Rating Action: Moody's assigns Aa1 to CA. Dept. of Water Resources' Central Valley Project Water System Revenue Bonds, Series BB and BC
Global Credit Research - 17 Jul 2020
New York, July 17, 2020 -- Moody's Investors Service has assigned an Aa1 rating to the California Department of Water Resources' Central Valley Project Water System Revenue Bonds, Series BB and Series BC (Federally Taxable). The expected Series BB bond issuance amount is approximately $560 million and the Series BC issuance amount is approximately $408 million. The current issuance represents parity obligations to the Department of Water Resources' (DWR or Department) close to $2.6 billion in outstanding Central Valley Project (CVP) water system revenue bonds, which are also rated Aa1 by Moody's. The outlook is stable.
Moody's also maintains a Aa2 rating on DWR's $17 million in outstanding Devil Canyon Castaic Bonds, reflecting the smaller number (six) of contractors associated with these revenue bonds, no step-up provisions, and a lower rate maintenance requirement of 1.0x. These risk factors are largely offset by Metropolitan Water District of Southern California's (Revenue rated Aa1 stable) responsibility for 88% of debt service for those bonds.
The Aa1 rating reflects the strong take-or-pay nature of the water supply contracts from which debt service payments are derived and the critical, long-term importance of the water supply to DWR's 29 contractors, which collectively provide water to 69% of the state's population. Also key to the Aa1 rating is the strong credit quality of the largest contractors, particularly MWD of Southern California. While there have been no historical payment delays on the part of contractors, the additional security offered by strong step-up provisions would enable the Department to withstand a significant amount of delinquencies, lowering the potential of default even in the event of a missed payment by one of the smaller, non-rated contractors.
These considerations partially mitigate uncertainties associated with California's more volatile precipitation levels, which lead to varying annual water deliveries. The combined size and reliability of DWR's contractors also serve to offset risks associated with DWR's sizeable capital investment needs. The most notable of these are $1.1 billion in Oroville Dam Spillway repairs and a share of California's project to improve Delta conveyance facilities, with total project costs estimated at up to $10 billion or more.
Notwithstanding the take-or-pay nature of the water supply contracts, the associated costs and required capital investments of delivering state water project supplies will remain an important factor in our analysis. Costs associated with California's strict legal and regulatory operating environment and uncertainty regarding final FEMA reimbursements for Oroville Dam Spillway repairs are also incorporated in the rating.
The coronavirus pandemic, which we regard as a social risk, is not a key driver of this rating action. Collections for DWR will remain strong given the take-or-pay nature of the water supply contracts. The coronavirus crisis is not a key driver for this rating action. However, the situation surrounding coronavirus is rapidly evolving and the longer-term impact will depend on both the severity and duration of the crisis. If our view of the credit quality of DWR changes, we will update the rating and/or outlook at that time.
Moody's has a stable outlook on the Department's long-term water enterprise ratings, primarily reflecting the time-tested strength of the underlying water supply contracts and the share of contract payments supported by the highly-rated MWD. Water deliveries have fallen below requested amounts over the past decade due to limited water supply availability. Nevertheless, given the bonds' strong security provisions, Moody's believes that material, future contract payment delinquencies or defaults are unlikely.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS
- Substantially increased, long-term water delivery reliability
- Effective resolution of contract extension with contractors
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
- Failure to reach agreement on contract extension with remaining contractors
- Significant, permanent reductions in water deliveries
Payment of principal and interest on the bonds is secured by a pledge of gross revenues derived from payment obligations under water supply contracts with 29 participating contractors. The majority of annual debt service on outstanding obligations is additionally secured by step-up provisions requiring at least an additional contribution of up to 25% of debt service on the part of participants. These step-up provisions are enhanced by the presence of larger contractors of Aa credit quality. Contractors are billed in advance for debt service.
USE OF PROCEEDS
Of the Series BB bonds approximately $322 million will be used to take out outstanding commercial paper, $109 million will refund Series AU floating rate bonds, and $250 million will
pre-fund 12 to 18 months of future department capital expenditures. The Series BC will refund certain of the department's outstanding revenue bonds.
The California Department of Water Resources is responsible for the construction and operation of the State Water Project, a massive statewide system of aqueducts, dams, reservoirs, pumping stations and electric generation facilities running from Oroville Dam, north of Sacramento to a terminus in Riverside County and delivering water supplies to 69% of the state's population.
The principal methodology used in these ratings was US Municipal Utility Revenue Debt published in October 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1095545. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Joseph Manoleas Lead Analyst Regional PFG Northeast Moody's Investors Service, Inc. One Front Street Suite 1900 San Francisco 94111 US JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Michael Wertz Additional Contact Regional PFG Northeast JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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