SAN FRANCISCO - The San Diego County Water Authority, California's third-largest urban water wholesaler, plans to sell $580 million of certificates of participation as soon as tomorrow to pay for the canals, tunnels, and dams that the growing region needs to compete in the arid Southwest's water wars.
The deal will fund $516.5 million of capital projects and refinance up to $63.2 million of COPs issued in 1997. The authority, which serves three million residents, is in the midst of one of the nation's biggest local water capital improvement plans, with $1.3 billion of spending planned over the next five years and $3.9 billion over the next 30 years.
"We're making the investments we need to make so that we'll have reliable water 30 years from now," said SDCWA finance director Eric Sandler. "We are aggressively pursuing diversification and reliability because we're in a semi-arid region with very little groundwater and we are at the end of the two major water conveyance systems - the state water project and the Colorado River aqueduct."
The authority is trying to improve its credit ratings as it prepares for heavy borrowing in the coming years. The district has covenanted to maintain debt service coverage of at least 120% on its senior-lien debt, including the current issue, but its member agencies have agreed to increase the coverage ratio to 150%.
Standard & Poor's last week upgraded the authority's COPs to AA-plus from AA. The debt is rated Aa3 by Moody's Investors Service and AA by Fitch Ratings.
"The rating action reflects the cumulative results - both operational and financial - of an extended track record of very strong management and planning practices," Standard & Poor's said in its report.
The authority has $951 million of fixed-rate COPs outstanding and $460 million of commercial paper. It has no swaps or auction-rate securities.
The current deal will include serials between 2009 and 2028, and term bonds with mandatory sinking funds in 2033 and 2038, according to the preliminary official statement.
The authority may insure some of the certificates, said financial adviser Richard Morales of Wedbush Morgan Securities Inc. They carry a standard 10-year call provision at par and are tax-exempt.
A Moody's report noted that the SDCWA plans to maintain a smaller-than-usual debt service reserve fund of 50% of maximum annual debt service. Morales said the agency plans to keep a lower reserve for just this one debt issue because current rates will yield negative arbitrage in the debt service reserve fund.
Goldman, Sachs & Co. is book-running senior manager on the negotiated deal. Citi is co-senior manager. Banc of America Securities LLC, Lehman Brothers,and Merrill Lynch & Co. are also part of the syndicate. Orrick, Herrington, & Sutcliffe LLP is bond counsel, and KNN Public Finance is co-financial adviser with Wedbush Morgan.
The current financing will fund dozens of projects. The highest profile is the relining of the All American Canal, which moves Colorado River water through the desert to southern California. The project is the centerpiece of a federally mandated, seven-state water-sharing pact that reduces California's take from the river.
By helping the state and the Imperial Irrigation District replace a porous, 23-mile earthen stretch of the All American Canal with a concrete-lined channel, San Diego will increase supplies for its growing population and for the farms of the Imperial Valley.
The plan has been in the works for years but had to overcome a series of lawsuits from environmentalists and from Mexican communities that depend on groundwater that seeps from the canal.
The rebuilt All American Canal will give San Diego 52,200 acre-feet of water a year. An acre-foot of water is enough to cover a football field one-foot deep. The project will provide enough water for more than 100,000 households.
The SDCWA is diversifying its sources to prepare for the intense water competition that will face the arid Southwest as populations grow in the years ahead. It currently gets three-quarters of its water from the Metropolitan Water District of Southern California.
San Diego is just one of six counties, including Orange and Los Angeles counties, that compete for water from the MWD. In drought years, the district cut the authority's water allocations sharply. San Diego plans to reduce its dependence on the MWD to 30% by 2030.
To assure its supply of fresh water, the San Diego authority is also pushing conservation, water recycling, and construction of a private desalination plant in Carlsbadf. It is relining water pipes to prevent leakage, and it is increasing its emergency storage capacity within the county.
"If you have all your eggs in one basket, you're at more risk for a less reliable water supply," Sandler said.
The current financing will pay to raise the San Vicente Dam in the city of San Diego to 274 feet from 220 feet, adding 52,000 acre-feet of local storage capacity. It will also fund the San Vicente Pipeline, which will allow the authority to move water throughout the county in the event of an emergency.
While providing enough water is a constant struggle for Southern California officials, Standard & Poor's said the "essential" nature of the service and the authority's "aggressive" efforts to seek out supplies are reasons for its high rating.
