AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings on and removed from Ratings Watch Negative the following underlying ratings of the Westlands Water District, California (Westlands or the district):
--$97.3 million revenue certificates of participation (COPs), series 2005A, 2007A, 2007B and 2008A, at 'AA-';
--$22.1 million revenue COPs series 2008A (bank bonds) at 'AA-';
--$74.2 million revenue refunding bonds series 2012A at 'AA-'.
In addition, Fitch has affirmed the ratings on and removed the Rating Watch Negative on the following San Luis & Delta Mendota Water Authority, CA (SLDMWA) bonds:
--$29.8 million refunding revenue bonds (Delta Habitat Conservation and Conveyance Project), series 2013A, at 'AA-'.
The Rating Outlook is Negative.
KEY RATING DRIVERS
NEGATIVE WATCH REMOVED: Fitch has removed the district's ratings from Negative Watch because it believes the actions taken by the Securities and Exchange Commission and the district mitigate the risk of future misrepresentations and omissions by the district relating to district financial results. Further, board adopted fixed-land based charges mitigate the risk of future revenue volatility.
NEGATIVE OUTLOOK: The Negative Rating Outlook is due to the potential for significant leveraging and additional drainage management responsibilities that would be assumed by the district following authorization of a drainage settlement (drainage settlement) with the United States. Authorization of the drainage settlement is pending U.S. Congressional approval.
LARGEST WATER DISTRICT IN THE NATION: Westlands is the largest water district by acreage in the nation, encompassing 614,700 acres in Fresno and Kings Counties in the San Joaquin Valley serving mostly agricultural irrigation needs. The district serves a highly concentrated agricultural user base that produces crops valued around $1.5 billion annually.
LOW ALLOCATIONS LEAD TO HIGHER COSTS: Although the district has ample water entitlements [1.19 million acre feet (af) to serve regional irrigation need]), allocations of Central Valley Project (CVP) water can vary widely from year to year, driven by hydrology and environmental regulations. Unfavorably for the district, CVP allocations have been 5% or less annually since 2014, forcing the district to purchase more costly supplies elsewhere for its customers.
SOUND FINANCIAL POSITION: The district's financial position is generally stable following the adoption of fixed-rate land based charges in fiscal 2011. DSC on senior lien debt has been 1.6x or higher since 2011. District cash balances have continued to climb, growing to over $140 million for fiscal 2015, up from just $40 million in fiscal 2010.
WESTLANDS GUARANTY ON SLDMWA BONDS: The rating on SLDMWA bonds reflects Westlands' obligation to pay 100% of debt service to the trustee. Westlands' is entitled to subsequent repayment from the other eight districts, which makes up about 20%, or approximate $8 million, of the total obligation. SLDMWA obligation is paid as an operating expense by Westlands.
RATING SENSITIVITIES
ADDITIONAL LEVERAGE WITH DRAINAGE SETTLEMENT: The rating would likely be downgraded if the U.S. Congress approves the drainage settlement with Westlands Water District due to significant debt likely to be required as part of the settlement, which could ultimately pressure the district's financial performance. If the drainage settlement agreement is not authorized, the Outlook would likely be moved to Stable based on the district's existing credit profile.
LEVERAGE ON BEHALF OTHERS: Additional debt taken on by the district on behalf of other agencies, such as the San Luis & Delta Mendota Water Authority, could further pressure district finances and lead to a rating downgrade.
CREDIT PROFILE
RATING WATCH NEGATIVE REMOVED
Following further discussions with the district, Fitch believes that the accounting reclassifications utilized in fiscal 2010 to meet the 1.25x rate covenant were isolated to that reporting period. Additionally, the board's adoption of a formal written policy for disclosure procedures coupled with the staff training related to disclosure procedures and responsibilities required under federal law are indicative of the district board and management's undertaking to provide more transparent financial disclosure going forward. Removal of the Rating Watch Negative is further supported by Fitch's belief that the adoption of fixed-rate land based charges starting in fiscal year 2011 help to mitigate the risk of future revenue volatility resulting from reduced CVP water allocations.
DRAINAGE SETTLEMENT COULD PRESSURE DISTRICT
In September of 2015 the district entered into a settlement with the U.S. to resolve decades of litigation surrounding drainage issues within the district brought on by the district and various district landowners. The settlement, which has been signed by the U.S. and the district, still requires Congressional authorization. Fitch views favorably the district's receipt of a permanent water contract (albeit with a reduced delivery entitlement) and relief from $295 million (present value) in obligations to the U.S. However, Fitch is concerned with the additional responsibilities taken on by the district for drainage management and the related costs and liability that could be incurred.
Low end estimates of costs associated with the drainage settlement are approximately $400 million, which is double the current debt outstanding of the district and its obligation to repay bonds on behalf of the SLDMWA. High end estimates are closer to $800 million, or four times the district's current outstanding obligations. The district is also required to permanently retire 100,000 acres of land (reducing the irrigable acreage by 17%) and compensate farmers in drainage affected parts of the district. The district currently owns about 90,000 acres of land and would look purchase or obtain non-irrigation covenants on the additional 10,000 acres. The district has about $50 million set aside in a land and water reserve fund which could be used to offset the costs related to the immediate implementation of some of the drainage settlement requirements, but would likely have to debt finance additional costs associated with completing the requirements.
LARGE, UNIQUE IRRIGATION DISTRICT
Westlands 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. The district covers 614,700 acres in Fresno and Kings County on the west side of the San Joaquin Valley of which about 568,000 is irrigable. 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) CVP.
CONCENTRATION OF AGRICULTURAL CUSTOMERS
The district serves a small concentrated customer base comprised of approximately 700 connections for agricultural irrigation service and another 200 municipal and industrial connections. Irrigation water sales accounted for 80% of the district's operating revenues, land based charges 17% and municipal and industrial revenues accounted for just over 2% of operating revenues in fiscal 2015. Offsetting the ratepayer concentration risk somewhat is the high value of the cash crops farmed in the district (about $2 billion in calendar 2015).
2015 FINANCIAL RESULTS BOOSTED BY LAND SALES
Financial results for fiscal 2015 were strong, boosted by $22 million in additional non-operating revenues from the sale of land. Senior lien and all-in DSC, including land sale proceeds were 3.6x and 2.6x, respectively. Without the land sale proceeds, DSC would have still been healthy at 2.1x and 1.7x, respectively. The district budgets to achieve 1.25x DSC on senior lien debt and its rates are designed to cover the cost of water plus some operational expenses of the district. Management provided forecasts project senior lien DSC of 2.3x in fiscal 2016 supported by an additional $6 million in land sales, before dropping to 1.4x for fiscals 2017 - 2020. Forecasts assume rates based on 0% CVP water allocations.
District cash continued an upward trend. Cash balances registered $140 million in fiscal year 2015, up sharply from $40 million in fiscal year 2010. Cash balances would likely decline somewhat when the drainage settlement is authorized as the district indicated utilizing some reserves to complete drainage settlement requirements.
LOW CVP ALLOCATIONS RESULT IN HIGHER COST
District water is purchased from the USBR's CVP project and sold to users at prices designed to cover cost. CVP allocations have been minimal the last several years, with 0% CVP allocation in 2014 and 2015 and just 5% in 2016. When allocations are low the district is forced to purchase supplemental water on the open market which can be costly.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869223
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008779
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008779
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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