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Fitch Rates Metropolitan Water District of Southern California's 2006 Series B Bonds 'AA+'

Posted on: Thursday, 21 September 2006, 15:00 CDT

Fitch assigns a rating of 'AA+' to Metropolitan Water District of Southern California's (Metropolitan) approximately $45 million water revenue refunding bonds, 2006 series B. The 2006 series B bonds are scheduled to sell via negotiated sale on Oct. 5, 2006. Loop Capital Markets is the lead underwriter on the 2006 series B bonds. In addition, Fitch affirms the 'AA+' long-term rating on Metropolitan's approximately $3.8 billion in outstanding parity bonds. The Rating Outlook is Stable.

The 'AA+' rating reflects credit strengths that include the essentiality of the service provided, consensus regarding Metropolitan's role as the region's wholesale water supplier, a very strong financial position even with a recent decline in debt service coverage levels, effective and conservative management decisions, and a robust, diverse and growing service area. Unaudited financials for fiscal 2006 indicate debt service coverage of 1.85 times (x). This represents a reduction from the past three fiscal years when coverage was in excess of 2.5x, and projections indicate that coverage levels may remain between 1.8x-1.9x for the next few years. Fitch views the decline to 1.85x coverage level as acceptable for the rating, given Metropolitan's fundamental credit strengths. The bonds are secured by net operating revenues of Metropolitan's water system.

Credit concerns focus on the sizeable, albeit manageable, capital costs related to long-term water supply, storage and treatment costs. Metropolitan's five-year capital investment plan (CIP) totals $2.2 billion and 76% is expected to be funded from bond proceeds. Over the next five years, Metropolitan expects to add another $1.4 billion to its current $3.8 billion in outstanding debt. Financial projections over the next five years indicate lower debt service coverage and liquidity than historical levels, reflecting long-term cost pressure that will accompany Metropolitan's CIP and operating cost increases. Cost pressure at Metropolitan and regional pressure by its members to limit rate increases will likely continue to be a challenge.

Metropolitan is a wholesale water provider to 26 member public agencies. Its vast service area includes over 18 million residents, or about 85% of the population in Los Angeles, Orange, Riverside, San Bernardino, San Diego, and Ventura counties. While member agencies are not required to purchase Metropolitan's water, Fitch does not view competition as a credit concern given the practical lack of other supplies. Metropolitan provides between 40% and 60% of the service area's water, depending on water conditions, and works with the State Department of Water Resources (DWR) on the development and acquisition of long-term water supply for the region. Metropolitan's supply is derived from two sources - Northern California's Bay/Delta water via the state water project (SWP) and the Colorado River via the Colorado River Aqueduct. Conservation and recycling efforts will be a focus for future investment and development of local water supplies.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Source: Business Wire

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