Fitch Assigns Initial Rating of 'AA-' to Jurupa Comm. Services Dist, CA Water COPs; Outlook Stable
Source: Business Wire
--$9 million certificates of participation (COPs)(2010 water facilities financing), series A (tax exempt) 'AA-';
--$22 million COPs (2010 water facilities financing), series B (federally taxable Build America Bonds -direct payment) 'AA-'.
The bonds are expected to sell via negotiation on Feb. 18. Proceeds from the series A COPs will be used to refund a portion of the district's outstanding COPs, finance improvements to its water system, fund a debt service reserve and pay costs of issuance. Proceeds from the series B COPs will be used to fund improvements to the water system, fund a debt service reserve and pay costs of issuance.
The Rating Outlook is Stable.
RATING RATIONALE:
--Financial performance in terms of debt service and liquidity has been very strong; margins are expected to slightly decline as a result of rising fixed costs.
--Sizeable rate increases have been implemented and approved to support additional debt; despite recent adjustments, the district maintains rate flexibility.
--Exposure to growth-related capital facility fees is a credit concern, given the large portion of the district's revenues provided from this revenue stream.
--Capital needs are manageable though are expected to increase over the long term.
--Debt ratios are favorable although amortization is slow.
--The service area has experienced rapid growth; significant softening has also occurred with the recession with unemployment rates above state and national levels.
KEY RATING DRIVERS:
--The district's strong financial metrics are a key credit driver.
--A rapidly growing customer population could place operational, and consequently, financial pressure on the system.
--Rising capital and operating costs could pressure rate affordability.
SECURITY:
The COPs are payable from net water system revenues after payment of operations and maintenance expenses and from tax revenues or 50% of the property tax revenues paid to the district beginning in fiscal 2011.
CREDIT SUMMARY:
The district provides water service to around 91,000 in eight unincorporated communities of Riverside County. It also wheels (transports) water to the City of Ontario, the City of Norco and the Santa Ana River Water Company. Water supplies are derived primarily from the Chino Basin aquifer via 23 wells. The aquifer is an adjudicated groundwater supply managed by the Chino Basin Watermaster. The district also purchases water from the Chino Desalter Authority and treated water from the Rubidoux Community Services District. Water customer growth averaged a rapid 6.1% annually over the last five years. While growth was a much slower 1.9% from fiscal 2008 to 2009, the district does face some growth pressures. Growth-induced costs are projected to rise at the latter end of the decade for the development of an imported water connection and supporting infrastructure, though the size and timing of the capital needs is dependent on the rate and amount of future growth.
Fitch views the exposure to growth-related capital facility fees as a credit concern, given that the fees have represented 52% of the district's water operating revenues on average over the last five years. Nevertheless, a multi-year rate package was adopted in October of 2007, with rate hikes averaging 19% annually over the 2008 to 2011 calendar year period (based on usage of 10,000 gallons per month). At the same time, base charges were increased by 40% to help stabilize revenues and cover more of the district's fixed costs. The rate adjustments and increases have helped and will continue to help reduce the district's historical reliance on capital facility fees to fund operations. Furthermore, the district is conservatively projecting that capital facility fees will average 7% of operating revenues annually over the next five years. The district also benefits from its share of the county's 1% property tax collections. While the revenues apportioned to the water fund have historically accounted for less than 1% of gross revenues, they are projected to account for 4% of total revenues going forward as the tax revenues will be evenly split between the water and sewer funds.
Debt service coverage in fiscal 2009 was a strong 14.8 times (x) including capital facility fees, and 3.5x excluding capital facility fees. Projected debt service coverage is expected to fall but remain healthy at over 2.3x including capital facility fees and approved rate increases. Given the district's recent rate adjustments and conservative growth projections, senior annual debt service (ADS) is projected to average 1.4x annually over the next five years excluding capital facility fees. The district's five-year capital plan is estimated at $64 million, including this debt issuance, though there is room to defer projects if the growth does not rebound.
Liquidity is strong with unrestricted cash of $26.6 million or 522 days operating cash. Future reserve levels are expected to decline given that 61% of the district's capital projects are anticipated to be cash-funded, though they should remain appropriate for the rating category.
The regional economy is diversified among manufacturing, retail, educational and health and social services. However, economic conditions currently are weak as evidenced by high county unemployment rates; the December 2009 county unemployment rate stood at 14.3%, well above state (12.1%) and national (9.7%) levels. Wealth levels are below the state, although they remain above the U.S. average.
Considerations for Taxable/Build America Bonds Investors
The following sector credit profile is provided as background for investors new to the municipal market.
Water and Sewer Utility Revenue Bonds:
Municipal water and sewer utilities in the U.S. are enduring natural monopolies that typically have autonomous rate setting ability and provide highly essential services. The bonds are secured by a pledge of net revenues generated by the water and/or sewer system; and typically include structural legal protections such as rate covenants, debt service reserve requirements, and anti-dilution tests. As such, the sector exhibits extremely strong credit characteristics with minimal defaults. Reflective of this strong performance, the average water and sewer revenue bond rating is 'A+' with 53% at or above 'AA-' and approximately 6% rated 'BBB+' or below. Those with low investment-grade or below-investment-grade ratings generally have substantial capital programs, a high degree of leverage or weak financial flexibility as reflected in low cash levels, narrow debt service coverage and/or limited rate-raising flexibility.
Applicable criteria available on Fitch's website at www.fitchratings.com:
--'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
Julie Seebach, 512-215-3740, Austin
Karen Ribble, 415-732-5611, San Francisco
or
Media Relations:
Cindy Stoller, 212-908-0526, New York
Email: cindy.stoller@fitchratings.com
