Fitch Affirms Rancho California Water District Financing Auth, CA's Rev Bonds at 'AA+'
Source: Business Wire
--Approximately $214 million revenue bonds, 2005C, 2008A, and 2008B.
Fitch also assigns it long-term 'AA+' rating to the district's outstanding bonds:
--Approximately $7 million revenue bonds, series 2001A;
--Approximately $54 million revenue bonds, series 2002A.
The Rating Outlook is Stable.
RATING RATIONALE:
--The district's financial profile remains healthy despite recent declines in growth related connection fee revenue and a weakening of the local economy and assessed values. Further deterioration is not anticipated.
--The district's groundwater supply provides a competitive advantage in the region - the cost of its local water supply is lower than that of imported water from the Metropolitan Water District that has mandated supply reductions in recent years.
--The district relies on significant revenues from property taxes and property assessments, both collected by the Riverside County Tax Collector.
--Regular rate increases have kept pace with rising water supply costs.
--Capital needs are sizable and may add to the district's already high debt burden.
KEY RATING DRIVERS:
--Potential declines in property tax receipts in fiscal 2011 could result in additional financial pressure on the district. Receipts remained flat fiscal 2010 despite a reduction in assessed value.
--Continued capital spending in line with historical expectations, without the funding anticipated from connection fees that have declined substantially, could result in additional debt at a utility with already high debt levels compared to Fitch's medians for the 'AA' category.
--Management of ongoing water supply issues and preservation of revenues in light of continued lower sales could impact financial margins for bondholders. Fitch expects the district to maintain debt service coverage in the range of its current financial projections to preserve the rating.
SECURITY:
The bonds are secured by installments made by the district to the Financing Authority, the issuer of the bonds. The district's obligation to make installment payments from its net revenues is absolute and unconditional.
CREDIT SUMMARY:
The district provides water and wastewater services to a population of approximately 140,000 in southwestern Riverside County, California. The service area encompasses nearly 100,000 acres and includes the City of Temecula, a portion of the City of Murrieta, and unincorporated areas of Riverside County. Until the recent recession and housing market decline, the service area had experienced rapid growth as a region that was once predominantly agricultural was developed into multiple master-planned developments given its location within the Inland Empire. Growth has slowed significantly in the past two years although the district still added around 200 customers in 2009. Connection fee revenues have fallen from over $8 million in 2006 to less than $1 million projected in 2010, reducing the district's available funds for capital improvements. To date, the district's tax revenues have not declined significantly, although further declines may occur depending on assessed values in the region.
The majority (65%) of the district's water supply is provided by the Metropolitan Water District, (MWD; water revenue bonds rated 'AAA' with a Negative Outlook by Fitch), the regional wholesale provider of imported water to serve communities in the region. Due to critically dry hydrological conditions and reductions in its available supply, MWD implemented a mandatory 10% reduction in treated water deliveries to its members, including the district, effective July 1, 2009 as well as 30% reductions in agricultural deliveries implemented Jan. 1, 2008. However, despite its reliance on MWD, the district has water supply attributes that provide flexibility in both supply and cost. The remaining water supply is provided by the district's groundwater rights. The groundwater basin also provides additional flexibility in that the district may purchase lower cost 'recharge' water from MWD for storage in its basin (21% of total supply in 2009). Sizable agricultural demand (35% of total water usage) enables the district to purchase water from MWD at lower agricultural rates for those users.
In response to the anticipated lower water sales and potential decline in tax revenues, the district adopted a sizable 22% water rate increases effective in fiscal year 2010. The Board is considering a smaller 6.4% rate increase that would become effective in fiscal 2011. The district has historically adopted necessary rate increases needed to keep up with its water supply costs. Rates are competitive, in part, because around 40% of the district's revenues are provided by tax receipts. The district receives a share of the county's 1% property tax revenues and collects its own assessments on land value within the district. These revenues are susceptible to assessed value declines. Revenues received in fiscal 2010 are expected to be flat to 2009 revenues and a small decline is projected in fiscal 2011. The district's delinquency rates have increased on its collections. The district does not participate in the county's teeter plan, taking the full risk and reward of collections.
Debt service coverage is strong at 2.8 times (x) in fiscal 2009, or 2.7x excluding connection fees. However, debt service coverage is projected to decline with future bond issues to 1.7x debt service coverage, excluding connection fees, which are projected to remain modest. Liquidity is healthy with $21.8 million in unrestricted reserves and $28 million in an O&M restricted reserve in fiscal 2009, representing 328 days operating cash. Debt levels are high at $4,724 per customer (based on the combined system) as compared to Fitch's median for the 'AA' category of $1,462 per customer. Despite growth slowdown, the district still has capital needs, primarily related to the development of new water supply. The district is evaluating its capital needs at the current time, in light of lower than anticipated demand and slower development in the service territory. Capital spending was supported, in large part, by connection fee revenues which have declined. A replacement funding source will have to be secured or capital spending reduced to preserve the district's financial performance. Partially mitigating concerns about funding of capital needs is the district's approximately $150 million capital reserve that can be used to fund a portion of the district's long term needs; these monies are also available to boost operational funding, if needed.
These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following reports:
--'Revenue-Supported Rating Criteria', Dec. 29, 2009;
--'Water and Sewer Revenue Bond Rating Guidelines', Aug. 6, 2008.
Additional information is available at www.fitchratings.com.
Contact:
Fitch Ratings, San Francisco
Kathy Masterson, +1-415-732-5622
Fitch Ratings, Austin
Douglas Scott, +1-512-215-3725
Media Relations, New York
Cindy Stoller, +1-212-908-0526
cindy.stoller@fitchratings.com
