Fitch Rates Irvine Ranch Water District, California COPs 'AA+'
Source: Business Wire
--$99.8 million certificates of participation (COPs), refunding series 2010, rated 'AA+';
The 2010A COPs are scheduled to sell via negotiation the week of Feb. 1, 2010. Proceeds from the 2010 COPs will refund all of the district's outstanding COPs, series 2008 and 1986, both of which are currently outstanding in the variable rate mode. The series 2010 COPs will not have a debt service reserve fund.
The Rating Outlook is Stable.
RATING RATIONALE:
--Financial performance is very strong, characterized by high all-in debt service coverage and sizable liquidity balances.
--Long-range capital planning activities are exceptional.
--Utility rates are relatively low, limiting pressure on the rate base.
--The service area is affluent, but economic activity has declined dramatically in the current recession.
--The district continues to develop new water sources to counter uncertainty regarding the ongoing reliability and high cost of imported water supplies.
KEY RATING DRIVERS:
--Continued progress toward the development of new water supplies, given the overall regional concerns regarding long-term water supply and the rapid cost escalation of imported water.
--Preservation of historical financial metrics as the service area experiences slower growth.
SECURITY:
The bonds are payable from net system revenues after payment of operations and maintenance expenses. Certain ad valorem revenues are excluded from the revenue pledge since they are restricted for the payment of debt service related to the district's general obligation bonds.
CREDIT SUMMARY:
The Irvine Ranch Water District provides retail water and wastewater services to an estimated 330,000 people within the city of Irvine (the city) and portions of five other cities and unincorporated areas in Orange County. Water supplies are derived from imported surface water purchased from the Metropolitan Water District (MWD; revenue bonds rated 'AA+' by Fitch); local groundwater, managed by the Orange County Water District (OCWD; COPs rated 'AAA'); and recycled sources from the district's wastewater treatment facilities. Purchases from the MWD provided about 31% of the district's water supply in fiscal 2009. MWD has imposed mandatory water rationing restrictions on its members due to low water supply. The district has been able to supplement its supply from other sources and, although voluntary conservation efforts are in place, has not had to force mandatory cutbacks on its customers. Groundwater supply provided 46% of water supply in 2009. The remaining water was provided by the district's recycling plants that provide wastewater treatment services to around 71% of the district's wastewater flows. The remaining wastewater is treated by the Orange County Sanitation District (OCSD; COPs rated 'AA'). The district is in the process of expanding its wastewater treatment facilities in order to provide additional recycled water supply, as well as control costs on its wastewater treatment services.
IRWD's financial performance has been strong and consistent. Fitch's analysis focuses on all-in debt service coverage, which includes the consideration of around $400 million in outstanding general obligation (GO) bonds. Although the GO bonds are secured by ad valorem taxes assessed by the district, the district uses its net revenues to support a portion of the GO debt. In addition, the district has pledged its net revenues to reimbursement agreements with various banks to secure the district's position in relation to liquidity facilities provided by those banks to support the GO debt, outstanding in the variable rate mode. All-in debt service coverage has been over 2.0 times (x) in the past three years and after a projected decline in fiscal 2010 to 1.7x, is projected to return to levels above 2.0x within two years. Modest inflationary rate adjustments are expected but the district's rates are low compared to the service area wealth levels and other regional providers. The financial projections include the expected issuance of $260 million in additional GO bonds. No additional COPs are expected.
The five-year capital improvement plan has an estimated cost of $494 million and is expected to be funded approximately 50% from ongoing revenues. The district has a substantial amount of variable rate debt outstanding - 80% of its overall debt portfolio. The issuance of the series 2010 COPs will reduce this amount from 100% of the portfolio. A portion of the debt is synthetically fixed through the use of $130 million in LIBOR swaps.
The district uses its significant cash reserves to balance interest rate risk. In addition to its operating reserves, the district has a sizable replacement fund. The balance in the fund was $138.9 million as of Dec. 31, 2009. Although earmarked for capital, this fund acts as a rate stabilization fund and can be used to pay operating expenditures. The replacement fund provided substantial liquidity when included with the district's operating reserves, with 839 days cash on hand at the end of fiscal 2009.
The district's service area consists of 178 square miles in central Orange County (approximately 22% of the county). The service area is characterized by high wealth and low unemployment levels and is close to reaching build-out. While assessed value in the district has not declined, growth has slowed dramatically and the county is experiencing a significant decline in economic activity as evidenced by a sizable drop in sales tax revenue. International business, technology, and research, anchored by the University of California, Irvine, along with mortgage finance and retail provide the basis for the local economy.
These rating actions reflect the application of Fitch's current criteria which are available at www.fitchratings.com and specifically include the following reports:
--'Revenue-Supported Rating Criteria' (Dec. 29, 2009);
--'Water and Sewer Revenue Bond Rating Guidelines' (Aug. 6, 2008).
Additional information is available at 'www.fitchratings.com'.
Contact:
Fitch Ratings, San Francisco
Kathy Masterson, +1-415-732-5622
Amy Doppelt, +1-415-732-5612
or
Cindy Stoller, +1-212-908-0526
(Media Relations, New York)
cindy.stoller@fitchratings.com
