Fitch Ratings assigns the following ratings to Contra Costa Water District, California's (the district):
--$66 million water revenue refunding bonds, series P 'AA+';
--$60 million water revenue notes, series B 'AA'.
The bonds are expected to price the week of June 21, 2011 via negotiated sale.
Fitch also affirms the following ratings for the district:
--$417 million outstanding revenue bonds series 1992E, 2001K, 2002L, 2003M, 2005N, 2007O at 'AA+';
--$30 million in outstanding Contra Costa Water Authority water treatment revenue refunding bonds, series 2002A at 'AA+';
--$127.6 million in outstanding water revenue notes, series 2010A at 'AA'.
Fitch has withdrawn the 'AA' rating on the district's water revenue notes series 2010B as the bond was not sold.
The Rating Outlook is Stable.
RATING RATIONALE:
--The Contra Costa Water District's (the district) financial metrics are adequate, although revenue pressures over the next five years are expected to lower margins and reduce annual debt service (ADS) coverage to modest levels.
--Coverage concerns are somewhat mitigated by the conservative assumptions underlying projections and by the district's sizeable rate stabilization fund.
--Planning efforts and policies are very good, providing a stable operating environment.
--The district has a diverse supply portfolio sufficient to meet customer demands through build out.
--Capital needs are manageable, which offsets some concerns related to an elevated debt profile.
--Steady annual rate increases are expected to remain modest.
KEY RATING DRIVERS:
--Improvement in the district's debt service coverage levels in the near term will be key to maintaining the current rating level.
--Rising debt levels beyond amounts currently planned over the near term would be a concern as it could further weaken operating performance.
SECURITY:
The bonds are senior lien obligations payable from net revenues of the district's water system. The notes are mezzanine obligations payable from net revenues on a subordinate basis to the bonds. The authority bonds are senior obligations payable from rental payments made by the district to the authority as an O&M expense.
CREDIT SUMMARY:
The district provides both retail and wholesale water service to about 550,000 people in the 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). Based upon existing resources, as well as source water development projects contained in the district's 10-year fiscal 2012-2021 capital improvement program (CIP) supplies are expected to be sufficient to meet customer demands through ultimate build-out of the service area.
Capital needs are manageable but will peak over the next year as the district completes a major water supply project, the expansion of its Los Vaqueros Reservoir. Thereafter, annual capital costs are expected to fall significantly and focus more on renewal of system assets. Capital costs for the 10-year fiscal 2012-2021 period total $510.4 million, down from $599 million for the prior 10-year period. Including this issuance, borrowed sources will account for about 20% of the costs. While planned debt to equity funding of the CIP is favorable, prior issuances by the district have led to elevated debt ratios. However, amortization is relatively rapid, with 60% of principal repaid within 10 years, which should allow the debt profile to improve over the medium term. The district expects to continuously refund and rollover maturing series B notes until fiscal year 2021, when it will refinance them with senior long-term debt. The series B notes mature Oct. 1, 2016.
While the district's financial performance has historically been strong and stable as a result of significant planning efforts, comprehensive policies regarding reserve levels and consistent annual adjustments to rates necessary to support operations, coverage has recently declined and is projected to remain at lower levels in the near term. Annual debt service (ADS) coverage has tracked closely with previous financial projections, part of the district's annually updated 10-year CIP, averaging 2.2 times (x) over the past three years. However, combined senior and mezzanine coverage declined to 1.7x in fiscal 2010, or just 1.1x less capital contributions. Coverage is projected to bottom out at 1.2x in fiscal 2013, or 0.9x less capital contributions. Because the forecast uses the immediate previous year as the base, the projected declines in coverage are conservative and result from the lower water sales and weak economic environment in the base year of fiscal 2010. Water sales declined to about 93,000 acre-feet in fiscal year 2010 from a peak of 122,000 in 2007. Management projects an additional decline of 1.7% in fiscal 2011, not returning to normal levels until 2017. While projected debt service coverage levels are not consistent with the current rating category, Fitch's concerns are somewhat mitigated by conservative assumptions underlying the projections and the significant rate stabilization fund, which has a balance of $56.88 million. Furthermore, system reserves are strong at 607 days cash and 887 days of working capital.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope and IHS Global Insight.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated Oct. 8, 2010;
--'Water and Sewer Revenue Bond Rating Guidelines', dated Aug. 6, 2008;
--'2011 Water and Wastewater Medians', dated Jan. 18, 2011;
--'2011 Outlook: Water and Wastewater Sector', dated Jan. 18, 2011.
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Water and Sewer Revenue Bond Rating Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=395918
2011 Water and Wastewater Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=593285
2011 Outlook: Water and Wastewater Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=593286
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
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