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California Department of Water Resources -- Moody's assigns Aa1 to California Dept. of Water Res. (Water Enterprise) revenue bonds, Series BF; outlook stable

·14 min read

Rating Action: Moody's assigns Aa1 to California Dept. of Water Res. (Water Enterprise) revenue bonds, Series BF; outlook stableGlobal Credit Research - 02 Sep 2022New York, September 02, 2022 -- Moody's Investors Service has assigned a Aa1 rating to the State of California Department of Water Resources Central Valley Project Water System Revenue Bonds Series BF. The bonds are expected to be issued in the approximate par amount of $264.3 million. Concurrently, Moody's has affirmed the Aa1 ratings on the California Department of Water Resources' (DWR or Department) close to $3.1 billion in outstanding parity senior lien obligations. Moody's maintains Aa2 ratings on DWR's outstanding subordinate commercial paper notes. The outlook is stable.Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM907843047 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.RATINGS RATIONALEThe Aa1 rating reflects the strength of the Department's revenue pledge, supported by payments from 29 contractors who together provide water to roughly 69% of the state's population. Despite the State of California's (Aa2 stable) ongoing drought and DWR's cuts to water deliveries, contractor payments supporting operations and debt service are protected given the strong take-or-pay nature of the water supply contracts irrespective of the amount of water delivered. These contract provisions serve to maintain consistent debt service coverage and sound liquidity despite the state's record drought conditions, which have forced significant cuts to water deliveries in 2021 and 2022 and required some contractors, most notably the Metropolitan Water District of Southern California (Aa1 stable), to request additional allocations for health and safety purposes.The rating also incorporates the strong credit quality of the largest contractors. 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. The combined size and reliability of DWR's contractors also serve to offset risks associated with DWR's sizeable capital investment needs to ensure adequate future supplies, the largest of which involves a proposed project to improve Delta conveyance facilities currently being studied by the Department, with possible total project costs estimated at $16 billion or more.RATING OUTLOOKThe stable outlook reflects the time-tested strength of the underlying water supply contracts and the share of contract payments supported by the highly-rated Metropolitan Water District of Southern California. Water deliveries have fallen below requested amounts over the past decade due to limited water supply availability, with water deliveries in 2021 and 2022 near historical lows. Nevertheless, the bonds' strong security provisions will serve to support stable debt service coverage and liquidity. The stable outlook also assumes successful extension of contracts past current expiration dates in 2035.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS- Substantially increased long-term water delivery reliability- Effective resolution of contract extension with contractorsFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS- Failure to reach agreement on contract extension with remaining contractors- Continued drought conditions requiring ongoing significant cuts to water deliveries- Capital project costs that significantly increase water chargesLEGAL SECURITYPayment of principal and interest on the bonds is secured by a pledge of 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 with strong credit quality. Contractors are billed in advance for debt service. Senior lien bonds are additionally secured by a debt service reserve equal to one-half maximum annual debt service.USE OF PROCEEDSSeries BF bond proceeds will refund $149.2 million of DWR's outstanding Series AT bonds and retire approximately $128.5 million of outstanding commercial paper notes. Proceeds of the Department's Water System Revenue Bonds, including proceeds from Series BF are used to fund a debt service reserve account equal to one-half year MADs. The Series AT bonds are the only remaining series of long-term variable rate bonds, and following this refunding, DWR will have no long-term variable rate debt.PROFILEThe California Department of Water Resources is a department within the Natural Resources Agency of the State of California and is responsible for the construction and operation of the State Water Project. The Director, the Lead Deputy Director, the Deputy Director for the State Water Project, and the General Counsel are each appointed by the Governor. The State Water Project incorporates a massive statewide system of aqueducts, dams, reservoirs, pumping stations and electric generation facilities running from Oroville Dam, north of the city of Sacramento (Aa2 stable) to a terminus in Riverside County (Aa2 stable) and delivering water supplies to 69% of the state's population.METHODOLOGYThe principal methodology used in these ratings was US Municipal Utility Revenue Debt Methodology published in April 2022 and available at https://ratings.moodys.com/api/rmc-documents/386721. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESThe List of Affected Credit Ratings announced here are all solicited credit ratings. For additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM907843047 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:- Rating Solicitation- Issuer Participation- Participation: Access to Management- Participation: Access to Internal Documents- EndorsementFor 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 on https://ratings.moodys.com/rating-definitions.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 issuer/deal page for the respective issuer on https://ratings.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.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://ratings.moodys.com/documents/PBC_1288235.Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating. Helen Cregger Lead Analyst REGIONAL_WEST Moody's Investors Service, Inc. 405 Howard Street Suite 300 San Francisco 94105 JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Heather Guss Additional Contact REGIONAL_SOUTHWEST 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 © 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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