The State Water Project consists of aqueducts, dams, storage facilities and pumping stations and conveys a supplemental water supply to 71% of Californians.

SAN FRANCISCO - California's Department of Water Resources is planning to sell $625 million of triple A-rated water revenue bonds on Tuesday.

The proceeds will advance refund a portion of the department's outstanding water revenue bonds issued to finance capital costs of its water system projects.

The bonds received a triple-A rating and stable outlook from Standard & Poor's, which cited the strength of the department's water contractors and the requirement of the contractors to make payments regardless of the amount of water delivered.

Contractors are obligated to make payments equal to operating and maintained costs and at least 1.25 times aggregate debt service.

"The stable outlook reflects Standard & Poor's expectation that the DWR water system will maintain its strong liquidity position, that the credit quality of its principal water contractors will remain strong, and that the project's water will remain a vital source of supply for much of the state's population," analysts said in a report.

Moody's Investors Service assigned a Aa1 rating and stable outlook, noting the largest contractors' strong credit ratings and the department's ability to withstand a large amount of delinquencies by contractors, with the help of step-up provisions.

"These considerations mitigate the risks associated with the current drought and the generally volatile and unpredictable annual precipitation levels," Moody's said. "As the drought continues, the state's water supply will become an increasingly important factor in our analysis, notwithstanding the take-or-pay nature of the supply contracts."

The state has been experiencing one of its worst droughts on record, and is currently in its third "dry year."

According to Perla Netto-Brown, chief of fiscal services at the state's DWR, annual water deliveries of the state water project to its contractors have decreased significantly since 2006. In 2013, they were approximately 35% of total contractors' request—the lowest level since 2008.

However, the DWR is protected through its water contracts since payments from contractors are not conditioned on the amount of water delivered, Netto-Brown said.

California's DWR is a department within the California Natural Resources Agency of the state and is responsible for the planning, construction, and operation of the State Water Project. The water project conveys a supplemental water supply to 29 local agencies and includes a set of dams, water storage facilities, aqueducts, and pumping stations.

"The state water project supplies water to agencies serving 71% of Californians and a significant portion of the state's agriculture industry," according to Netto-Brown.

DWR currently has around $2.4 billion of debt outstanding, and anticipates borrowing an additional $1.4 billion for its water system over the next seven years.

Future projects requiring capital expenditures include the North Bay Aqueduct Alternative Intake, Phase II of the East Branch Enlargement, and the Perris Dam Remediation Project.

Next week's deal will be priced by Morgan Stanley on Tuesday, following a retail-order period on Monday.

The refunding bonds are expected to amortize from 2018 to 2032 and will be offered with a 10-year par call.

Orrick, Herrington, Sutcliffe LLP is serving as bond counsel and Montague DeRose and Associates.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.