LOS ANGELES -- The San Diego County Water Authority plans today to price a $300 million certificate of participation issue following a recent credit rating uppgrade despite uncertainty over various water supply issues in California.
State and local officials continue to grapple with ways to ensure a reliable water supply for California's growing population, and the state's five-year drought has magnified debate over the issue.
In the face of such uncertainty, however, the San Diego authority managed to garner credit ratings that tilt it into the double-A category.
Late last month, for example, Moody's Investors Service upgraded the authority's water revenue certificates to Aa from A1. In addition, Fitch investors Service rated the authority's certificates for the first time, assigning them an AA-minus.
Standard & Poor's Corp., however, held to its existing A-plus assessment.
Moody's and Fitch both cited the strength of the authority's service area, including its economic diversity, as a positive. The authority, a water wholesaler serving 23 member agencies, meets most of the water needs in San Diego County, which ranks fourth largest in the United States in terms of population.
The agencies noted that the authority retains a strong margin of financial security, driven partly by the implementation of new fees and the authority's ppractice of passing on to its customers rate increases imposed by the Metropolitan Water District of Southern California. All of the water supplied by the authority is purchased from the district, which serves most of Southern California.
From an East Coast standpoint, existing water issues in the West are viewed as "extremely significant and seen as a negative" in general terms, said Alan Spen, a senior vice president at Fitch.
The debate is not necessarily limited to the adequacy of supply, but rather involves issues such as the transmission, allocation, and pricing policies affecting water, Mr. Spen said. But despite five years of drought, he noted that California "is in reasonably decent shape" because conservation annd other water-saving measures have worked.
Mr. Spen acknowledged that the authority's water rates could double over the next five years, but he also noted that the increase can be absorbed because ratepayers' current charges are relatively low.
Fitch attached a minus to its rating to reflect the continuing uncertainty of the state's water situation, he said, adding that the outlook could improve with three or four years of normal rainfall.
Standard & Poor's recognizes that, "financially, [the authority] has done quite well," but the agency maintained its A-plus rating because of "lots of uncertainty," said Christine Ruppert, an assistant vice president at the firm.
Today's certificate issue will triple the authority's debt outstanding, Ms. Ruppert noted, and also will support an ambitious capital improvement program.
The capital program has growth to $661 million through the year 2000, up from estimates of $530 million two years ago, Ms. Ruppert said. She added that the increase in the size of the program -- which includes certain cost overruns -- causes some concern.
Ms. Ruppert said Standard & Poor's also would prefer to justify a double-A rating with higher wealth and income indicators than currently exist in the county, given the extent of expected large rate increases in coming years.
Officials from the authority and its financing team met with potential investors in New York, Boston, and Chicago last week to discuss the upcoming financing.
The discussion was not centered on the drought because the authority has "weathered that very well," said Zach McReynolds, vice president of Rauscher Pierce Refsnes Inc., the authority's financial adviser. Rather, many of the questions were focused on the long-term water supply issues facing the authority and the Metropolitan Water District, he noted.
Proceeds from today's sale will fund pipeline capacity improvements, additional storage facilities, and other upgrades.
Besides these improvements, "It's pretty clear that they need to have a reservoir," Mr. McReynolds noted, adding that the authority is going through an exhaustive planning effort to find an acceptable site. The authority previously scuttled a water storage project and prematurely redeemed a $100 million bond issue when environmentalists blocked construction.
Various committees of the Metropolitan Water District also are scheduled to meet next week to develop a recommendation for the whole board on proposed rate increases that take effect next year.
In a meeting last month, committee members pressed the district's staff to scale back proposed rate increases, partly because of fear that consumers will feel they are being penalized for conserving water.
"Politically, it's very touchy at this point," said Robert Campbell, chief financial officer of the authority. "It's basically unfortunate timing" because part of the rate increase is needed for the metropolitan district's capital improvement programs, not solely in reaction to reduced water consumption.
An underwriting group led by Prudential Securities Inc. is handling the authority's certificate issue, which includes various current interest and capital appreciation serial and term maturities.
The deal also could include up to $80 million of inverse floating rate securities insured by Municipal Bond Investors Assurance Corp.
