TEXT-Fitch Aafirms Yuba City, CA water rev COPs at 'AA-'; outlook stable

Wed Jan 30, 2013 9:14am EST

Jan 30 - Fitch Ratings affirms the following ratings of Yuba City, CA (the city):

--$22.2 million water revenue certificates of participation (COPs), series 2005.

The Rating Outlook is Stable.

SECURITY

The COPs are secured by a first lien on the net revenues of the water system.

SENSITIVITY/RATING DRIVERS

ADEQUATE FINANCIAL PERFORMANCE: Financial performance is adequate, with coverage at median levels and inconsistent liquidity levels which are expected to stabilize.

HIGH DEBT: Debt ratios increased with a recent state loan, and amortization is slow. Capital plans appear manageable.

PLANNED RATE INCREASES: System user charges are low, and a series of rate increases recently approved by the city council for the next five years is not expected to materially affect affordability.

INCREASED TREATMENT CAPACITY: Upon completion of a fish screens project currently underway, treatment capacity will be increased by 20%. Water supply remains sufficient through build out.

STABLE, CONCENTRATED SERVICE AREA: The system serves a relatively stable customer base that is somewhat concentrated, with the largest customer representing 8% of operating revenues.

CREDIT PROFILE

Yuba City, located 40 miles north of Sacramento in California's central valley, is the seat of Sutter County. The city, with a population of about 65,000, is a largely agricultural economy with the largest employers consisting of fruit processors, government, medical services, and retail outlets.

ADEQUATE FINANCIAL PERFORMANCE

Debt service coverage is adequate at 1.5x in fiscal 2012 and 1.6x in fiscal 2011 (after transfers). The system makes annual transfers of about $1.7 million to the general fund for cost of service including billing and collections. The city's forecast shows coverage remaining at least at these levels through fiscal 2016 given recently implemented rate increases. Fitch believes the forecast is reasonable given the size of planned rate hikes and projection of operating costs.

Liquidity has been inconsistent due to timing of reimbursements from loan agreements with the state. In addition, the city had spent down reserves to construct improvements related to conversion from groundwater to surface water. Cash at year end fiscal 2010 was zero but increased to $1.3 million at year-end fiscal 2011. Cash increased sharply at year-end fiscal 2012 to $14.7 million (equal to over 1,000 days cash), primarily the result of the receipt of loan agreement reimbursements. Fitch expects cash levels will decline somewhat from this level before stabilizing due to lack of additional major capital spending plans.

PLANNED RATE INCREASES

Fitch notes positively that the city approved a five-year rate package with increases for fiscals 2012 through 2016. The base rate increase ranges from 2.8% to 5.9% per year and the volumetric increase ranges from 2.8% to 11.5%. The package was in response to a 2011 water rate study which found that current water rates were insufficient to fund ongoing expenses and the additional debt service for a $15 million state loan for the surface water facility upgrade and expansion, as well as additional capital needs over the next five years.

GOOD CAPACITY

The system obtains its surface water supply from the Feather River under four water supply contracts. Its primary permits from the State Water Resources Control Board allow it to obtain up to 15,500 acre feet (AF) per year. The city's base summer water supply is provided through a contract with the North Yuba Water District (NYWD), which provides up to 4,500 AF of water to the city. Additionally, the city has a water supply contract for State Water Project water with the California Department of Water Resources (DWR) that entitles the city to divert up to 9,600 AF per year. However, the average allocation is about 60% of the allotment. Both the NYWD and DWR contracts expire in 2035. The city also has access to 2.9 million gallons per day (mgd) from a backup groundwater well. Water supply is projected to be adequate for full buildout.

The city's water treatment plant has a design capacity of 36 mgd and storage capacity of 20.6 million gallons. The current permitted capacity of 30 mgd will be increased to 36 mgd once the intake structure and fish screens are completed in February 2014. The current maximum demand is nearly 27 mgd.

The city must install fish screens on its Feather River Intake Structure in order to mitigate the adverse impact on the spring-run and fall-run Chinook salmon and Steelhead trout. The project is partially funded through a $900K federal grant and $500K state grant, with the balance of approximately $3.6 million funded through paygo.

ELEVATED DEBT LEVELS; MANAGEABLE NEEDS

Debt ratios increased to high levels in 2012 with the $15 million state loan for the surface water facility. At $2,555 per capita, debt is much higher than the prior year level of $1,773 and higher than Fitch medians at the rating level. The system's debt is expected to decrease gradually over the next five years, as no additional borrowing is planned. Amortization of debt is slow with only 60% of principal repaid within 20 years. The five-year capital improvement plan totaling $20 million is primarily for repair and replacement projects and is expected to be funded with paygo.

STABLE, SOMEWHAT CONCENTRATED CUSTOMER BASE

Yuba City provides water service to approximately 18,077 connections, of which about 80% are residential. The largest customer of the system is Sunsweet Growers, Inc., representing a somewhat concentrated 8% of operating revenues. The other nine largest customers represent another 8%. Population growth has averaged about 1.8% over the last five years.

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