Fitch Rates Castaic Lake Water Agency, CA's Rfdg Revenue Bonds 'AA-'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned the following rating to Castaic Lake Water Agency, CA's (the agency) bonds:

-- $16.9 million refunding revenue bonds series 2014A, rated 'AA-'.

The bonds will be sold via negotiation the week of June 10. Proceeds of the bonds will be used to refund the senior lien 2004A COPs for debt service savings.

In addition, Fitch affirms the following ratings:

-- $53.4 million in outstanding senior lien certificates of participation (COPs) at 'AA' (post-refunding);

-- $218.2 million in outstanding parity lien COPs at 'AA-';

-- $45.9 million of bank notes corresponding to the agency's commercial paper notes at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds and parity COPs are payable solely from a pledge of net revenues of the agency after payment of senior lien debt service costs; the senior lien is closed. Net revenues include facility capacity fees and the agency's share of the county's 1% ad valorem taxes but excluding property taxes levied for payment of State Water Project (SWP) obligations. In addition, amounts on deposit in the rate stabilization fund are pledged to certificate holders.

The bank notes are on parity with the agency's parity lien COPs (subordinate to the senior lien); there currently are no bank notes outstanding.

KEY RATING DRIVERS

SOUND FINANCIAL PERFORMANCE: The agency's financial position is solid with robust liquidity metrics and sound debt service coverage. Sale of excess water capacity over the last two fiscal years provided a modest boost to debt service coverage, and increased charges are projected to yield similar results over the five-year forecast period.

ABOVE-AVERAGE DEBT PROFILE: Leverage ratios are above average. Principal payout is slightly below average, but capital needs appear manageable.

RELATIVELY STABLE REVENUE BASE: Recently adopted three year annual rate hikes and a change in the structure to collect a fixed component that comprises roughly 60% of debt service requirements during the forecast period are considered positive credit factors. Moreover, the agency receives a portion of the county's 1% property tax.

SLOW RETURN OF DEVELOPMENT: While economic indicators are sound, new area development has been modest resulting in lower than previously expected development-related facility capacity fees.

WATER SUPPLIES SUFFICIENT: Water supplies are sufficient to meet member demands over the long term. The agency has ample water reserves in storage to guard against the current drought.

RATING SENSITIVITIES

CONTINUED HEALTHY FINANCIAL METRICS: Maintenance of strong all-in debt service coverage (DSC) and solid liquidity are key credit considerations.

CREDIT PROFILE

Located predominantly in Los Angeles County, approximately 35 miles northwest of downtown Los Angeles, CLWA provides wholesale water service to a population of approximately 287,000 through four retail purveyors. The agency provides around 50% of the region's water supplies (43,281 AF in 2013), with the remainder derived from members' own local sources. The agency's water supplies come mostly from Northern California's San Francisco Bay/Sacramento-San Joaquin River Delta via the SWP. While SWP supplies have been affected by recent litigation, the agency projects that it has sufficient allocations from the SWP, combined with other water resources, to meet demands through 2050.

RELATIVELY STABLE REVENUE BASE

Financial operations of the agency are strong. Revenue sources are diverse, comprised primarily of wholesale water charges, a portion of the county's 1% property tax levy, and facility capacity fees (connection fees). Additional sources that are not expected to be recurring include settlement agreements and sale of water in excess of storage capacity to non-member purveyors (fiscal years 2013 and 2014).

The agency's portion of the 1% property tax revenues comprised an average 44% of the agency's total revenues over the last five fiscal years. Although generally these are considered a very stable revenue source, the state diverted over 65% of them in fiscal years 2005 and 2006. The agency was able to absorb the two-year loss with its ample cash and reserves to maintain DSC and to fund the capital budget. Future diversions by the state are now less likely as these would now require legislative action.

The board adopted rate increases effective for fiscal years 2014 through 2016 and a new water rate structure to include a fixed component for the first time. The fixed charge component is roughly 75% of the total water charges and is projected to generate roughly 60% of annual debt service. The agency is in litigation over the allocation method of the fixed costs with one of the retail purveyors. The agency does not expect any adverse financial impact from this litigation, since the allocations, not the amount of total allocated fixed costs, are the subject of the litigation.

During fiscal years 2013 and 2014, the agency generated an aggregate $11.9 million in non-recurring revenue from sales of water it had acquired in excess of its storage capacity. Although all of the agency storage facilities and reservoirs are currently at capacity (157,920 AF), the agency does not plan to sell excess water given the uncertainty of the current drought.

SOUND FINANCIAL METRICS

For fiscal 2013 all-in debt service coverage was a strong 1.5x, or 1.2x excluding facility capacity fees. MADS coverage for fiscal 2013 is 1.08x including outstanding senior lien debt service obligations. Unaudited results for fiscal 2014 point to similar coverage levels. Liquidity and cash flows for fiscals 2013 and 2014 appear to be healthy, although analysis is limited by the use of governmental fund accounting (as opposed to proprietary fund accounting). The agency reports that approximately $80 million of the $92.4 million in cash and investments recorded in fiscal 2013 is unrestricted.

Projected operating results for fiscal years 2015 through 2019 show all-in DSC to range between a low 1.5x to a high 2.0x (1.0x to 1.3x net of facility capacity fees). These projections assume steady increases in facility capacity fees and the agency's share of the 1% property tax resulting from gradual improvement in area development.

SENIOR LIEN DEBT

After the current offering, the agency will have one remaining series of senior lien bonds (series 1999) outstanding. These bonds were issued as capital appreciation bonds with no maturities until fiscal 2022. Since the current refunding shifts the series 2004 senior lien COPs to the parity lien, beginning in fiscal 2015, the agency will have no debt service associated with this senior lien, until annual $10.4 million debt service payments are made between fiscal years 2022 through 2031.

HIGH DEBT LOAD OFFSET BY MANAGEABLE CAPITAL PLAN

The agency's five-year fiscal 2015 through 2019 capital improvement plan (CIP) totals approximately $99.7 million of which $21 million will be funded with proceeds available from prior issuance and $14.4 million with pay-go. The agency plans to debt fund the remaining $64 million with future bond sales. Currently, the agency plans to return to market with a $34.1 million bond issuance in fiscal 2015 and another estimated $38.5 million in fiscal 2018.

Debt amortization is slow over 10 years with principal payout at 30%, but accelerates significantly when the senior lien bonds begin to mature. Currently, the agency has an elevated debt profile compared to its wholesale peers, with debt per capita at just under $1,200. Debt per capita is projected to rise modestly to roughly $1,260 after issuance of the planned debt.

Additional information is available at 'www.fitchratings.com'.

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 2013);

-- 'Water and Sewer Revenue Bond Rating Guidelines' (July 2013);

-- '2014 Water and Sewer Medians' (December 2013);

-- '2014 Outlook: Water and Sewer Sector' (December 2013).

Applicable Criteria and Related Research:

2014 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2014 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832036

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Gabriela Gutierrez, CPA, +1-512-215-3731
Director
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Teri Wenck, +1-512-215-3742
Associate Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings, Inc.
Primary Analyst
Gabriela Gutierrez, CPA, +1-512-215-3731
Director
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Teri Wenck, +1-512-215-3742
Associate Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com