Fitch Upgrades Yuba City, California, Wastewater System to 'A+'; Outlook Stable

SAN FRANCISCO--(Business Wire)--
In the course of routine surveillance, Fitch Ratings upgrades
$20.7 million in outstanding Yuba City, California wastewater revenue
certificates of participation, series 2000 and 2002 to 'A+' from 'A'.
The Rating Outlook is Stable.

The upgrade to 'A+' from 'A' reflects the wastewater system's (the
system) financial performance which has surpassed projections; lower
than expected leverage; reduced revenue concentration; the adoption of
a rate ordinance with annual increases at the greater of 4.3% or the
statewide CPI, and the renewal of the system's discharge permit. The
'A+' rating incorporates the system's strong financial results, sound
management, and weakened economic conditions. Financial metrics are
marked by a solid cash position and good historical, as well as
projected, debt service coverage. Economic conditions have softened
noticeably in recent months, led by a severe decline in the housing
market.

The wastewater certificates are secured by a senior lien and
pledge of net revenues from the enterprise, supported by a covenant to
set rates and charges sufficient to yield net revenues at or in excess
of 1.2 times (x) maximum annual debt service (MADS). Issuance of
additional bonds requires that historical net revenues equal at least
1.2x MADS.

Yuba City, which is located about 40 miles north of Sacramento
with a current estimated population of about 60,000, has grown rapidly
in recent years due to annexation and new housing development. The
area has a strong agricultural base, including farming and related
industry, and until recently benefitted as a more affordable
alternative to the rapidly growing Sacramento area. With the decline
of the regional housing market, Yuba City's economy is showing signs
of weakening. Unemployment, although predictably higher than the state
average, rose to a very high 13.4% in June 2008 compared to a more
typical 10.5% in June 2007.

The system provides service to approximately 14,000 customers. The
wastewater treatment plant has a current capacity of 10 million
gallons per day (mgd) compared to demand of about 6 mgd. Capacity can
be expanded modularly when development continues; however, system
expansion plans have been postponed until necessary. The city's
projected population at build out is about 140,000. Water and
wastewater service are billed together and totals about $45 for a
typical household, which appears competitive compared to other similar
providers. The customer base is increasingly diverse, with the largest
customer (Sunsweet Growers Inc.) representing about 7.4% of fiscal
2007 revenues.

The system's financial operations are solid with healthy liquidity
levels and strong debt service coverage. Coverage of MADS over the
past three years has averaged 4.1x. This is far in excess of the
original projections of about 1.5x; the difference is primarily a
result of very conservative operating costs estimates. Pro forma MADS
coverage is conservatively projected to decline to 1.5x for fiscal
2009 and 2010 before increasing moderately to 2.0x in fiscal 2012. The
net revenue pledge includes connection fees, projections for which the
city has significantly revised downward. However, if the lower
projected growth does not materialize, the city may need to revise
upward its planned rate increases.

The system's five-year wastewater discharge permit was approved by
the Regional Water Quality Control Board in October 2007 but has been
appealed by an environmental group. If the appeal is upheld, the
system may require additional capital investments in order to improve
the quality of discharge. Notwithstanding the above, the enterprise's
five-year capital program currently totals $6.2 million, primarily to
address major maintenance needs and does not include additional debt
issuance. Current debt per customer is low at about $1,300.

Fitch has issued an exposure draft on July 31 proposing a
recalibration of tax-supported and water/sewer revenue bond ratings
which, if adopted, may result in an upward revision of this rating
(see Fitch research 'Exposure Draft: Reassessment of the Municipal
Ratings Framework').

Fitch's rating definitions and the terms of use of such ratings
are available on the agency's public site, 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 Ratings, San Francisco
Karen Ribble, 415-732-1756
Scott Monroe, 415-732-5618
or
Media Relations:
Cindy Stoller, 212-908-0526, New York

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