The bonds are expected to sell via negotiation the week of
In addition, Fitch downgrades the following ratings on outstanding obligations:
--Implied long-term subordinate lien rating to 'AA-' from 'AA'.
Fitch also affirms the following district rating:
The Rating Outlook is revised to Stable from Negative.
The district bonds are senior lien obligations payable from net revenues of the district's water system (the system). The authority bonds are senior obligations payable from rental payments made by the district to the authority from net system revenues. The water revenue notes, series A and B, are mezzanine obligations payable from net system revenues on a basis subordinate to the senior debt. The CP notes are subordinate lien obligations payable from net system revenues on a basis subordinate to the senior and mezzanine debt.
KEY RATING DRIVERS
DOWNGRADE DUE TO LOWER OPERATIONS: The downgrade and revision in Outlook to Stable from Negative reflects a stabilization of debt service coverage (DSC) at a lower level from prior highs and one that is more consistent with a 'AA' senior lien/'AA-' subordinate lien rating given all other credit factors.
SIGNIFICANT LIQUIDITY: DSC concerns are partially mitigated by the district's consistently high cash levels with reserves equal to over two years operations, or approximately double the average for the rating category.
AMPLE SUPPLY: District supplies are sufficient to meet user demands with only a moderate request for voluntary cutbacks of customers during the current drought cycle. The district's diverse supply portfolio is also capable of satisfying customer demands through build out, which is estimated to occur in 2050.
STABLE CUSTOMER BASE: The district provides water to a full composition of residential, municipal, and industrial customers in a stable growth environment.
ELEVATED DEBT; MANAGEABLE NEEDS: Capital needs are manageable and amortization is fairly rapid, which should allow the district's debt profile to come more in line with median levels by the end of the forecast period.
SHORT-TERM RATING: The 'F1+' rating on the district's extendable CP program reflects anticipated market access of the district and corresponds to the district's 'AA-' implied long-term subordinate lien credit rating.
IMPROVING OPERATING MARGINS: Actual DSC results or relatively near-term prospects of results that are more consistent with historical DSC would be viewed favorably.
OVER RELIANCE ON CONNECTION FEES: The district's DSC levels net of connection fee revenues over the forecast period range from just above 1.0x to under 1.5x, well below average for the rating level. Failure by the district to generate at least 1.0x DSC from recurring revenues would likely pressure the rating even with the prospects of likely sizeable DSC margins subsequent to the forecast period.
The district provides both retail and wholesale water service to about 500,000 residents in central and northern
ADEQUATE COVERAGE/STRONG LIQUIDITY
Financial performance has historically been strong as a result of significant planning efforts, comprehensive policies regarding reserve levels, and consistent annual adjustments to rates necessary to support operations. DSC has declined more recently due to lower sales resulting from several years of drought followed by a cool, wet weather year, conservation efforts, and the economic downturn. For fiscal 2012 total DSC was just 1.4x compared to the prior three-year average of 2.1x.
Fiscal 2013 total DSC remained 1.4x on a 3.5% rate hike and uptick in sales volume that was offset by rising operating expenses. Total DSC is expected to remain at this lower level (in the 1.3x-1.5x range) through most of the fiscal 2014-2018 financial forecast. The lower DSC is driven predominantly by the expectation of a drop in sales to just 87,000 acre-feet (af) in fiscal 2015 related to the current drought and calls for conservation coupled with only moderate annual sales increases through fiscal 2020 when total sales are expected to reach 115,000 af and approximate pre-recession highs.
This lower DSC is more consistent with the 'AA' senior/'AA-' subordinate lien level. Despite the lower DSC, cash flows are expected to be sufficient to allow the district to meet the vast majority of its capital needs through pay-go sources and preserve very strong reserve levels. For fiscal 2013 the district maintained over 730 days cash based on unrestricted resources as well as board-restricted reserves consisting mostly of the district's
MANAGEABLE CAPITAL NEEDS
Ongoing capital needs are manageable given the recent completion of major water supply projects, including the expansion of the district's
Capital costs for the 10-year fiscal 2015-2024 period total
ELEVATED DEBT PROFILE TO IMPROVE
The planned debt to equity funding of the CIP is favorable, although prior issuances have led to elevated existing debt ratios. Currently, outstanding debt per capita of
This rapid principal amortization of existing debt and lack of significant borrowing plans in the future will allow debt ratios to fall dramatically in the coming years. Currently elevated debt carrying charges should also level off in fiscal 2020 and then fall significantly beginning in fiscal 2025. As debt service costs drop, even more surplus cash would be available for capital and should preserve and likely enhance district cash reserves and operating margins. Greater certainty of this improving financial profile could lead to positive rating action in the future.
STABLE SUPPLY AND CUSTOMER BASE
The customer base is sufficiently diverse, with treated water customers consistently accounting for about 62% of total operating revenues and untreated (i.e. wholesale deliveries) accounting for about 33%. Untreated water is about evenly split between municipal and industrial customers. This includes the cities of
The district benefits from its location in the eastern portion of the greater
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
--'Revenue-Supported Rating Criteria (
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (
--'2014 Water and Sewer Medians' (
--'2014 Outlook: Water and Sewer Sector' (
2014 Water and Sewer Medians
2014 Outlook: Water and Sewer Sector
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
Source: Fitch Ratings
Most Popular Stories
- Homeowners More Satisfied With Mortgage Servicers
- Discounts Help U.S. Auto Sales Sizzle in July
- Russia, Ukraine Now Face Off Over Football Clubs
- Colorado Issuing Immigrant Driver's Licenses
- Recruiting and Keeping the Perfect Employee
- MassMutual Teams Up With ALPFA
- Chrysler U.S. Sales in July Hit 9-Year High
- Fiat Looks Abroad After Chrysler Merger Vote
- Dow Wipes Out Gains for the Year: What Happens Now?
- House Shelves Immigration Bill, Goes on Vacation