SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' rating to the following Los Angeles County Sanitation Districts Financing Authority, California (authority) debt issued on behalf of District No. 14 (the district):
--Approximately $172.5 million subordinate capital projects revenue bonds 2015 series A.
The bonds are scheduled to sell via negotiation on or about April 1, 2015. Proceeds will refund the district's outstanding series 2005 bonds.
In addition, Fitch affirms the following ratings:
--$167.6 million (pre-refunding) outstanding subordinate series 2005B revenue bonds at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from net revenues of the district's wastewater system (the system) after payment of a small amount of senior lien obligations ($2.65 million outstanding).
KEY RATING DRIVERS
ADEQUATE FINANCIAL PERFORMANCE: The district's financial performance is sound with adequate debt service coverage (DSC) and extremely robust liquidity.
DISCIPLINED RATE SETTING: The district's board has approved a series of large rate increases, averaging 10% annually over the past five years, to provide adequate financial coverage as the district invested heavily to improve and expand treatment capacity. Rates are likely to decline slightly after the current refunding.
STRONG, CENTRALIZED MANAGEMENT: The district is managed by the Los Angeles County Sanitation Districts' centralized staff, which oversees 23 sewer agencies providing services to more than five million Los Angeles County residents, giving the district access to significant financial and operational management expertise.
HIGH DEBT BURDEN: The debt burden is high at $3,838 per customer, but likely to slowly decrease with amortization. The district has no further debt issuance plans and quite manageable capital needs after its recent treatment plant upgrades.
WEAK LOCAL ECONOMY: The district's local economy is relatively large but dominated by a nearby military base. Unemployment is chronically elevated, and median household income (MHI) is somewhat low.
RATING SENSITIVITIES
COVERAGE WEAKNESS: Fitch is likely to downgrade the rating if the district's DSC ratio dips below current levels on a sustained basis or the district's liquidity position falls significantly. The Stable Outlook means Fitch believes such events are unlikely.
CREDIT PROFILE
District 14 provides wastewater treatment services to a relatively sizeable residential, commercial and industrial customer base centered on the city of Lancaster in northern Los Angeles County. The district owns the area's treatment plant and sewer trunk lines, and local governments own the collection system. The district treats effluent to tertiary standards, allowing it to sell the water for reuse irrigating landscapes and crops. Treatment capacity is adequate with recent flows equaling three-quarters of the plant's 18 million gallon per day capacity.
ADEQUATE FINANCIAL PERFORMANCE
Financial performance is healthy, but DSC margins are somewhat thin for the rating category. All-in DSC (excluding rate stabilization fund transfers) has averaged 1.4x over the three years ended June 30, 2014. Fitch believes DSC at its current level is adequate for the rating level because the issuer's revenues are more stable than other systems (i.e. revenues are primarily based on fixed sewer fees per household) and the utility currently has minimal capital needs that would require large amounts of excess cash flows; the district's new treatment plant has pushed the average age of plant to a very low and favorable level of just five years.
With debt service rising due to borrowing for its new treatment plant, the district projects all-in DSC of just 1.35x over the next five years. Fitch expects the utility to outperform this particularly conservative forecast, which assumes no meaningful connection fee revenues, tax revenues below historical collections and quite elevated expense growth. With some outperformance of the forecast, coverage is likely to remain adequate for the rating level.
The district's liquidity position is very strong with $38.1 million, or 1,131 days of operating cash, on hand at the end of fiscal 2014, significantly in excess of 'AAA' medians. Ample and growing reserves also offset concerns about narrow DSC, allowing the utility to absorb unexpected expenses and transitory revenue fluctuations.
GOOD RATE DISCIPLINE
The district raised rates in a disciplined manner to prepare for the increased debt service for the new treatment plant. Rates are quite reasonable in dollar terms at just $41.33 a month for a single family home, but they are somewhat high relative to service area incomes at 1% of MHI. The utility plans to use some of the savings from the current refunding to provide rate relief to customers, lowering rates by about $1 a month.
HIGH DEBT BURDEN
The district's main credit weakness is its very high debt burden related to the recent treatment plant improvements. Debt per customer was $3,838 at the end of fiscal 2014 compared to an 'AA'-category median of $1,934. Debt to net plant assets was also high at 69%, compared to the rating category median of 50%. While debt levels weigh on the rating, the recent capital improvements provide a solid basis for future operations and growth, and the district has implemented adequate rate increases to afford the new debt service. The district has no new money borrowing plans over the next five years, which will allow debt to decline gradually with amortization. About 38% of debt will repaid over the next decade.
WEAK SERVICE AREA ECONOMY
The utility serves a sizeable, but economically weak service area that includes the city of Lancaster (population 159,523) and portions of adjacent Palmdale. The local economy is dominated by nearby Edwards Air Force Base. The unemployment rate of 10.7% in December 2014 has declined from recessionary highs but chronically runs significantly above the national average. MHI is about 82% of the state level and 95% of the national level. The individual poverty rate is high at 21.5%. The service area is largely residential with modest top 10 customer concentration at 8.5%.
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.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 2014);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);
--'2015 Water and Sewer Medians' (December 2014);
--'2015 Outlook: Water and Sewer Sector' (December 2014).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275
2015 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818409
2015 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818410
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981470
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