--Issuer Default Rating at 'BB-'.
The Rating Outlook is Stable.
The bonds are secured by a security interest in pledged collateral, which consists of all tangible and intangible assets owned by Alco.
KEY RATING DRIVERS
FINANCIALS REMAIN NARROW BUT ADEQUATE: Alco's ratings reflect the utility's adequate but relatively weak financial metrics, including very low liquidity levels. A rate base increase in 2011 improved Alco's financial profile from prior levels, although ongoing margins are expected to be relatively modest.
FAVORABLE REGULATORY ENVIRONMENT: The
LIMITED SERVICE AREA AND MANAGEMENT: The customer base is limited and includes a narrow economic profile and very high unemployment. Reflective of the size of operations, organizational leadership is concentrated, although the executive team is well qualified.
CAPITAL STRUCTURE TO CONTINUE: Capital needs are manageable, which should help to improve Alco's elevated debt to equity mix over time.
LONG-TERM SUPPLY ADEQUACY: The utility provides an essential service and water supplies are sufficient to meet long-term demands. Drought conditions affecting the state have limited impact to Alco's operations.
USAGE DECLINES: Declines in sales volume would erode financial results and make it difficult to achieve Alco's approved return on equity (ROE) absent additional rate adjustments. Alternatively, rate base offsets to counter lower sales volumes would push already high user charges even higher.
CAPITAL STRUCTURE: Improvement in Alco's capital structure would alleviate leverage concerns.
REGULATORY FRAMEWORK: Unfavorable changes in
ADEQUATE BUT WEAK FINANCIAL RESULTS
Operating revenues improved 4% in calendar 2013 on higher sales volumes. However, improvement to Alco's income statement performance for the year was offset by a similar percentage increase in operating expenses - driven by higher production costs, repairs on a well, and an increase in income tax expenses - as well as higher debt service costs. For 2013, EBITDA covered interest by 2.3x (up from 1.7x in 2012) but EBITDA only covered total debt service by 1.5x (down from 1.8x).
Along with the relatively neutral operating results, cash flows were similarly unchanged in 2013 from the year prior. Cash flows from operations were down a total of
No new financial projections are available, but forecast estimates prepared last year and that extend through 2017 reportedly remain valid. These figures point to relatively similarly EBITDA coverage of interest of 1.9x-2.2x assuming certain inflationary and rate base offsets in future years, flat sales, and limited growth in operating expenses.
DEBT PROFILE REMAINS ELEVATED
For 2013 Alco's debt relative to equity improved marginally to 74% from 75% in 2012 as a result of amortization of existing debt and lack of new borrowings. Debt-to-EBITDA saw similar movement to 5.3x from 5.7x in 2012 given the neutral financial performance during the year. Ongoing incremental improvement in the system's debt profile is expected over the near term as a result of limited planned borrowing and continued amortization of existing obligations. Nevertheless, the system's elevated debt profile continues to be a major credit factor.
MANAGEABLE CAPITAL BUT PAY-GO TO LIMIT LIQUIDITY IMPROVEMENT
Alco's current capital improvement program (CIP) for 2014-2017 totals
STABLE REGULATORY ENVIRONMENT
Alco is regulated by the CPUC but regulations are fairly well defined and Alco has received timely rate relief. However, as a result of Alco's 2011 rate case, residential charges, which were already relatively high, have risen to a very high 1.4% of median household income based on 1,400 cubic feet per month. While Fitch expects the CPUC will allow future adjustments to cover necessary operating and capital expenditures and to generate a continued ROE commensurate with other similarly-sized private water utilities in the state (currently in the 10% range), the system's level of charges poses some concern.
LIMITED SERVICE TERRITORY AND MANAGEMENT
Alco is a private retail water company in
Given the scope of operations, the number of company personnel is limited, including the executive team. Largely offsetting the concern related to limited personnel is the sound experience and qualifications associated with Alco's executive management team.
In addition to the sources of information identified in the Corporate Rating Methodology and Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology' (
--'Revenue-Supported Rating Criteria' (
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
Source: Fitch Ratings
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