Rating Action: Moody's assigns Aa1 to the Metropolitan Water District of Southern California's (CA) Water Revenue Bonds

Global Credit Research - 07 Jan 2021

New York, January 07, 2021 -- Moody's Investors Service has assigned a Aa1 rating to the Metropolitan Water District of Southern California's Water Revenue Bonds, 2021 Series A. The bonds will be issued for an estimated par amount of $191 million. Moody's maintains a Aa1 rating on the Metropolitan Water District of Southern California's ("MWD") $2.4 billion in outstanding parity senior lien water revenue bonds and a Aaa rating on MWD's $32.2 million in outstanding general obligation unlimited tax (GOULT) debt and. In addition, MWD has close to $1.4 billion outstanding subordinate lien water revenue bonds, which are not rated by Moody's. The outlook is stable.

RATINGS RATIONALE

The Aa1 rating reflects MWD's immense service area that includes over 300 cities across six counties within southern California. Consistent finances with sound debt service coverage and liquidity levels also support the rating. Financial performance is enhanced by adopted policies, the availability of a rate stabilization reserve and measured, deliberate and consistent rate management. MWD's ongoing efforts to increase water storage and facilitate interstate agreements to ensure reliable supplies in the face of climate change are also factored into the rating. Based on the state's historic, six-year drought, MWD has sufficient water in storage, in excess of emergency supplies, to withstand a multi-year drought period, offsetting risks associated with variability of both hydrologic conditions and precipitation levels that are again below long-term averages. The rating incorporates MWD's relatively high degree of leverage, with a balanced portfolio and favorable management of variable rate obligations and swap agreements.

We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. A wholesale water provider, MWD is somewhat insulated from customer delinquencies and other potential impacts of the coronavirus pandemic, although it has taken immediate steps to address potential challenges. These initiatives include modified rates increases for fiscal years 2021 and 2022, reduced spending in fiscal 2021, and creation of a deferral program for invoices from January 2021 through June 2021 for its retail member agencies with significant customer payment delinquencies. Any deferred amounts are due and payable by December 29, 2021. The quality and availability of water supplies have not been impacted, and the coronavirus crisis is not a key driver for this rating action. We do not see any material immediate coronavirus related credit risks for the Metropolitan Water District of Southern California. However, the situation surrounding coronavirus is rapidly evolving and the longer-term impact will depend on both the severity and duration of the crisis.

RATING OUTLOOK

The stable outlook reflects our expectation that MWD will maintain sound financial performance with consistent debt service coverage and liquidity levels despite the long term challenge of meeting the water demands of a growing population, the increasing cost pressures of regulatory requirements, and environmental risks that will reduce the reliability of available water supplies. It also incorporates our expectation that MWD will effectively manage through the impacts of the coronavirus crisis, which will include lower demand and somewhat reduced flexibility to increase rates, both of which are likely to contribute to slower revenue growth.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING

- Material and sustained increase in debt service coverage and liquidity

- Long-term alleviation of water supply pressure including sustained growth in stored water supply and development of alternative water reuse projects

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING

- Significantly weakened debt service coverage

- Prolonged drought period that significantly reduces available supplies

- Capital costs required to meet future supply or environmental requirements that significantly weakens financial performance

LEGAL SECURITY

MWD's revenue bonds are special limited obligations payable and secured solely from net operating revenues on parity with outstanding senior lien parity obligations. There is no reserve fund associated with the 2021 Series A bonds.

USE OF PROCEEDS

The 2021 Series A bonds will finance a portion of MWD's capital investment plan (CIP) over the next two years including system enhancements and upgrades. Significant CIP projects include improvements to major pumping stations, distribution pipelines, dams and reservoirs and two treatment plants.

PROFILE

Comprising 26 member agencies including 14 cities, 11 municipal water districts and one county water authority, MWD serves as a water wholesaler to a 5,200 square mile service area with over 19 million residents. MWD provides supplemental water to its member agencies that represent a critical portion of the members' water supply mix, with these supplies projected to represent roughly 50% of member agencies' water supplies over at least the next 25 years. While member agencies continue to develop their own water supplies from recycled and desalination supplies, reliance on MWD remains stable and in some cases will increase as a result of water quality regulations, underscoring the essentiality of MWD water to the region. The district serves exclusively as a wholesale supplier, with no direct retail customers.

METHODOLOGY

The principal methodology used in this rating was US Municipal Utility Revenue Debt published in October 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1095545. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Helen Cregger Lead Analyst Regional PFG West Moody's Investors Service, Inc. 405 Howard Street Suite 300 San Francisco 94105 US JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Thomas Jacobs Additional Contact Regional PFG Northeast JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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