SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings assigns an 'AA' rating to the following Cucamonga Valley Water District Financing Authority, CA (the district) debt:
--$40 million water revenue bonds series 2012.
The bonds are scheduled to sell via negotiation on or about Oct. 18, 2012. Bond proceeds will finance capital improvements, including water treatment capacity upgrades, and cost of issuance.
The Rating Outlook is Stable.
The bonds are backed by net water revenues after payment of operation and maintenance expenses and senior lien obligations. The district has about $160 million of senior obligations outstanding; the senior lien is closed.
KEY RATING DRIVERS
HEALTHY FINANCIAL PERFORMANCE: All-in debt service coverage (DSC) has averaged a solid 2.0x over the five years ended fiscal 2011 and is likely to remain near that level over the next five years. Liquidity was solid with 268 days cash on hand for fiscal 2011 and is likely to improve steadily due to recent rate increases.
DISCIPLINED RATE SETTING: The district's board of directors has exhibited good rate discipline, raising rates consistently to maintain strong financial performance. The board approved a five-year rate plan in 2010 that raises rates by about 5% a year. Automatic adjustments for imported water costs are an added strength.
DIVERSE, ADEQUATE WATER SUPPLY: The district has adequate water supply for its build-out population with a reasonably diverse mix of sources, including imported water, local surface water, local ground water and recycled water.
SIGNIFICANT DEBT BURDEN: Debt levels are well above average and expected to remain high. The debt burden is elevated due to the purchase of significant water rights that position the district's water portfolio well and will have a positive impact well beyond amortization of the related bonds. Concerns about the debt burden are offset by strong financial performance.
STRONG SERVICE AREA: The district serves the affluent suburban community of Rancho Cucamonga in western San Bernardino County. The region has been hard-hit by the national housing downturn, but the district serves a well-established community within close commuting distance of major southern California employment hubs.
STRONG MANAGEMENT PRACTICES: The district's debt and financial policies are strong, and board oversight appears quite good with regular financial updates to policymakers and strong policymaker expertise in water issues.
The district has come through a period of considerable stress with a solid financial profile that is likely to improve over the next few years. Water sales were depressed by economic weakness and drought-related conservation efforts in 2009, while costs for imported water supplies rose sharply. These stresses pushed DSC well below its long-term average to a merely acceptable 1.2x in fiscal 2009.
The district reacted strongly with expense reductions and rate hikes and has since posted markedly improved results with DSC averaging a solid 1.7x in the three years ended fiscal 2012 (unaudited). In addition to necessary rate increases, the district restructured rates to include automatic pass-through of imported water cost increases, which decreases the chance of such misses in future years.
The district performed quite solidly in a rainy, low-demand year in fiscal 2011 with DSC at 1.6x. Demand began to rise again in fiscal 2012, helping the utility return to a strong 1.9x DSC ratio for the year. Fitch expects coverage to remain close to this level over the next five years, but expects some continued variability due to weather-driven demand variations.
Accompanying the drop in DSC in fiscal 2009, the district's liquidity also declined, falling to 142 days cash as capital spending depleted reserves amid weaker-than-expected results. However, with the district's timely rate adjustments, days cash rebounded to more than 300 days by the end of fiscal 2012, according to preliminary financial results. The utility has also implemented a new set of reserve policies that are likely to push reserves higher over the next five years if policymakers adhere to the policies.
Rates have been raised consistently over the years to maintain margins, with the latest five-year rate package adopted in 2010. This recent rate package includes rate increases of about 5% a year and an escalator provision that protects against imported water cost increases. Rates remain affordable compared to neighboring providers after the increases, and recent rate increases have been uncontroversial.
HIGH DEBT LEVELS
The district's debt burden will be high at a projected $4,381 per customer or $1,066 per capita after the current offering. Debt is expected to decrease only gradually over the next five years to $3,969 per customer or $988 per capita given slow amortization of outstanding bonds and minimal future borrowing plans. Concern about elevated debt levels is largely offset by the district's solid financial performance. Another offsetting consideration is that about one-half of the utility's debt is related to the acquisition of significant water rights that amortize over the next 23 years; these water rights will provide substantial reliability to the district over the longer term.
HEALTHY SUPPLY PORTFOLIO
The district's supply position is stronger than many southern California water utilities as a result of its pro-active acquisition of local water rights and investments in treatment capacity over the years. The district is now able to produce about one-half of its water from local supplies with the balance coming from imports, largely from the State Water Project via the Metropolitan Water District of Southern California and the Inland Empire Utilities Agency.
The current bond offering will finance treatment facilities that will allow the district to utilize local pumping rights more fully, increasing local water usage from the Cucamonga Basin and thereby reducing more costly and less reliable imported water. The district has also built up a significant reserve of local ground water credits that position it to weather interruptions in imported supplies better than many other providers.
STRONG SERVICE AREA
The district's service area is solid despite weakness in the broader San Bernardino County economy. The high income suburb of Rancho Cucamonga makes up approximately 90% of the customer base. Median household income is 151% of the national level, while poverty is less than half of the national level.
The district is located in the foothills of the San Gabriel Mountains within commuting distance of major Southern California employment centers in Los Angeles, Orange and Riverside counties. The service area is primarily suburban and residential, but it also includes significant office parks, shopping centers, and educational institutions, as well as logistics, manufacturing enterprises. Rancho Cucamonga's unemployment rate trends somewhat lower than the national average and well below state and county levels.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was informed by information from CreditScope and IHS Global Insights.
Applicable Criteria and Related Research:
'Revenue-Supported Rating Criteria', June 12, 2012;
'U.S. Water and Sewer Revenue Bond Rating Criteria', Aug. 3, 2012;
'2012 Water and Sewer Medians', Dec. 8, 2011;
'2012 Outlook: Water and Sewer Sector', Dec. 8, 2011.
Applicable Criteria and Related Research:
2012 Outlook: Water and Sewer Sector
2012 Water and Sewer Medians
U.S. Water and Sewer Revenue Bond Rating Criteria
Peter Fitzpatrick, +44 20 3530 1103
Media Relations, London
Andrew Ward, +1-415-732-5617
650 California Street
San Francisco, CA 94108
Matthew Reilly, +1-415-732-7572
Douglas Scott, +1-512-215-3725
Source: Fitch Ratings