The San Diego County Water Authority has finalized two long-term water supply agreements with neighboring water districts, securing a potential revenue stream of $660 million and, it says, establishing a new model for regional water cooperation in Southern California.
The SDCWA, a wholesale water provider with no direct retail customers, sells water to 22 member agencies, including cities, special districts and the 125,000-acre Camp Pendleton Marine Corps base, primarily located in northern San Diego County.
The two 21-year agreements, one with the Eastern Municipal Water District and the other with the Western Municipal Water District, both in Riverside County, stipulate that WMWD will
The water wholesaler will not need to build new pipelines because the agreements allow the districts to receive a portion of the SDCWA's take from the
The Eastern deal,
The agreements are the result of a larger re-envisioning process that addresses a "perfect storm" the authority faced, Harris said. Two years of record rain combined with the water supply from the Claude "Bud" Lewis Desalination Plant meant the SDCWA had a water supply that exceeded its demand.
Through its agreement with
The authority also lost two of its smaller water district customers, had to tap reserves and was contemplating a double-digit rate increase, though with pushback from customers ultimately capped the increase to 8%, said Malcolm D'Silva, an S&P Global Ratings associate director.
S&P lowered to negative its outlook on the SDCWA's AAA rating in June 2024, citing lower water sales and rising contractual costs.
The agreements with the two out-of-county districts are an innovative solution that should benefit the San Diego County authority financially while improving regional drought resiliency, said Jenny Poree, a San Francisco-based consultant and former S&P Global water utility sector lead.
"They are making a very prudent decision that is beneficial from a regionalization, resiliency and affordability standpoint," Poree said. "With the volatility we have seen in hydrology, utilities can't afford to take a 'go it alone' approach any longer and need to leverage partnerships and shared assets to improve the diversity of supply without unduly stressing ratepayers."
The SDCWA plans to use the new revenue to aggressively manage its finances, Harris said.
While the board can lower rates for customers in the short term, the main goal is to "aggressively pay down its $2 billion in debt, rather than paying it back over a 30-year cycle," she said.
The new strategy is part of a long-term plan to maximize the authority's revenue stream and reduce its debt burden. The authority also plans to issue about $285 million in new money bonds and around $100 million in refundings in the fall, she said.
The authority has issuer ratings of Aa2 and AA-plus from Moody's Ratings and Fitch Ratings. Both assign stable outlooks. S&P remains at AAA and negative.
Prior to the S&P outlook revision, the region had experienced two years of historically high rainfall, which meant its clients didn't need as much water from the wholesaler, Harris said.
Since then, Harris said the water authority's metrics have improved, its reserves have improved and the coverage ratio on its bonds is above 1.5 times.
S&P's typical expectation for triple-A rated agencies is 2 times coverage of bond debt, said Kurt Forsgren, an S&P managing director.
Even with the agency's work in developing the new customers in Riverside County, S&P analysts indicated they are taking a wait-and-see approach on the negative outlook.
The 24-month review period set by S&P, which began in June 2024 when a negative outlook was assigned, is scheduled to conclude in June.
S&P stated when the negative outlook was assigned there was a one-in-three chance of a rating downgrade during that time frame. Now as the deadline draws near, three outcomes are possible: S&P could affirm the triple-A rating and return the outlook to stable, extend the negative outlook period, or lower the rating, Forsgren said.
The S&P analysts said they are looking for more clarity on the water authority's financial and performance outlook before they release further guidance.
"This development is just one of the things we look at," Forsgren said of the new agreements.
"It will not be the sole consideration to resolve the negative outlook. It's more looking out longer term in positioning of the rating, and at the trajectory of where they are headed and the steps taken along the way," he said.
"S&P doesn't have many triple-A credits with a negative outlook, so it's a unique position to be in and to be as highly rated as they are," Forsgren said. "With the triple-A distinction there is a high hurdle in terms of expectations of financial performance."
There could be developments that are either positive or negative along the way and the analysts have to consider what challenges the authority could face that would erode their finances, he said.
"The agreements could help strengthen the water authority," said D'Silva. "But we are looking at how it fits in with its financial trajectory and operating fundamentals."
Among the concerns the analysts said they have is that some of the water wholesaler's water district customers have started to develop their own water supply programs. For instance, the city of San Diego is developing a water purification project to clean recycled water that it expects will provide nearly half of the city's water supply locally by the end of 2035. Other SDCWA customers are also working on their own water supply.
Under the leadership of Dan Denham, who was named general manager in August 2023 after 17 years as a deputy general manager, the water wholesaler hopes to change its trajectory, Harris said.
By striking agreements like those with the Riverside County agencies, it enables its partners to avoid taking on debt to provide water to its users, while helping SDCWA to reduce its debt burden, Harris said.
"We will look at all of the outstanding liabilities. We also have $100 million of annual commercial paper needs," she said. "So maybe we will issue less debt going forward and emphasize pay-go."
The authority is working on a five-year plan and also one that extends out longer term to maximize the new revenue stream, Harris said.
In addition to the new money debt and refundings it has planned, SDCWA is also evaluating its
The Carlsbad desalination plant was financed with $734 million in tax-exempt bonds
The $734 million deal won The Bond Buyer's Far West
The water authority has refinanced bonds to save on debt payments. In 2023, $158 million in revenue bonds were issued to finance a new ocean intake system.
The original financing was predicated on a 30-year, take-or-pay water purchase agreement, meaning the water authority pays for the water regardless of whether it takes delivery. The 30-year bonds for the project were initially issued at a 4.78% interest rate.
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