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.
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.
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
MANAGEABLE CAPITAL PLANS: Capital plans are manageable and focus on expansion of
DIVERSE SERVICE AREA: The service area is broad and diverse and is characterized
by high income levels and low unemployment.
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
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
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