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Fitch Rates Metropolitan Water District of Southern California's $400MM Water Revs 'AA+'

Posted on: Friday, 4 May 2007, 15:00 CDT

Fitch Ratings has assigned an 'AA+' rating to Metropolitan Water District of Southern California's (Metropolitan) approximately $400 million water revenue, 2006 authorization, series A. The bonds are scheduled to sell via negotiated sale on May 15, 2007. Bear Stearns & Co. is the senior manager on the transaction.

Fitch has also affirmed the 'AA+' long-term rating on Metropolitan's approximately $3.8 billion in outstanding water revenue bonds and the 'AAA' long-term rating on Metropolitan's approximately $359 million on general obligation bonds. The Rating Outlook on all the bonds is Stable.

Revenue bonds are secured by net operating revenues of Metropolitan's water system. General obligation bonds are secured by Metropolitan's ability to levy unlimited ad valorem taxes on its $1.5 billion tax base. Proceeds of the 2006 authorization, series A bonds will be used to fund a portion of Metropolitan's $2 billion capital plan over the next five years.

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. Metropolitan serves as the regional coordinator for the growth that will require additional water supplies, largely consisting of reclamation, conservation, and potentially desalination.

Credit concerns focus on the sizeable capital costs related to long-term water supply, storage and treatment costs. Metropolitan's five-year capital investment plan (CIP) totals $2 billion and 76% is expected to be funded from bond proceeds. Over the next five years, Metropolitan expects to add another $1.5 billion to its current $3.8 billion in outstanding debt, including the bonds. Long-term cost pressure 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.

Financial performance in fiscal 2006 was weaker than previous years with debt service coverage of 1.85 times (x) and fixed charge coverage of 1.27x. The decline is the result of increased state water project costs and debt service costs associated with the capital plan. Including an $87 million transfer in from the rate stabilization fund, coverage was more in-line with historical levels at 2.33x and fixed charge coverage of 1.6x. Debt service coverage is projected to range between 1.67x and 2.2x over the next five years. Fitch views the projected decline in debt service coverage as acceptable for the current rating, given Metropolitan's fundamental credit strengths, the temporary nature of the declines, and the board's history of demonstrated support for cost recovery through rates, when necessary.

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), which provided approximately 75% of its water supply in 2006, and the Colorado River via the Colorado River Aqueduct, which provided the remaining 25%.

Fitch notes that there is currently a court order that could significantly impact the SWP water supply. The California Department of Water Resources, the operator of the project, has been ordered to cease operation of the project by mid-June or obtain an incidental take permit as required by the California Endangered Species Act. It is not known at this time if DWR will obtain the permit by mid-June or if the case will be appealed, which may allow the court order to cease operations to be stayed.

The loss of SWP water would be a negative credit development for Metropolitan and its members. Should this unlikely event occur, Metropolitan has a drought resource management plan that could be implemented, which includes the use of urgent and significant rationing, the curtailment of all groundwater replenishment, and the use of stored reserves that are approximately equal to Metropolitan's annual demand.

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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