The Rating Outlook is Stable.
The bonds are secured by a first lien on net water and sewer revenues after payment of operations and maintenance expenses.
KEY RATING DRIVERS
SOLID FINANCIAL PERFORMANCE: Financial performance has remained consistently solid despite a period of economic, cost and supply pressures. Revenue bond debt service coverage (DSC) averaged 2.3x over the three fiscal years ended
DISCIPLINED RATE INCREASE: The district's board has raised rates as needed to maintain healthy financial performance despite variable demand conditions and significant imported water cost increases. Rates remain affordable compared to other regional providers.
MODERATE DEBT BURDEN: The debt burden is low at
RECOVERING SUBURBAN SERVICE AREA: The district provides essential water and sewer services to a large
IMPORT DEPENDENT: The district is dependent on imported water supplies, forcing it to manage sporadic supply curtailments and periods of sharp price escalation. Regional investments in water storage capacity have insulated
FINANCIAL PERFORMANCE: The rating is sensitive to changes in fundamental credit characteristics, particularly changes in financial performance or rate setting behavior. The Stable Outlook means that Fitch does not expect such changes.
PRESSURE FROM STATEWIDE DROUGHT: Pressure on financial margins could occur if water sales fall below assumed levels if severe multi-year water rationing were to be implemented. Sustained decline in financial margins and reserve levels below management's targeted levels could put pressure on the rating.
Western Municipal provides essential water and sewer services to a population of 900,000 residents of a 527-square-mile service area in western
SOLID FINANCIAL PERFORMANCE THROUGH STRESSFUL PERIOD
The district's financial performance recovered to strong levels following a period of difficult drought and recession. Revenue bond DSC rose to 2.5x in fiscal 2013 from 2.0x in 2012. All-in coverage, which includes subordinate debt service payments, averaged a healthy 2.0x over the past three years. Free cash-to-depreciation averaged a solid 81.6% over the period, providing significant funds for investment in the system.
Revenues are reasonably diverse with significant property tax, sewer and fixed water meter fees providing a stable base underlying the district's variable water and connection fee revenues. All-in DSC excluding volatile connection fees averaged a sound 1.5x over the past three years.
The utility's five-year financial forecast shows all-in DSC without connection fees averaging better than 2.0x over the next five years. The forecast appears reasonable, relying primarily on rate increases that are very close to past practices to provide gradually increases in revenues. The district could see revenues underperform the forecast if the current severe California drought continues into 2015, forcing rationing, but margins are sufficient to provide adequate coverage even with significant water conservation.
The district's revenue structure provides a good matching of variable expenses and revenues, particularly in its wholesale business. The district sells imported water to eight wholesale customers (providing about 65% of water revenues) and passes the cost of purchased water from the
The cost-based nature of the wholesale water business provides a high degree of stability to the district's overall financial performance and a close matching of variable revenues and expenses. Retail rates also include surcharges that allow the district to pass along imported water costs, albeit with less precise matching than wholesale charges.
Liquidity has been consistently solid with
SOLID RATE DISCIPLINE
The district's elected board of directors has raised rates as necessary to maintain strong financial performance, passing through large rate increases related to imported water costs in a disciplined and formulaic manner. The utility increased retail water and sewer rates by an average of 8.5% annually over the five years ended 2014. Combined retail water and sewer rates equal an affordable 1.9% of
IMPORT DEPENDENT, ADEQUATE SUPPLIES FOR NOW
The district imports about 90% of its water from the
The regional wholesaler has not imposed mandatory supply reductions for 2014 despite extreme drought conditions and SWP allocations equal to just 5% of contracted amounts because of robust storage in its reservoirs. Western Municipal is likely to face progressively larger supply water curtailments beginning in 2015 if the drought continues.
DEBT TO REMAIN MODERATE
The district's debt burden of
The bank bond rating is associated with the district's 2012A variable rate bonds should they ever be held by the liquidity provider,
RECOVERING SUBURBAN SERVICE AREA
The district provides retail water services to 23,544 customers, retail sewer services to 8,232 and wholesale water to eight water retailers. The district is part of a broad and diverse suburban economy that is recovering from one of the nation's deepest regional housing downturns during the recent recession.
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 informed by information from CreditScope and IHS Global Insights.
--'Revenue-Supported Rating Criteria' (
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (
--'2014 Water and Sewer Medians' (
--'2014 Outlook: Water and Sewer Sector' (
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2014 Water and Sewer Medians
2014 Outlook: Water and Sewer Sector
Source: Fitch Ratings
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