TEXT-Fitch rates Orange County Water District, Calif. refunding revs
Feb 7 - Fitch Ratings assigns its 'AAA' rating to the following bonds issued by Orange County Water District, CA (the district): --$53.6 million revenue refunding bonds, series 2013A. Proceeds of the series 2013A bonds will refund all outstanding certificates of participation (COPs), series 2003B. The 2013A bonds will not have a debt service reserve fund. Savings provided by the refunding will primarily be realized in 2026-2034, as the amortization is longer dated. The bonds are expected to sell via negotiation on or around Feb. 20, 2013. In addition, Fitch affirms the following ratings: --Approximately $300 million revenue COPs at 'AAA'. The Rating Outlook is Stable. SECURITY The bonds are secured by revenues of the district, net of all district operations and maintenance (O&M) costs but excluding the basin equity assessment and water purchase costs. SENSITIVITY/RATING DRIVERS STRONG FINANCIAL PROFILE: The district's financial performance is exemplary, marked by strong financial policies, limited expenditures, and a history of increasing rates in line with operating and capital costs. SUBSTANTIAL RATE FLEXIBILITY: The district maintains substantial rate flexibility relative to competing supplies from the Metropolitan Water District of Southern California (MWD; GO and water revenue bonds rated 'AA+' by Fitch). STABLE REVENUES: District revenues are derived primarily from annual assessments on groundwater users and property taxes, both of which have proven stable over time. MANAGEABLE CAPITAL PLANS: Capital plans are manageable and focus on expansion of capacity. DIVERSE SERVICE AREA: The service area is broad and diverse and is characterized by high income levels and low unemployment. CREDIT PROFILE The district is located in the northern half of Orange County, CA (implied GO rating of 'AA+' by Fitch), encompassing approximately 350 square miles and an estimated 2.4 million residents. Created by the state legislature in 1933, the district operates under the direction of an elected and appointed 10-member board of directors. SUBSTANTIAL RATE FLEXIBILITY The district's primary role is management of the Orange County Groundwater Basin (the basin), which is a primary drinking water source for numerous water purveyors in Orange County. The basin's groundwater supplies 19 municipal and 110 private groundwater producers that pump and deliver water to their customers and pay replenishment assessments (RAs) and additional replenishment assessments (ARAs) to the district based on groundwater extracted from the basin. The district maintains substantial rate flexibility based on its limited yet key role in regulating, protecting, and resupplying basin groundwater. Competition is mitigated by the scarcity of alternative water sources and relatively inexpensive price of groundwater supplies compared to imported MWD water. Currently, MWD water is around $847 per acre-foot (af) for local purveyors, while the cost of district basin water (not including utility costs) is about $266 per af. Assessments are expected to increase moderately at an average of 6% annually through fiscal 2017, thus maintaining rate flexibility. Groundwater assessment delinquency rates are very low. STRONG FINANCIAL PROFILE District financial metrics are healthy. Approximately 67% of revenues are derived from the assessments and 18% from property taxes, which have been quite stable. Annual debt service (ADS) coverage has consistently exceeded 2.0 times (x) on a senior lien basis and a minimum of 1.8x for all debt obligations. Fitch calculated coverage fell below these levels in fiscal 2012 to 1.7x on a senior basis and just 1.1x on an all-in basis, primarily due to the purchase of a large quantity of available MWD low-cost replenishment water (versus untreated full service MWD water). As a result, discretionary purchased water costs, which are treated as an O&M expense for Fitch coverage calculations, nearly doubled for the year, rising to $29 million, well above the prior five-year average of $11 million. Less these costs, as per the indenture, all-in coverage for fiscal 2012 was 2.3x. The basin is primarily recharged with water from the Santa Ana River watershed, but the district also purchases water from MWD when available for replenishment purposes. The district's practice is to build up reserves and purchase the replenishment water when available. Projections show a return to historical coverage levels beginning in fiscal 2013 and through at least fiscal 2017. Liquidity is substantial as a result of the district's conservative fiscal management and prudent reserve policies. After several years of cash and working capital in excess of 880 days, cash dipped in fiscal 2012 to a still very high 680 days due to the purchase of MWD replenishment water. Cash levels are expected to increase to historical norms going forward, only dipping in years in which MWD water is purchased. The district prudently maintains its board-approved policies to sustain reserves for various purposes. These consist of a replacement and repair reserve (fiscal 2012 year-end balance at $58 million), an operating budget reserve ($16 million), a toxic cleanup reserve ($4 million), a general contingency reserve ($3 million), and a water fund for purchase of replenishment water ($22 million). MANAGEABLE CAPITAL NEEDS Future capital needs are manageable and generally serve to expand the district's ability to provide additional supplies, enhancing its revenue base. The five-year CIP through fiscal 2017 totals $246 million and focuses on both expansion and rehabilitation. Capital concerns are minimal and relate primarily to continued protection of the basin from groundwater contamination, which the district aggressively pursues. Recent capital needs have focused on the district's Groundwater Replenishment System (GWRS), a $482 million project completed in January 2008. GWRS expanded the recharge capacity of the basin by 72,000 acre-feet per year (af/yr), allowing for more groundwater pumping from the basin. The district has begun construction on expansion of the GWRS by 31,000 af/yr, with completion expected in early 2015. Costs related to the expansion total $142 million and will be funded with a low cost state loan. Despite the costs, the incremental increases to assessments to fund the GWRS project are relatively minor and are not expected to affect the district's cost competitiveness. Basin production was more than 282,000 acre-feet of water in fiscal 2012 and is expected to increase each of the next several years to about 350,000 af by 2016 due to the GWRS expansion. DIVERSE AFFLUENT SERVICE AREA The county benefits from a large, diverse, and wealthy economic base as well as its proximity to Los Angeles, Riverside, and San Diego. Unemployment rates have historically been lower than the region, state, and nation and continue to be low at 7% in November 2012. Wealth indicators, as measured by median household income, are high at 124% and 144% of the state and nation, respectively. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope. Applicable Criteria and Related Research: --'Revenue-Supported Rating Criteria' (June 12, 2012); --'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 3, 2012); --'2013 Water and Sewer Medians' (Dec. 5, 2012); --'2013 Sector Outlook: Water and Sewer' (Dec. 5, 2012). Applicable Criteria and Related Research: Revenue-Supported Rating Criteria U.S. Water and Sewer Revenue Bond Rating Criteria 2013 Water and Sewer Medians 2013 Outlook: Water and Sewer Sector
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