Nov 7 - Fitch Ratings assigns the following ratings to the Metropolitan
Water District of Southern California, CA's (Metropolitan) water revenue
--Approximately $80.0 million water revenue refunding bonds, series 2012G 'AA+'.
Bond proceeds will refund outstanding variable rate obligations of Metropolitan
with fixed rate debt and pay costs of issuance. The final maturity is not being
extended. Bonds are expected to price via negotiated sale on Nov. 15, 2012. The
bonds do not have a debt service reserve fund.
At this time, Fitch also affirms the following ratings:
--$3.88 billion in outstanding water revenue and index mode bonds at 'AA+';
--$504.6 million index mode bonds at 'AA+'/'F1+';
--$99.9 million special variable rate water revenue refunding bonds, series
2010A (self-liquidity) at 'AA+'/'F1+';
--$196.5 million waterworks general obligation bonds at 'AAA'.
The Rating Outlook on all bonds is Stable.
GO BONDS: The GO bonds are secured by an unlimited ad valorem tax on all
property within the district.
WATER REVENUE BONDS: Revenue bonds are secured by net water revenues of the
district. The series 2010A bonds do not have a liquidity facility to support the
weekly tender but instead rely on Metropolitan's own liquidity. Payment of a
tender for these bonds, the SIFMA index notes, or the term bonds is secured by a
subordinate pledge of net revenues. Payment of principal at the final maturity
is secured by net revenues.
NO CROSS DEFAULT: A failure by Metropolitan to provide sufficient proceeds to
pay the purchase price of the SIFMA or term mode bonds or the self-liquidity
2010A bonds at the tender date would not constitute an event of default on
Metropolitan's revenue or GO bonds.
KEY RATING DRIVERS
WHOLESALE SUPPLIER: Metropolitan is the supplemental wholesale water supplier to
18 million people in southern California. Water is provided from two major
supply sources that have experienced some variability. Revenues are provided
from 26 member agencies that exhibit strong credit quality.
ADEQUATE FINANCIAL PROFILE: Financial metrics are low for the rating but typical
for a wholesale agency with additional financial strength provided by the
members and timely rate recovery. Financial performance in fiscal 2012 improved
and reflects board adopted financial policies.
DEMAND VARIABILITY: Water sales declined 29% over fiscal years 2009 - 2011,
causing a direct impact on district revenues. While water sales have increased
from 2011, the variability of water sales is a credit risk given the rate
structure that is primarily volumetric.
WATER PURCHASE AGREEMENT EXTENSIONS: Metropolitan recently approved extendinge
its water purchase agreements with 23 of its 26 members through 2014. Ongoing
discussions about replacement agreements will occur during the next two years.
Metropolitan's challenge is the wide range of water demand from members in any
given year, depending on weather conditions, availability of member's own
supplies, and conversation balanced against the largely fixed costs of its water
RATE FLEXIBILITY: Metropolitan's revenue flexibility is evident in the 75%
cumulative rate increases over the recent six-year period, although rate
sensitivity is likely heightened given the magnitude of recent rate actions. The
Board has approved additional rate increases of 5% per year effective mid-year
in fiscals 2013 and 2014.
LIMITED EXPENDITURE FLEXIBILITY: Expenditure flexibility is limited given
Metropolitan's relatively high fixed costs associated with its water supply and
debt costs. Pay-as-you-go capital appropriations and cash reserves provide some
flexibility to absorb weather related demand fluctuations.
COMPLEX DEBT PORTFOLIO: Metropolitan's debt portfolio continues to require
management attention, given its complexity and the use of short-term debt with
and without liquidity support and a large swap portfolio.
INDEX MODE BONDS: The 'AA+'/'F1+' rating on the SIFMA index mode bonds reflects
the market access implied by the Metropolitan's long-term credit quality.
SELF LIQUIDITY VARIABLE RATE DEBT: The 'AA+'/'F1+' rating on the series 2010A
self-liquidity bonds, outstanding in the weekly mode, reflects the liquidity
provided by Metropolitan's $535 million in unrestricted cash and restricted O&M
fund as of Sept. 30, 2012.
GO BONDS: Metropolitan's general obligation (GO) rating of 'AAA' is based on its
ability to levy unlimited ad valorem taxes on its sizable $2 trillion tax base,
with the property tax revenues restricted to be used only for debt service on
the GO bonds and capital costs related to the State Water Project (SWP).
Metropolitan is a wholesale water supplier in a large and diverse six-county
area in southern California to 26 member agencies, many of whom have some
limited form of local water supply and, given the significant cost increases in
Metropolitan's supply, are investing in alternative supplies to reduce water
purchases from Metropolitan, when economical.
FINANCIAL PERFORMANCE STABILIZED IN FISCAL 2012
Metropolitan's financial position remains healthy, despite a trend of declining
financial margins between 2006 and 2011. Financial performance reached an
exceptionally low level in fiscal 2011, primarily resulting from only 1.63
million acre feet (maf) of water sales as compared to the budgeted amount of
1.93 maf. Debt service coverage, excluding one-time revenues, was 1.35x on
revenue bonds and 0.94x coverage on all payment obligations. Metropolitan used
$49 million from its rate stabilization fund in fiscal 2011, which improved
coverage levels to 1.57x and 1.09x, respectively.
Debt service coverage of revenue bonds improved in fiscal 2012 to 1.81x with
fixed charge coverage of 1.31x. The improvement reflected water sales of 1.68
maf. While sales came in below budgeted sales of 1.85 maf, financial performance
improved with a 7.5% rate increase effective mid-year 2012 and expenditure
reductions in areas such as conservation spending, water delivery costs, and
power expenses increased net revenues in fiscal 2012. Operating and maintenance
expenditures declined 10% from 2011, which had been reduced 3% from 2010. Water
sales in 2012 included 225,000 maf of replenishment water sales to members once
Metropolitan removed its allocation restrictions in late fiscal 2011.
PLANNING ASSUMPTIONS ANTICIPATE LOW WATER SALES
Metropolitan is assuming between 1.7 - 1.75 maf in water sales in future years,
which represents lower forecasted sales than those used for financial planning
and rate setting in previous years. Sales could dip below the forecasted amounts
in certain years although Metropolitan is assuming that demand will normalize
around this 1.7 maf level even with additional supply development being done by
its members with Metropolitan's support. Fitch believes these sales assumptions
are reasonable given the confluence of events that reduced annual sales from
over 2.0x maf prior to 2010, including hardened conservation and efficiencies
achieved during the 2007-2009 drought, wet weather conditions in 2010 and 2011
that improved local water supplies and reduce demand for outdoor use, and the
ongoing economic downturn across the service area.
Year to date sales in fiscal 2013 are slightly ahead of budgeted sales of 1.7
maf. Metropolitan remains well positioned with its water storage and water
supply rights to meet a substantially higher demand from its members, should it
occur. The ongoing uncertainty in water sales presents some level of risk to
revenues, given the highly volumetric rate structure, while its expenditures are
With the relatively flat assumed water sales, improvement in financial
performance relies on rate increases and expenditure reductions. In April 2012,
the Board adopted rate increases of 5% for each of the next two calendar years.
This was the lowest of the three staff proposals, reflecting rate sensitivity
among the member agencies given the sizable rate increases to date. The lower
revenues than those provided in the other rate options will be mitigated in the
budget through lower spending on storage programs, staffing, and equipment
replacement. Debt service coverage is projected at 1.63x in fiscal 2013 and
1.15x fixed charge coverage. The 'AA+' rating assumes that Metropolitan will
generally operate, at a minimum, at or above this level of financial
performance. Given the cyclicality of demand, certain years will likely generate
CASH RESERVES FOR RISK
Metropolitan continues to have a degree of financial flexibility provided by its
reserves, with the rate stabilization fund at $332 million as of June 30, 2012.
However, reserves are used to mitigate other risks, such as providing
self-liquidity for $99.9 million in variable rate bonds and $50 million as a
set-aside for potential litigation costs with the San Diego County Water
Authority (SDCWA). To the extent the litigation is decided in favor of SDCWA and
Metropolitan Water District must make a payment to SDCWA, Fitch anticipates that
any settlement would be collected from other rate categories in a timely manner.
The litigation relates to the rate methodology used to allocate costs between
members. Although it is consistent with the district's history to have customer
equity issues arise regarding rate-setting at such a large wholesale agency with
so many members, Fitch views the increasing tension between the two entities as
a potential credit concern.
REGIONAL SUPPLY CHALLENGES RESULT IN LOWER WATER DEMAND FROM MEMBERS
The previous five years have brought significant developments to the water
supply mix in Metropolitan's service area and the demand profile from members
for its water. Drought conditions and regulatory changes to pumping on the State
Water Project have prompted Metropolitan and its members to work together to
develop new local supplies that will reduce the regional demand in Southern
California for imported water sold by Metropolitan.
The significant increases in Metropolitan's water rates to its members over the
past six years have made local alternatives cost effective that had previously
not been considered viable.
Metropolitan's members are not required to buy minimum amounts of water from
Metropolitan but instead use the imported water supply to supplement existing
and new local sources. In addition, Metropolitan's rate structure is heavily
weighted towards volumetric pricing, so fluctuations in demand have a direct
impact on revenues.
Metropolitan's role in the region is crucial in that it supplies 40% - 60% of
Southern California's water supply in six counties with a service area
population of 18 million. As the supplemental provider and with imported water
costs typically higher than local supplies, Metropolitan absorbs much of the
regional demand variability due to conservation and efficiency investments as
well as economic pressures. Although a regional economic recovery may increase
demand, Metropolitan's members are required to meet a legislative requirement to
reduce per capita usage by 20% in 2020, so investments in recycling and
conservation may continue to place longer-term downward pressure on
Metropolitan's water sales and revenue base.
For more information on Metropolitan Water District, see Fitch's Report,
'Metropolitan Water District', dated April 25, 2012.
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.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Water and Sewer Revenue Bond Rating Guidelines' (Aug. 3, 2012);
'Tax-Supported Rating Criteria' (Aug. 14, 2012);
'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14,
--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity' (June
--'Rating U.S. Municipal Short-Term Debt' (Dec. 8, 2011).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
2012 Water and Sewer Medians
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity
Rating U.S. Municipal Short-Term Debt