The bonds are scheduled to sell via negotiation on or about
In addition, Fitch affirms the following rating:
The Rating Outlook is Stable.
The bonds are backed by a subordinate lien on net water revenues of the
KEY RATING DRIVERS
STRONG SERVICE AREA: The district is the monopoly provider of essential water services to the affluent suburban community of
HEALTHY FINANCIAL PERFORMANCE: Revenue bond debt service coverage (DSC) has averaged a solid 2.0x over the three fiscal years (FY) ended
DISCIPLINED RATE SETTING: The district's board of directors has exhibited good rate discipline, raising rates consistently to maintain strong financial performance. The board approved a five-year rate plan in 2010 with 5% annual increases. Automatic adjustments for imported water costs provide a degree of financial stability.
DIVERSE, ADEQUATE WATER SUPPLY: The district has adequate water supply for its built-out population with a reasonably diverse mix of sources, including imported water, local surface water, local ground water and recycled water. It appears well-positioned to withstand near-term drought pressures.
SIGNIFICANT DEBT BURDEN: Debt levels are well above average and expected to remain high. The debt burden is elevated due to the purchase of significant water rights that position the utility's water portfolio well and will have positive impact well beyond amortization of the related bonds. Concerns about the debt burden are offset by strong financial performance.
STRONG MANAGEMENT PRACTICES: The district's debt and financial policies are strong, and board oversight appears quite good with regular financial updates to policymakers and strong policymaker expertise on water issues.
FINANCIAL PERFORMANCE: The rating is sensitive to shifts in fundamental credit factors, particularly rate-setting behavior and financial performance. The Stable Outlook means that Fitch does not expect any significant changes in these key credit factors.
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.
The district provides water services to about 186,000 people in and around the city of
DSC has recovered to healthy levels following the last recession. Revenue bond DSC (combined senior and subordinate) was a strong 2.2x in 2013, while all-in coverage including non-bonded indebtedness was healthy at 2.0x. The district's revenues vary with economic, weather and supply conditions with coverage dipping to a low of 1.2x in 2009 during the last recession and drought.
Sales are currently performing well but could be reduced by drought-related conservation measures if the current severe California drought continues through next winter's rainy season. The district has not yet imposed mandatory cutbacks on users because of ample availability of stored water for 2014.
The utility has adjusted rates and expenditures as necessary to recover solid performance after periods of weakness and maintains adequate reserves to withstand short-term variability in coverage. The district had
SOLID RATE DISCIPLINE
Cucamonga Valley's board has adjusted rates in a timely manner to maintain margins with a five-year rate package adopted in 2010 including rate increases of about 5% a year and an escalator provision that protects against imported water cost increases.
Rates remain affordable compared to national benchmarks with 7,500 gallons of water costing 0.7% of median household income. Rates based on the arid region's much higher actual usage also appear affordable compared to neighboring providers. Recent rate increases have been uncontroversial.
The utility is currently beginning the process of assessing rates and its rate structure for its next five-year rate package. The district expects moderate rate increases in line with recent years and is considering implementing a drought rate structure that would reduce revenue volatility in the face of droughts and add to financial stability.
HIGH DEBT LEVELS
The district's debt burden will be high at a projected
Concern about elevated debt levels is largely offset by the utility's solid financial performance and the positive impact that the financed assets are likely to have on the utility over the long term. About half of the utility's debt is related to the acquisition of significant water rights that amortize over the next 22 years, but will provide substantial benefits to the utility over the longer term.
HEALTHY SUPPLY PORTFOLIO
The utility's supply position is stronger than many southern California water suppliers as a result of its proactive acquisition of local water rights and investments in treatment capacity over the years. The district is now able to produce about half of its water from local supplies. Cucamonga has further reduced its exposure to near-term drought pressures through the acquisition of more than a year's supply in banked local groundwater credits.
The utility remains dependent on imported supplies from the
SOLID SERVICE AREA
The district's service area is solid despite weakness in the broader
The service area is primarily suburban and residential, but it also includes significant office parks, shopping centers, and educational institutions, as well as logistics, and manufacturing enterprises.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the 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', dated
--'2014 Outlook: Water and Sewer Sector', dated
2014 Outlook: Water and Sewer Sector
U.S. Water and Sewer Revenue Bond Rating Criteria
2014 Water and Sewer Medians
Revenue-Supported Rating Criteria
Source: Fitch Ratings
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