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Rating Action: Moody's assigns Aa2 to San Diego County Water Authority, CA's Water Revenue Bonds, Series 2022A; outlook stableGlobal Credit Research - 27 Jan 2022New York, January 27, 2022 -- Moody's Investors Service has assigned a Aa2 rating to San Diego County Water Authority's Water Revenue Bonds, Series 2022A. The bonds will be issued in the expected par amount of $170 million. Concurrently, Moody's has affirmed the Aa2 ratings on San Diego County Water Authority's (authority or SDCWA) $1.4 billion in outstanding senior lien water revenue obligations and Aa3 ratings on the Authority's $146.5 million in outstanding subordinate water revenue obligations. The outlook is stable.RATINGS RATIONALEThe Aa2 senior lien revenue bond rating reflects the Authority's position as the primary wholesale water provider for a very large service area that incorporates 24 participating member agencies; increasingly diverse sources for water purchases; and conservative financial practices with adopted reserve and debt policies. The rating also incorporates fixed charges and the availability of a rate stabilization fund that serve to maintain stable debt service coverage levels despite variable water sales and declines in per capita water use. These financial mechanisms also insulate the Authority from risks associated with variable water supplies given ongoing drought conditions in California (Aa2 stable) and much of the West.The rating also incorporates the Authority's moderate, planned withdraws from the rate stabilization fund through fiscal 2025 to moderate rate increases. Also factored into the rating is the Authority's elevated leverage driven by large-scale capital projects, uncertainty resulting from two member agencies' applications to detach from the Authority, and risks associated with the Carlsbad desalination plant, a P-3 venture for which the Authority is the sole user and financial obligor.The Aa3 subordinate revenue bond rating reflects the subordinate lien of these obligations as well as somewhat weaker covenants for debt service coverage requirements.RATING OUTLOOKThe stable outlook reflects the likelihood that the Authority's satisfactory operating performance will continue to be stable, supported by strong management practices despite challenges associated with ongoing drought conditions, rising costs, and required capital investments. The outlook also incorporates the likelihood that the Authority will retain the capacity to raise rates as necessary to meet debt service coverage and adopted reserve targets.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS- Sustained trend of favorable debt service coverage- Completion of the Carlsbad intake project and demonstration that additional capital improvements are not required for contracted deliveries- Maintenance of improved reserve levels while supporting capital investmentsFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS- Significant declines in debt service coverage levels- Draws on the rate stabilization account that significantly exceed projections or overall weakening in liquidity- Detachment of member agencies that significantly reduces projected consumption levelsLEGAL SECURITYThe Series 2022A bonds are on parity with the Authority's senior lien revenue bonds and will be paid by installment payments secured by a senior lien pledge of the net revenues of the water system, and a rate covenant of 1.2 times. While the Series 2022A bonds will not have a debt service reserve fund, Moody's does not view this as a significant credit weakness given the Authority's targeted reserve levels for liquidity purposes.Subordinate lien bonds have subordinate lien on net revenues of the water system. Subordinate lien bonds have a rate covenant of 1.0 times.USE OF PROCEEDSBond proceeds will fund components of the Authority's capital improvement program including line replacement and relining and other capital improvements. The bonds will also fund all or a portion of a number of projects associated with water storage such as the rehabilitation of the Lake Hodges Dam and improvements to the Hauck Mesa storage reservoir.PROFILEAs a wholesale water provider, the Authority provided around 75% of total water consumption in fiscal 2021 to 24-member agencies across 1,479 square miles of western San Diego County (Aaa stable) including its coastal areas, serving a growing population of over 3.3 million people. Member agencies include six cities, seventeen special districts and a federal military installation. The Authority's service area accounts for roughly 97% of San Diego County's population, and the City of San Diego, CA Water Enterprise (senior water revenue bonds rated Aa2) is its largest member with a population of approximately 1.4 million representing close to half the Authority's total customers. Otay and Helix Water Districts represent the Authority's 2nd and 3rd most populous member agencies, respectively.METHODOLOGYThe principal methodology used in these ratings 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 DISCLOSURESFor 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 ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are 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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.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. 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