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Fitch Rates Orange County Sanitation District, CA's Notes 'F1+'

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings assigns an 'F1+' rating to the following Orange County Sanitation District, California (OCSD or the district) debt:

--Approximately $134.2 million revenue refunding certificate anticipation notes (CANs) series 2012C.

The notes are scheduled to sell via competition on or about Oct. 18, 2012. Proceeds will refund series 2011B and pay cost of issuance.

In addition, affirms the following ratings:

--$1.2 billion wastewater revenue obligations (certificates of participation) at 'AAA';

--$143.2 million of revenue refunding certificate anticipation notes, series 2011B at 'F1+'.

The Rating Outlook is Stable.

SECURITY

The notes and certificates are secured by installment purchase payments from the district (the obligor) to the Orange County Sanitation District Financing Corp. (the issuer). The payments are payable from net wastewater revenues after operations and maintenance expenses.

KEY RATING DRIVERS

LARGE AFFLUENT SERVICE AREA: The district's essential role as the wastewater service provider to a large and wealthy service area of 2.5 million people and flat rate structure provide a high degree of revenue stability.

STRONG FINANCIAL PERFORMANCE: Debt service coverage averaged a healthy 2.4 times (x) over the three years ended in fiscal 2012 (unaudited), and liquidity was strong with an estimated 1,245 days cash on hand during the same period.

DISCIPLINED RATE SETTING: The district's board has raised rates consistently and significantly to preserve financial margins as the district undertook a major capital program to upgrade its plants to full secondary sewerage treatment standards.

GOOD RATE FLEXIBILITY: Rates remain very affordable at just 0.3% of the county's median household income due to significant property tax revenues.

MODERATE DEBT BURDEN: The long-term debt burden is moderate at $514 per capita and forecast to decline gradually over the next five years.

MANAGEABLE BORROWING PLANS: The district's capital plan is sizeable, but manageable, and will require no further borrowing over the next five years.

STRONG MANAGEMENT PRACTICES: Sound reserve policies, a robust strategic planning process and long-term capital planning drive long-term financial and rate planning processes.

SHORT-TERM DEBT STRATEGY: The 'F1+' rating reflects OCSD's long-term credit quality and implied market access to remarket the notes. The district has used the certificate anticipation note structure since 2008 and refinanced the notes each year with a subsequent issue.

CREDIT PROFILE

STRONG FINANCIAL RESULTS

The district provides wastewater service to the northern and central portions of Orange County (the county) and about 80% of county residents. Financial metrics remained strong with debt service coverage rising to a very strong 2.7x in fiscal 2012 by Fitch's calculation. Coverage is forecast to remain above 2.3x through fiscal 2017.

Liquidity remains very strong with $470 million of unrestricted cash and investments at the end of FY 2012. Audited unrestricted cash and investment levels have averaged more than 1,000 days over the past five years. With strong reserve policies and planning targets, Fitch expects the district to maintain robust liquidity levels.

AFFORDABLE RATES DESPITE REGULAR AND ONGOING INCREASES

The district's board has been very disciplined in raising rates to support the district's shift to full secondary treatment of sewerage discharges. Rate increases have averaged 10.4% over the past five years and are scheduled to continue at 4% a year. Still, rates are very affordable at $267, a year for a single family residential home in fiscal 2012. Rate increases are slowing down with the completion of major capital treatment level upgrades and the slowing of debt issuance.

CAPITAL PRESSURES ABATING

OCSD has managed its significant regulatory and capital burdens well. In 2002, the district's board decided to upgrade its treatment wastewater effluent discharged into the ocean to full secondary treatment. The district historically operated under a 301(h) waiver, allowing for less than full secondary treatment. The district voluntarily entered into a consent decree concurrently with the issuance of a new ocean discharge permit. The consent decree called for implementation of full secondary treatment by December 2012. The district has essentially met this broad requirement and expects to complete all of the detailed construction milestones in the consent decree by the end of this year.

The district has scaled back borrowing plans for the next five years, which will allow debt to slowly decline. An estimated 28% is scheduled to be repaid in 10 years and 66% in 20 years. Debt is expected to fall to about $460 per capita in fiscal 2017. The district's current five-year (fiscals 2013 - 2017) capital improvement plan (CIP) is large but manageable, at $934.3 million, and it will require no additional borrowing. In addition to building further capacity for secondary treatment, the CIP includes significant investments in replacement and renewal of collection system and treatment plant facilities.

STABLE SERVICE TERRITORY AND DIVERSE REVENUE STREAMS

The district's primary revenue streams are quite stable, with property taxes providing about 20% of revenues and sewer fees providing 70%. Property taxes were little changed during the housing downturn and have begun to show signs of growth again. The district's service area includes relatively built-out and well-established communities such as Anaheim, Huntington Beach, Irvine and Santa Ana, insulating the district from the sharp declines in assessed value (AV) that have hit newly developed areas. AV fell 1% in 2010 and 0.3% in 2011 before recovering in fiscal 2012 with a 1.4% gain.

OCSD's affluent suburban service area continues to provide strong fundamental base for the district's operations despite a deep cyclical downturn. The county's unemployment rate has decreased significantly over the past year, falling to 7.9% in July from 9.2% a year earlier. While the rate remains cyclically elevated, it is declining and remains well below statewide average of 10.9% for California.

Orange County's unemployment rate has traditionally tracked lower than state and national levels. Long-term employment prospects for the county appear solid, given the large and diverse economy and high education and wealth levels. The district benefits from its desirable coastal location, and residents have good access to employment opportunities in the massive Los Angeles metropolitan economy. MHI is 122% of state and 143% of national levels.

Legal provisions are adequate with a 1.25x rate covenant and 1.25x maximum annual debt service additional bonds test.

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', dated June 12, 2012;

--'U.S. Water and Sewer Revenue Bond Rating Criteria', dated Aug. 3, 2012;

--'Rating U.S. Municipal Short-Term Debt', dated Dec. 8, 2011

--'2012 Water and Sewer Medians', dated Dec. 8, 2011;

--'2012 Outlook: Water and Sewer Sector', dated Dec. 8, 2011.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684901

Rating U.S. Municipal Short-Term Debt

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=659234

2012 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657111

2012 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657110

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Fitch Ratings
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Andrew Ward, +1-415-732-5617
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Secondary Analyst
Kathryn Masterson, +1-415-732-5622
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Managing Director
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elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings

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