008.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
Water and Sewer Revenue Bond Rating Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=395918
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