Fitch Rates Cucamonga Valley Water District, CA's Revs 'AA'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings assigns an 'AA' rating to the following Cucamonga Valley Water District Financing Authority, California debt:

--Approximately $12 million water revenue bonds series 2014.

The bonds are scheduled to sell via negotiation on or about June 18, 2014. The proceeds will refund the district's 2003 senior lien water revenue bonds, fund ongoing capital improvements and pay costs of issuance.

In addition, Fitch affirms the following rating:

--$36.1 million outstanding water revenue bonds series 2012.

The Rating Outlook is Stable.

SECURITY

The bonds are backed by a subordinate lien on net water revenues of the Cucamonga Valley Water District (the district). The district will have about $142.4 million of senior obligations outstanding after the current refunding; the senior lien is closed.

KEY RATING DRIVERS

STRONG SERVICE AREA: The district is the monopoly provider of essential water services to the affluent suburban community of Rancho Cucamonga in western San Bernardino County.

HEALTHY FINANCIAL PERFORMANCE: Revenue bond debt service coverage (DSC) has averaged a solid 2.0x over the three fiscal years (FY) ended June 30, 2013 and is likely to remain near that level over the next five years. Liquidity is strong and improving with 363 days cash on hand at the end of 2013.

DISCIPLINED RATE SETTING: The district's board of directors has exhibited good rate discipline, raising rates consistently to maintain strong financial performance. The board approved a five-year rate plan in 2010 with 5% annual increases. Automatic adjustments for imported water costs provide a degree of financial stability.

DIVERSE, ADEQUATE WATER SUPPLY: The district has adequate water supply for its built-out population with a reasonably diverse mix of sources, including imported water, local surface water, local ground water and recycled water. It appears well-positioned to withstand near-term drought pressures.

SIGNIFICANT DEBT BURDEN: Debt levels are well above average and expected to remain high. The debt burden is elevated due to the purchase of significant water rights that position the utility's water portfolio well and will have positive impact well beyond amortization of the related bonds. Concerns about the debt burden are offset by strong financial performance.

STRONG MANAGEMENT PRACTICES: The district's debt and financial policies are strong, and board oversight appears quite good with regular financial updates to policymakers and strong policymaker expertise on water issues.

RATING SENSITIVITIES

FINANCIAL PERFORMANCE: The rating is sensitive to shifts in fundamental credit factors, particularly rate-setting behavior and financial performance. The Stable Outlook means that Fitch does not expect any significant changes in these key credit factors.

PRESSURE FROM STATEWIDE DROUGHT: Pressure on financial margins could occur if water sales fall below assumed levels if severe multi-year water rationing were to be implemented. Sustained decline in financial margins and reserve levels below management's targeted levels could put pressure on the rating.

CREDIT PROFILE

The district provides water services to about 186,000 people in and around the city of Rancho Cucamonga. The city is located in the foothills of the San Gabriel Mountains in western San Bernardino County about 41 miles east of downtown Los Angeles.

HEALTHY FINANCES

DSC has recovered to healthy levels following the last recession. Revenue bond DSC (combined senior and subordinate) was a strong 2.2x in 2013, while all-in coverage including non-bonded indebtedness was healthy at 2.0x. The district's revenues vary with economic, weather and supply conditions with coverage dipping to a low of 1.2x in 2009 during the last recession and drought.

Sales are currently performing well but could be reduced by drought-related conservation measures if the current severe California drought continues through next winter's rainy season. The district has not yet imposed mandatory cutbacks on users because of ample availability of stored water for 2014.

The utility has adjusted rates and expenditures as necessary to recover solid performance after periods of weakness and maintains adequate reserves to withstand short-term variability in coverage. The district had $38.4 million of unrestricted cash and investments, or 363 days of operating cash, on hand at the end of 2013. Cash has been increasing at a solid clip in recent years, as the utility moved to comply with a set of solid reserve policies approved by the board of directors in 2012.

SOLID RATE DISCIPLINE

Cucamonga Valley's board has adjusted rates in a timely manner to maintain margins with a five-year rate package adopted in 2010 including rate increases of about 5% a year and an escalator provision that protects against imported water cost increases.

Rates remain affordable compared to national benchmarks with 7,500 gallons of water costing 0.7% of median household income. Rates based on the arid region's much higher actual usage also appear affordable compared to neighboring providers. Recent rate increases have been uncontroversial.

The utility is currently beginning the process of assessing rates and its rate structure for its next five-year rate package. The district expects moderate rate increases in line with recent years and is considering implementing a drought rate structure that would reduce revenue volatility in the face of droughts and add to financial stability.

HIGH DEBT LEVELS

The district's debt burden will be high at a projected $4,021 per customer after the current offering. Debt is expected to decrease slowly over the next five years to $3,486 per customer, given no future borrowing plans. Amortization is somewhat slow with just 31% of debt repaid in 10 years and 74% in 20 years.

Concern about elevated debt levels is largely offset by the utility's solid financial performance and the positive impact that the financed assets are likely to have on the utility over the long term. About half of the utility's debt is related to the acquisition of significant water rights that amortize over the next 22 years, but will provide substantial benefits to the utility over the longer term.

HEALTHY SUPPLY PORTFOLIO

The utility's supply position is stronger than many southern California water suppliers as a result of its proactive acquisition of local water rights and investments in treatment capacity over the years. The district is now able to produce about half of its water from local supplies. Cucamonga has further reduced its exposure to near-term drought pressures through the acquisition of more than a year's supply in banked local groundwater credits.

The utility remains dependent on imported supplies from the Colorado River and the State Water Project (SWP) via the Metropolitan Water District of Southern California (Met Water, rated 'AA+' with a Stable Outlook by Fitch) and the Inland Empire Utilities Agency. Imported water is both more expensive and less reliable than local groundwater supplies. However, Met Water's significant investments in water storage capacity have somewhat reduced concerns about import dependence. Met Water has not imposed mandatory supply reductions for 2014 despite extreme drought conditions and SWP allocations equal just 5% of contracted amounts.

SOLID SERVICE AREA

The district's service area is solid despite weakness in the broader San Bernardino County economy. Rancho Cucamonga makes up 90% of the customer base. Median household income is high at 149% of the national level, while poverty is less than half of the national level.

The service area is primarily suburban and residential, but it also includes significant office parks, shopping centers, and educational institutions, as well as logistics, and manufacturing enterprises. Rancho Cucamonga's unemployment rate trends somewhat lower than the national average and well below state and county levels. The jobless rate was low at 5.4% in April 2014.

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

In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was informed by information from CreditScope and IHS Global Insights.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 3, 2013);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 31, 2013);

--' 2014 Water and Sewer Medians', dated Dec. 12, 2013;

--'2014 Outlook: Water and Sewer Sector', dated Dec. 12, 2013.

Applicable Criteria and Related Research:

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

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

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=833454

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Contacts

Fitch Ratings
Primary Analyst
Andrew Ward, +1-415-732-5617
Director
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Shannon Groff, +1-415-732-5628
Director
or
Committee Chairperson
Jessalynn Moro, +1-212-908-0608
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Andrew Ward, +1-415-732-5617
Director
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Shannon Groff, +1-415-732-5628
Director
or
Committee Chairperson
Jessalynn Moro, +1-212-908-0608
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com