AUSTIN, Texas--()--Fitch Ratings has assigned an 'AA-' rating to the following Westlands Water District, CA (the district) bonds:
--Approximately $80.5 million refunding revenue bonds, series 2012A.
The bonds will be sold via negotiation the week of Sept. 25. Bond proceeds will be used to refund all of the district's series 2002 certificates of participation (COPs), to fund the debt service reserve and to pay the cost of issuance.
In addition, Fitch affirms the 'AA-' rating on the following outstanding parity bonds:
--Approximately $87 million revenue COPs, series 2002A at 'AA-' (pre-refunding);
--Approximately $51 million revenue COPs, series 2005A at 'AA-';
--Approximately $34 million revenue COPs, series 2007A at 'AA-';
--Approximately $19 million revenue COPs, series 2007B at 'AA-';
--Approximately $26 million revenue COPs, series 2008A at 'AA-';
--Approximately $26 million revenue COPs, series 2008A (bank bonds) at 'AA-'.
Fitch also affirms the San Luis & Delta-Mendota Water Authority rating, which is based on Westlands Water District's credit quality as ultimate obligor for the following:
--$50 million revenue notes (DHCCP Development Project) series 2009 at 'AA-'.
The Rating Outlook is Stable.
The Westlands Water District (WWD) certificates are secured by a pledge of and first lien on net revenue of the district's water system.
The San Luis & Delta-Mendota Water District (SLDMWA) revenue notes are secured by an unconditional contractual obligation from WWD.
KEY RATING DRIVERS
AMPLE WATER ENTITLEMENTS: WWD's entitlement to substantial amount of water (1.19 million acre feet) is used to serve the region's irrigation needs.
CONCENTRATED USER BASE: The service area is made up of a small concentrated customer base. Water customers are also district landowners and voters.
FLUXTUATION CVP SUPPLY: Although WWD has ample water entitlements, allocations of Central Valley Project (CVP) water can vary widely from year to year. In years with low allocations the district purchases additional supplemental water and increases ground water pumping which in turn increase costs.
STABLE FINANCIAL POSITION: WWD has maintained solid financial operations with adequate debt service coverage despite declines in water sales in recent years. The implementation of fixed-rate land-based charges and increased cost of service rates have preserved financial margins.
INTRICATE RELATIONSHIP WITH OTHER AGENCIES: Water entitlements and allocation issued between the district, the State of California and the federal government are complex.
LARGE FUTURE CAPITAL PLANS: WWD anticipates large capital needs for construction to ensure water deliveries as part of the Bay Delta Conservation Project (BDCP), which could strain rate flexibility and financial margins.
WHAT COULD TRIGGER A RATING ACTION
CHANGES IN MEMBER CREDIT: The rating largely reflects the credit quality of WWD. Any changes to the credit characteristics of WWD, would impact the credit quality of SLDMWA.
LARGE, UNIQUE ENTITY
The district is governed by a nine-member board of directors elected from district land owners and is responsible for district governance and policies. The district maintains full independent rate-setting authority as well as the ability to place a lien on property if water bills are unpaid. WWD covers 614,700 acres in Fresno and Kings County on the west side of the San Joaquin Valley. It is the largest irrigation district in the U.S. by acreage and responsible for administering the delivery of water from the United States Bureau of Reclamation (USBR) Central Valley Project (CVP).
AMPLE ENTITLEMENTS, VARYING ALLOCATIONS
The district's CVP water entitlement totals 1.19 million acre feet (MAF). The water is purchased from the USBR and sold to users at prices designed to cover cost. In recent year actual deliveries of CVP water averaged 662,000 AF (approximately 60% of the entitlement) from fiscals 2007-2012. There was a notable decline in CVP water usage in 2009 and 2010 in which CVP water usage averaged just 264,000 (29% of the entitlement) for those two years. The most recent CVP allocation for 2011-2012 was over 70%, reflecting better than average water conditions; however, the 2012-2013 allocation is 40%.
CONCENTRATION OF AGRICULTURAL CUSTOMERS
The district serves a small concentrated customer base comprised of approximately 700 connections for irrigation services and another 200 for municipal and industrial connections. Irrigation water sales accounted for 88% of the district's operating revenues in 2012, while municipal and industrial sales accounted for approximately 1%. Offsetting the ratepayer concentration risk somewhat is the high value of the cash crops farmed in the district (over $1 billion in calendar 2010), the absence of alternative/equivalent supplies or infrastructure to deliver water, and the potential value of the district's water supplies to non-district customers. The demand for water in Southern California and the San Francisco Bay Area by users with connectivity to the CVP is very high.
WWD has multiple rates and charges designed to recoup its costs, including, among others, CVP contract rates, acreage charges, supplemental water charges, and power surcharge charges, as well as land based charges and assessments. Historical water enterprise financial operations are favorable, with positive annual results, good liquidity levels and designated reserves, and adequate debt service coverage. Annual debt service coverage ranged from 1.3x - 2.0x between fiscal years 2007-2012. Financial projections through fiscal 2017 reflect coverage ratios ranging from 1.3x - 1.4x. Liquidity levels as measured by days of cash on hand registered 223 days for 2012, a noticeable increase from a low of 144 in 2011.
In December 2010, WWD instituted land based operating and maintenance (O&M) charges in an effort to add stability to the district's rate structure. These new land land-based O&M charges, as well as, higher surface water deliveries, resulted in a significant increase to revenues in the district's 2011 financials. The additional land based charges, coupled with increased water rate charges implemented in December 2010, raised revenues by approximately 50% over fiscal year ended 2010. This increase in revenue allowed the district to keep pace with the higher cost of supplemental (which resulted in operating expenses increasing by a corresponding about 50%). Fiscal 2012 coverage registered 1.3x, falling more in line with the 2007-2010 average coverage levels. This was the result of a return to normal water deliveries and higher CVP allocation of over 70% for 2012.
WWD's future capital needs continue to be focused on obtaining additional water entitlements and to firm up delivery of existing entitlements. Capital improvements in the district have averaged just over $2 million a year for the last four years. However, additional water supply projects could result in more debt financing by the district.
ACTIVE PARTICIPATION WITH BAY DELTA CONSERVATION PROJECT
SLDMWA was established in January of 1992 and consists of 29 water agencies representing approximately 1,200,000 acres of federal and exchange water service contractors within the western San Joaquin Valley and in San Benito and Santa Clara counties. It was established to assume the operation and maintenance responsibilities of certain United States Bureau of Reclamation (USBR) CVP facilities.
The WWD is one of 29 member participants of the SLDMWA and has water entitlements to around 40% of the total 2.9 MAF available to SLDMWA. In 2009, SLDMWA issued $50 million in revenue notes is association with the Delta Habitat Conservation and Conveyance Project (DHCCP). WWD is obligor on the notes and responsible for 100% of the principal and interest on the notes should the authority not receive payments from other members. Approximately 95% of SLDMWA members have filed notice of intent to participate in the financing, bringing WWD's estimated share of repayment to approximately 65%. SLDMWA intends to remarket the notes upon maturity in 2014. The ability to successfully remark the notes is a key rating consideration.
The DHCCP is a program consisting of joint efforts by agencies of the federal government and the State of California and local agencies to fund and plan habitat conservation and water supply activities in the Sacramento San Joaquin River Delta/San Francisco Bay Estuary (the Bay Delta), including Bay Delta water conveyance options, commonly referred to as the Bay Delta Conservation Plan (BDCP). Pursuant to a Memorandum of Agreement, the SLDMWA, the California Department of Water Resources (DWR), the USBR, the Santa Clara Valley Water District (SCVWD, a member of SLDMWA), the State Water Project Contractors Authority (SWPCA), the Metropolitan Water District of Southern California (MWD) and the Kern County Water Agency (KCWA) (each a member of the SWPCA), and WWD have agreed to undertake the planning, the preliminary design and environmental compliance activities with respect to the DHCCP.
The current DWR estimate cost of the preliminary phase of the DHCCP is $240 million. Also pursuant to the MOA, 50% of the DHCCP Development Costs are allocated to federal agencies and federal water contractors (including WWD and other members of SLDMWA) with the remaining 50% of such costs being allocated to state and state water contractors (including DWR, SWPCA, MWD and KCWA). The Bay Delta Conservation Plan is a politically charged issue and as such has resulted in political posturing on the part of WWD and the USBR.
The cost of the DHCCP project is currently uncertain, with latest estimates being over $14 billion. Moreover, the ultimate source of funding for such a massive undertaking remains to be determined. Further leverage on the WWD and SLDMWA could apply downward pressure to the ratings.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope and Burton & Associates (Rate Consultants).
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 12, 2012;
--'Water and Sewer Revenue Bond Rating Criteria', dated Aug. 3, 2012;
--'2012 Water and Sewer Medians', dated Dec. 8, 2011;
--'2012 Outlook: Water and Sewer Sector', dated Dec. 8, 2011.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2012 Water and Sewer Medians
2012 Outlook: Water and Sewer Sector