News Column

Fitch Affirms Western Municipal Water District, CA's Revs at 'AA'; Outlook Stable

June 6, 2014

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings affirms an 'AA' rating on the following Western Municipal Water District Facilities Authority, CA debt:

--$99.8 million water revenue bonds series 2009B, 2010A and 2010B;

--$43.7 million series 2012A bonds (long-term rating) and associated bank bonds.

The Rating Outlook is Stable.

SECURITY

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 June 30, 2013. Liquidity remained sound with 315 days unrestricted cash and investments on hand at the end of fiscal 2013.

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 $170 per capita and expected to remain quite moderate. Investment in the system has been strong and proactive.

RECOVERING SUBURBAN SERVICE AREA: The district provides essential water and sewer services to a large Riverside County service area that is recovering from a deep economic slump.

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 Southern California from the effects of the current severe California drought thus far, but water deliveries could be reduced next year if the drought continues.

RATING SENSITIVITIES

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.

CREDIT PROFILE

Western Municipal provides essential water and sewer services to a population of 900,000 residents of a 527-square-mile service area in western Riverside County.

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 Metropolitan Water District of Southern California (Met Water, rated 'AA+' with a Stable Outlook by Fitch) directly through to those customers. Rates include an administrative fee for the district's costs.

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 $90.7 million of unrestricted cash and investments, or 315 days of operating expenses, on hand at the end of fiscal 2013. The district also had $23.6 million of restricted connection fee reserves available to use for capital projects.

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 Riverside County's median household income and appear comparable to other local providers of imported water.

IMPORT DEPENDENT, ADEQUATE SUPPLIES FOR NOW

The district imports about 90% of its water from the Colorado River and the California State Water Project (SWP) via the Met Water. Imported water is both more expensive and less reliable than local groundwater supplies, but the Met Water's significant investments in water storage capacity have somewhat reduced concerns about import dependence.

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 $152.9 million is quite low on a per capita basis ($170) and moderate as a percent of net plant assets at about 44%. The district's $82.1 million five-year capital improvement plan will require modest additional borrowing of about $10 million. Amortization is slow with just 62% of debt repaid over 20 years. The district has a $43.7 million, or 28.6% of outstanding debt, as variable rate demand obligations, which are synthetically fixed by a swap agreement and add a manageable degree of complexity to the debt portfolio.

The bank bond rating is associated with the district's 2012A variable rate bonds should they ever be held by the liquidity provider, Union Bank, N.A. Based on a review of the terms governing bank bonds specified in the letter of credit, Fitch believes that the incremental risk associated with bank bonds does not have a material impact on the long-term credit rating.

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. Riverside County's unemployment rate peaked at almost 15% in early 2010. It has been declining sharply since then but remained above the national average at 8.3% in April 2014.

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.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=833456

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

Director

+1-415-732-5617

Fitch Ratings, Inc.

650 California Street, 4th Floor

San Francisco, CA 94108

or

Secondary Analyst

Stephen Walsh

Director

+1-415-732-7573

or

Committee Chairperson

Jessalynn Moro

Managing Director

+1-212-908-0608

or

Media Relations

Elizabeth Fogerty, New York, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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