Moody’s Investor Service said it has assigned an Aa1 rating to California’s Department of Water Resources Central Valley Project System revenue bonds ahead of a sale.

The rating impacts $118 million of debt. A sale of $112 million by DWR is expected later this month, according to Moody’s.

“The rating primarily reflects the strong take-or-pay nature of the water supply contracts from which debt service payments are derived, and the critical, long run importance of the Department’s water supply to its contractors,” The report said.

The outlook on the system’s outstanding ratings is stable.

Moody’s said the DWR bonds benefit from the largest contractors’ strong credit standings, and the department’s ability to weather delinquencies by the contractors.

“These considerations largely offset the risk that would otherwise be posed by the tightening legal and regulatory environment for water exports from the Sacramento-San Joaquin Bay Delta, and the volatile annual precipitation levels,” the report said.

The money raised from the sale will be used to fund projects near San Bernardino, Calif., and refund a portion of the department’s outstanding water revenue commercial paper notes.

The department has never experienced a contract payment default, even with below average water deliveries in recent years, Moody’s said.

The ratings firm said the DWR still faces some challenges in the future, including significant future borrowing, tightening legal and regulatory for water exports from the Sacramento-San Joaquin Bay Delta and natural supply fluctuations.

The DWR also operates a large power system and uses those revenues to secure power system bonds, which are rated Aa3 with a positive outlook.

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