SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to the following Contra Costa Water District, CA (the district) obligations:
--$100 million water revenue refunding bonds, series R.
The bonds are expected to sell via negotiation on or around June 27. Proceeds will be used to refund all or a portion of the district's outstanding water revenue refunding bonds, series M, outstanding state revolving fund loans, and $30 million maturing mezzanine notes for net present value savings of approximately $9.1 million.
In addition, Fitch affirms the following ratings on outstanding obligations:
Contra Costa Water District
--$127.5 million water revenue refunding bonds, series P and Q at 'AA+';
--$240 million outstanding revenue bonds, series 2003M, 2005N, and 2007O at 'AA+';
--$157.5 million mezzanine water revenue notes, series 2010A and B at 'AA';
--$80 million extendable municipal commercial paper (CP) notes at 'F1+';
--Implied long-term subordinate lien rating at 'AA'.
Contra Costa Water Authority
--$22.9 million water treatment revenue refunding bonds, series 2012A at 'AA+'.
The Rating Outlook is Negative.
SECURITY
The district bonds are senior lien obligations payable from net revenues of the district's water system. The authority bonds are senior obligations payable from rental payments made by the district to the authority from net revenues, including rate stabilization fund moneys. The water revenue notes are mezzanine obligations payable from net revenues on a subordinate basis to the senior debt. The CP notes are subordinate lien obligations payable from net revenues of the district's water system on a basis subordinate to the senior and mezzanine debt. While revenues exclude taxes and assessments, O&M expenses under the trust agreement are net of costs paid from taxes.
KEY RATING DRIVERS
ADEQUATE DEBT SERVICE COVERAGE: The Negative Outlook continues to reflect the low actual and projected all-in annual debt service coverage (DSC) due in part to reduced water sales and connection fees. Although water sales have shown improvement, all-in DSC is expected to remain between 1.4x and 1.7x in the forecast period due to steady increases in operating spending.
HEALTHY LIQUIDITY: Coverage concerns are partially mitigated by the district's consistently high cash levels with reserves equal to over two years operations, or approximately double the average for the rating category.
AMPLE SUPPLY: The district has a diverse supply portfolio sufficient to meet customer demands through build out estimated to occur in 2050.
STABLE CUSTOMER BASE: The district provides water to a diverse base of residential, municipal, and industrial customers in a stable growth environment.
ELEVATED DEBT; MANAGEABLE NEEDS: Capital needs are manageable and amortization is fairly rapid, offsetting some concerns related to an elevated debt profile.
SHORT-TERM RATING: The 'F1+' rating on the district's extendable CP program reflects anticipated market access of the district and corresponds to the district's 'AA' implied long-term subordinate lien credit rating.
RATING SENSITIVITIES
MAINTENANCE OF HEALTHY OPERATING MARGINS: An inability to achieve at least forecast coverage levels, generate cash flow sufficient to maintain liquidity, and to fund projected capital spending would likely result in a one-notch downgrade.
CONTINUED RELIANCE ON CONNECTION/DEVELOPER FEES: The district's coverage levels net of connection fee and developer revenues over the forecast period range from 1.1x to 1.3x, well below average for the rating level. While developer fees are based on executed agreements, increased reliance or actual connection fees materially lower than forecast could result in negative rating action.
CREDIT PROFILE
The district provides both retail and wholesale water service to about 500,000 residents in central and northern Contra Costa County, a largely residential county in the north east San Francisco Bay Area. 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 (CVP).
ADEQUATE COVERAGE/STRONG LIQUIDITY
Financial performance has historically been strong as a result of significant planning efforts, comprehensive policies regarding reserve levels, and consistent annual adjustments to rates necessary to support operations. Coverage declined more recently due to lower sales resulting from several years of drought followed by a cool, wet weather year, conservation efforts, and the economic downturn. Fiscal 2012 combined senior, mezzanine and subordinate coverage was better than projected at 1.4x due to a $3.1 million surplus related to unanticipated settlement payments and cost containment despite water sales revenues coming in under budget.
Water sales volume fell 30% from fiscal 2007 to 2010 before increasing slightly (1.2%) to 94,000 acre-feet (af) in fiscal 2011. The upward trajectory continued with sales increasing 11% to 104,400 af in fiscal 2012 and 5% to 109,600 af projected for fiscal 2013. However, consumption remains below peak of 122,000 af in 2007 and management recently revised its projection for a return to normal levels to 2019 from 2017 citing the slow pace of economic recovery as having a more pronounced long-term effect than previously expected. Coverage is forecast at between 1.4x and 1.7x through fiscal 2017. This is based on the district's assumption that water sales rise 4% annually and that connection fees increase from $4 million in fiscal 2014 to $10 million in 2017; developer fees from executed contracts are also included. If these projections do not materialize and offsetting action is not taken resulting in coverage below forecast levels, Fitch would likely downgrade the senior bonds to 'AA'.
Fitch's concern regarding DSC is somewhat mitigated by the district's strong liquidity. Including the $56.88 million rate stabilization fund, the district's reserves total $148 million, equal to 853 days cash on hand, compared to the category median of about 400 days. The levels are stable, with a five-year average of 747 days.
MANAGEABLE CAPITAL NEEDS
Capital needs going forward are manageable given the recent completion of a major water supply project, the expansion of its Los Vaqueros Project (LVP). The LVP includes a reservoir, pumping stations, two Delta intakes, and other facilities. The new facility is designed to provide reliability during drought periods and will allow the district to market its storage capacity to others. The district recently signed an agreement with Alameda County Water District for up to 5,000 af of storage and expects an agreement with East Bay Municipal Utilities District (revenue bonds rated 'AA+' with a Stable Outlook by Fitch) in fall 2013. Annual capital costs are expected to fall significantly and focus more on renewal of system assets.
Capital costs for the 10-year fiscal 2014 - 2023 period total $550.6 million, of which $300 million are higher priority projects primarily financed through rates and charges. Borrowed sources account for about 11% of the costs of the higher priority projects. The remaining costs are related to potential projects which the district deems discretionary and can defer if needed. Supplies are expected to be sufficient to meet customer demands through ultimate build-out of the service area. This will be primarily due to existing resources and source water development projects contained in the district's CIP.
ELEVATED DEBT PROFILE
While planned debt to equity funding of the CIP is favorable, prior issuances by the district have led to elevated debt ratios. However, this concern is somewhat offset by the district's rapid amortization, with more than 60% of principal repaid within 10 years. Rapid amortization and limited additional debt plans should bring debt ratios down over the medium term, and this should allow the debt profile to improve over the medium term. The $80 million CP program represents about 12% of the district's outstanding debt. Fitch considers this to be a manageable level of short-term, variable rate obligations. The district expects to continuously rollover maturing series B mezzanine notes, which mature Oct. 1, 2016, until fiscal year 2021. At that time, Fitch expects the district will refinance the maturing notes with senior lien long-term debt.
STABLE SUPPLY AND CUSTOMER BASE
The customer base is sufficiently diverse, with treated water customers accounting for about 62% of total operating revenues and untreated accounting for about 33%. Residential customers account for about 76% of treated water revenues. Untreated water is about evenly split between municipal and industrial customers. This includes the cities of Antioch, Martinez, Pittsburg, and Brentwood, and industrial customers, including Tesoro, and General Chemical. The largest wholesale customer, Shell Oil Company, accounts for 22% of total untreated water revenues.
The district benefits from its location in the eastern portion of greater San Francisco Bay area, with access to employment centers of San Francisco, Oakland, and Silicon Valley. County income levels are 50% higher than U.S. averages and 28% above the state average. Unemployment of 7.8% as of March 2013 is on par with the nation and lower than the state.
LONG-TERM CREDIT QUALITY DRIVES SHORT-TERM RATING
The 'F1+' rating on the district's CP program reflects anticipated market access of the district and corresponds to its 'AA' implied long-term subordinate lien credit rating. The district's long-term ratings reflect the district's healthy liquidity, extensive planning efforts and policies, and stable supply and customer base. Other credit drivers include the district's high existing debt levels which are expected to decline over time given the recent completion of reservoir capacity expansion.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria (June 12, 2012);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 3, 2012);
--'2013 Water and Sewer Medians' (Dec. 4, 2012);
--'2013 Water and Sewer Medians' (Dec. 4, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684901
2013 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695756
2013 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695755
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=793722
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