AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed the rating on the following certificates of participation (COP) issued by Indian Wells Valley Water District, CA (the district) at 'AA-':
--$18.2 million in outstanding water revenue COPs series 2009.
The Rating Outlook is Stable.
SECURITY
The COPs are secured by net water system (the system) revenues, including one-time connection fees.
KEY RATING DRIVERS
SOLID FINANCIAL PROFILE: The system's financial performance is exhibited by strong debt service coverage (DSC) and robust liquidity levels.
RATE STRUCTURE; DROUGHT ACTIONS: The district's recently revised rates capture about 87% of service revenues in the fixed component of the total bill, thereby increasing financial stability. However, the district is in the highest tier of the state water conservation mandate requiring a significant 36% overall water reduction.
DEBT LOAD TO INCREASE: While debt ratios have improved in the last few years, additional borrowing plans to finance a portion of the capital improvement plan are expected to bring debt ratios back up to levels above the 'AA' category medians.
ADEQUATE SUPPLY: Water supplies, which are solely derived from groundwater sources, have been stressed with increased pumping during the drought. Current estimates indicate that this supply is adequate for the next few decades and development of additional water sources is expected to bolster longer-term needs.
STABLE ECONOMIC PROFILE: Although stable, the district's economic profile is somewhat limited, concentrated around defense-related research, development and testing. The district's unemployment rate is close to the national average and wealth levels slightly higher than the national average.
RATING SENSITIVITIES
MAINTENANCE OF SOUND FINANCIAL RESULTS: Maintenance of sound debt service coverage and liquidity levels will be important to maintaining the current rating given near term leveraging plans and revenue vulnerability due to state mandated water use reductions.
DROUGHT PRESSURES: While reductions in consumption levels appear manageable over the near-term given the high fixed component of water rates, reductions in expenditures and/or additional rate increases may be necessary to maintain current debt service coverage margins and thereby maintain rating stability.
CREDIT PROFILE
The district is located in the southern portion of the Indian Wells Valley and in the northeast corner of Kern County, approximately 110 miles north of San Bernardino and 150 miles northeast of Los Angeles. The district provides retail water service to nearly 12,000 customers (around 28,000 residents) in and around the city of Ridgecrest and its surrounding areas.
SOLID FINANCIAL PROFILE
Financial performance is strong featuring solid DSC and robust liquidity levels. During the last five years, all-in DSC has been above 2x with the exception of fiscal 2011 when coverage dropped to a still adequate 1.7x resulting from reduced water sales (as state water conservation programs were in effect) coupled with increased debt service requirements. The district has since updated its rate structure to include more fixed charges to stabilize cash flows. Liquidity also declined in 2011, but has remained strong over the past five years and finished fiscal 2014 at robust 541 days cash on hand.
Debt ratios have improved due to scheduled amortization and lack of new debt issuance. The district has also refinanced debt with a shortened maturity schedule and has utilized surplus funds to prepay some state loans in the last three fiscal years. Long-term debt per customer has gradually declined to $1,868 in fiscal 2014, compared with $2,274 in fiscal 2010, now below Fitch's 'AA' category median of $1,934 per customer. Scheduled amortization is slightly below the medians at 37% in 10 years and 70% in 20 years. Capital needs are manageable at $20 million over the next five fiscal years and focus mostly on repair and replacement. However, debt levels are expected to increase again, as the district plans to borrow $10 million from the state's revolving fund program for capital projects around fiscal 2018, the remaining capital program will be funded on a pay-go basis.
CURRENT SUPPLY IS ADEQUATE
The district produces all of its water from the local groundwater basin and has 10 wells with a production capacity of about 17 million gallons per day (mgd). Average daily demand is 6.0 mgd. The groundwater basin is non-adjudicated and is currently over-drafted. However, current estimates indicate that this supply is adequate for the next few decades. Longer term water needs are expected to be met with the development of brackish water, which the district has access to along with water rights from purchased lands, making use of treated waste water and exploring opportunities for importation and possible banking of water.
DISTRICT EXPECTS TO WITHSTAND MANDATORY WATER CUTS
On April 18, 2015 as a response to the Governor's recent executive order to reduce annual water usage by 25% over 2013 levels, the State Water Resource Control Board (SWRCB) issued a revised plan for mandatory water cuts for all of California's public water providers. The district is in the ninth and highest tier requiring a 36% reduction over 2013 levels. This district has adopted a water conservation ordinance and implemented a number of programs to promote water conservation, including a cash-for-grass rebate incentive program and free xeriscaping consultations. However, the district could face fines if water reduction targets are not met.
LIMITED, BUT STABLE LOCAL ECONOMY
The area economy is centered around the China Lake Naval Air Weapons Station, which is not served by the district but currently employs more than 4,000 civilians and 800 military personnel. With the stability of the weapons station jobs, the local unemployment rate was 7.4% in February 2015, up from 7.0% the year prior. This compared to 11% for Kern County, 6.8% for California and 5.8% nationally. The city of Ridgecrest's wealth levels are average at 99% of the state and 113% of U.S. averages.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in Fitch's U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 31 Jul 2013)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985510
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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