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Fitch Affirms Jurupa Community Services Dist., CA's Water Revs at 'AA'; Outlook Stable

February 4, 2014

SAN FRANCISCO --(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'AA' rating on the following Jurupa Community Services District , California (the district) debt: -- $29.3 million of water revenue certificates of participation (COPs), series 2010 A & B. The Rating Outlook is Stable. SECURITY The COPs are secured by net water revenues, including connection fees and half of the district's property tax collections. KEY RATING DRIVERS STRONG FINANCIAL PERFORMANCE: All-in debt service coverage (DSC) has risen to very high levels amid high water demand and a recovery in connection fee revenues. Unrestricted cash balances have declined from very high levels of prior years, but remain solid. UNCERTAIN RATE ENVIRONMENT: The board of directors failed to fully implement the rate package that was proposed at the time the COPs were sold, having kept rates unchanged since 2011. Financial results suggest the pause in rate increases was affordable, and the district is currently undertaking a new rate study that is likely to include significant rate increases to pay for new water supply costs. GROWING SUBURBAN SERVICE AREA: The district is a monopoly provider of essential services to a growing suburban service area with a largely residential customer base. RECOVERING REGIONAL ECONOMY: The district is part of the broader Riverside County economy, which was hard hit by the housing downturn. Home construction is once again adding significantly to the utility's customer base, while unemployment is declining from a very high level. MANAGEMENT CONCERNS: The district has had significant turnover among senior staff. New management is experienced, but has not yet developed a proven track record of managing the political, financial and operational issues facing this agency. The board of directors has failed to implement a consistent and clear rate strategy. STRONG DEBT PROFILE: Water debt levels are low and expected to decline slowly as outstanding bonds amortize. The district does not plan to issue additional water debt over the next five years, although supply concerns could add to the debt burden over the longer-term. ADEQUATE DROUGHT SUPPLIES: The utility has an adequate supply of ground water that positions it well to take advantage of increased demand during the current California drought. Additional supplies will be needed to accommodate expected growth. RATING SENSITIVITIES DECLINE IN LIQUIDITY: The rating could come under downward pressure if the does not impose rates that would stabilize unrestricted cash and investments at a healthy level. CREDIT PROFILE The district provides water and sewer services to about 107,500 residents in a 48-square-mile service area in northwestern Riverside County . The district serves the cities of Jurupa Valley and Easvale as well as unincorporated areas of Mira Loma , Glen Avon , Pedley, Sunnyslope, Sky Country and Indian Hills . SOLID FINANCIAL POSITION The utility's financial position remains solid, despite a delay in rate increases and a decline in liquidity. Current unrestricted cash and investments fell to $27.4 million , or a strong 418 days of operating cash, according to unaudited results for 2013 from 605 days in 2011. That's above the median level of days cash for an 'AA' rated utility of 388 days. The utility also maintained significant unrestricted non-current reserves totaling $12.3 million at the end of fiscal 2013. The reserves are held in highly liquid U.S. Treasuries and agency securities with maturities beyond 12 months. The utility also maintains significant restricted capital reserves. A surge in water use due to dry weather and a recovery in capital contributions offset the impact of delays in rate increases, but a continued inability to enact even modest rate increases could put pressure on the rating. DSC remained strong over the past three years, averaging a very high 6.0x through 2013. Capital contributions jumped 78% to $5.7 million in 2013 from $3.2 million in 2011. Fitch expects coverage to decline as the utility begins taking delivery of a significant new supply of desalinated brackish ground water, but coverage is unlikely to decline to a level that would pressure the rating. The near-term outlook for financial performance is somewhat uncertain because new district management has only recently commissioned a rate study. The utility's rates appear affordably and competitive by local standards, but the district has experienced some rate controversy, forcing policymakers to delay rate increases and suggesting limited rate flexibility. The utility's rates are affordable at about 0.9% of median household income for 7,500 gallons of water. Still, the utility experienced strong community opposition to a plan to shift to a water budget-based billing structure (tying rates to an estimate of water need based on factors such as family and lot size). The utility has commissioned a new rate study and expects significant rate increases to cover the cost of new groundwater pumping charges and the cost of a new supply of desalinated water. Failure to enact rate increases to cover the new costs could put downward pressure on the ratings. LOW DEBT BURDEN Water enterprise debt levels are currently low at $1,055 per customer and expected to decline slowly with no additional issuance planned over the next five years. Amortization is slow with just 24% of principal repaid in 10 years and 58% repaid in 20. The district's growth-driven 2014-18 capital improvement plan is large at $58 million , yielding annual per customer spending at about 170% of the median for rated utilities. The community's built out population is likely to require major debt-financed supply investments in the years ahead, given very narrow margin between supplies and demand. ADEQUATE DROUGHT SUPPLIES The water utility has an adequate, albeit limited, supply of groundwater that positions it well to provide service in periods like the current drought, but not to accommodate growth or unexpected demand. Growth tends to come with conversion of agricultural water rights as farmland is converted to residential use, which should help satisfy near-term growth pressures. Current water supplies are derived primarily from the Chino Basin aquifer via 23 wells. The aquifer is an adjudicated groundwater supply managed by the Chino Basin Watermaster. The district also purchases water from the Chino Desalter Authority and treated water from the Rubidoux Community Services District . The district's supplies are just adequate for its current customer base with water rights of about 30,500 acre feet per year (including an expansion in desalter capacity that's currently underway) and recent demand at about 27,000 acre feet. The utility also keeps a modest amount of stored carryover water in groundwater basin, allowing for some temporary misalignments between supply and demand. RECOVERING ECONOMY The service area economy is emerging from a deep slump related to the housing downturn with a solid uptick in new home construction. The regional economy is diverse and substantial with significant manufacturing, retail, educational, health and social services employment, as well as an enduring comparative advantage in warehousing and logistics industries due to its location along major highways inland from the ports of Long Beach and Los Angeles . Riverside County's jobless rate remained elevated at 9.6% in November but has declined sharply since peaking at over 15% in 2010. Additional information is available at ' ' In addition to the sources of information identified in Fitch's 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 3, 2013 ); --'U.S. Water and Sewer Revenue Bond Rating Criteria' ( July 31, 2013 ); --'2014 Water and Sewer Medians' ( Dec. 12, 2013 ); --'2014 Outlook: Water and Sewer Sector' ( Dec. 12, 2013 ). Applicable Criteria and Related Research : Revenue-Supported Rating Criteria U.S. Water and Sewer Revenue Bond Rating Criteria 2014 Water and Sewer Medians 2014 Outlook: Water and Sewer Sector Additional Disclosure Solicitation Status ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS . IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE ' WWW.FITCHRATINGS.COM '. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Ratings Primary Analyst: Andrew Ward , +1-415-732-5617 Associate Director Fitch Ratings, Inc. 650 California Street Fourth Floor San Francisco, CA 94108 or Secondary Analyst: Julieta Seebach , +1-512-215-3740 Director or Committee Chairperson: Amy Laskey , +1-212-908-0568 Managing Director or Media Relations: Elizabeth Fogerty , New York , +1 212-908-0526 Source: Fitch Ratings

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