Downgrade, negative outlook for a Los Angeles County water district

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A Los Angeles County water wholesaler received a downgrade and a negative outlook from Moody's Investors Service.

Moody’s downgraded the Central Basin Municipal Water District's long-term ratings and the ratings on its certificates of participation to Baa1 from A1 last week.

“It faces unique competitive pressure that has weakened its market position during and after the California drought, the district’s top customer (contributing to 47% of fiscal 2017 gross revenues) will cease to purchase water from the district beginning in fiscal 2020, a hit to revenues,” wrote Moody’s analysts Patrick Liberatore and Leonard Jones in a report.

The Water Replenishment District of Southern California informed CBMWD that 2019 will be the last year of its water replenishment purchases, Moody's analysts wrote.

WRD is building its own water treatment plant that will enable it to end reliance on imported water.

The Central Basin district’s ability to restore financial operations to healthy levels in the face of upcoming challenges will be crucial for its credit quality, Moody’s wrote. It will need to raise rates to stabilize operations, analysts wrote.

Credit challenges include a history of narrow debt service coverage, including rate covenant violations, decreasing demand for water from customers, a concentrated customer base and declining water usage, Moody's wrote.

The water district is a public agency established in 1952 to help mitigate the over-pumping of underground water resources in Los Angeles County. It wholesales water to public and private agencies who in turn provide municipal and industrial water service throughout the Central Basin, which includes 227 square miles of the county.

Cities, water districts and investor-owned companies that provide water service to local communities purchase water from the water district. The water district’s water supply comes largely from the Metropolitan Water District of Southern California.

The district also wholesales untreated MWD water to WRD, which uses the water to replenish the groundwater basin.

Reliance on MWD exposes “the district to challenging statewide and regional water supply issues and the relatively high prices of imported water prices,” Moody’s wrote.

The district also purchases recycled water from the County Sanitation Districts of Los Angeles County to sell to customers for non-potable uses such as landscape irrigation and commercial and industrial purposes.

Imported water sales remain the district’s primary source of revenue, totaling $43.7 million for fiscal 2017, while recycled water sales amount to $3.6 million for the same period, Moody’s wrote.

The district plans to restructure a portion of its existing debt in fall 2018 by deferring debt service to the outer years. The contemplated restructuring will lower the district's debt service over fiscal 2020-23 at the cost of higher debt service after 2029 and in aggregated over the life of the bonds.

"The district will need to grow net revenues substantially over the upcoming years in order to sufficiently cover for escalating debt service," Moody's wrote.

The district currently has $40.2 million of senior lien debt outstanding with a final maturity in 2040. This includes $11.1 million of adjustable rate refunding certifies of participation that are supported by a letter of credit from U.S. Bank that expires on Dec. 3, 2018. U.S. Bank is currently not willing to extend the LOC beyond December 2018, and the district plans to refund the Series 2008B COP's via fixed-rate bonds on a subordinate lien, Moody's wrote.

The remaining district debt is fixed-rate obligations that benefit from a debt service reserve fund. The Series 2008B COPs are not secured by a debt service reserve fund.

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Ratings Revenue bonds Utilities California