SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA' rating on the following Jurupa Community Services District, CA (the utility) debt:
--$8.2 million water revenue certificates of participation series (COPs) 2010A;
--$19.9 million water revenue COPs series 2010B.
The Rating Outlook is Stable.
The COPs are payable from net water revenues, including connection fees and half of the district's property tax collections, after payment of operations and maintenance expenses.
KEY RATING DRIVERS
GROWING SUBURBAN SERVICE AREA: The district is a monopoly provider of essential services to a growing suburban service area with a largely residential customer base. The Riverside County community has experienced volatile swings in development activity in recent years, but the economy is currently growing rapidly.
VERY STRONG FINANCIAL PERFORMANCE: All-in debt service coverage (DSC) averaged 5.5x over the three years ended June 30, 2015. Unrestricted cash and investments equaled 808 days of operating expense at year end.
SIGNIFICANT RATE INCREASES APPROVED: The board of directors has approved significant rate increases through 2019, addressing prior concerns about rate discipline.
STRONG DEBT PROFILE: Water debt levels are low at $967 per customer and expected to decline slowly as outstanding bonds amortize. The district does not plan to issue new money water debt over the next five years.
REGULATORY DROUGHT PRESSURES: The utility has an adequate supply of groundwater that positions it well during the current California drought. Nevertheless, state water regulators have ordered deep cuts in water usage that will diminish financial margins somewhat in fiscal 2016 and possibly beyond. Additional supplies will be needed to accommodate expected growth.
STRONG MARGINS, TOUGH ENVIRONMENT: The risk of rating movement appears low. Drought is unlikely to reduce the district's very strong financial margins to a degree that would cause a downgrade, while an upgrade appears unlikely due to ongoing growth and supply pressures, and elevated revenue volatility.
The district provides water and sewer services to about 120,000 residents in a 48-square-mile service area in northwestern Riverside County. Each of the services is accounted for individually and its obligations are separately secured. The district serves the cities of Jurupa Valley and Easvale as well as unincorporated areas of Mira Loma, Glen Avon, Pedley, Sunnyslope, Sky Country and Indian Hills.
The service area economy has emerged from a deep slump related to the housing downturn and is again experiencing rapid growth in new connections. The regional economy is diverse and substantial with significant manufacturing, retail, educational, health and social services employment, as well as an enduring comparative advantage in warehousing and logistics industries due to its location along major highways inland from the ports of Long Beach and Los Angeles. Riverside County's jobless rate runs above the national average but was well off recessionary highs at 6.2% in November 2015.
STRONG FINANCIAL PERFORMANCE
The utility's financial position remains strong despite the extreme California drought. Total revenues are somewhat volatile due to variation in water use and economically cyclical connection fee revenues, but margins are strong enough that revenue volatility does not weigh heavily on Fitch's assessment of financial performance. All-in DSC dropped to a still strong 4.1x in fiscal 2015 from 6.6x in fiscal 2014, driven by a decrease in connection fee revenues from elevated 2014 receipts. All-in coverage excluding connection fees was more stable, but still very strong, at 2.8x in fiscal 2014 and 2.7x in fiscal 2015. Free cash-to-depreciation averaged 267% over the past three fiscal years, providing ample funds for investment in the system.
Liquidity is also very strong. The enterprise had $55 million of unrestricted cash and investments, or 808 days cash, on hand at the end of fiscal 2015. It also maintains large restricted connection fee reserves of about $26 million that can be used to fund capital investments.
IMPROVED RATE DISCIPLINE
Rate discipline has improved since the last review in 2014. The utility experienced rate controversy over a plan to shift to water budget-based billing structure (tying tier sizes to an estimate of water need based on factors such as family and lot size), delaying rate action proposed at the time the rated bonds were issued in 2010. The utility's board has addressed this credit concern by restructuring rates and imposing moderate rate increases in 2015 and 2016, as well as a rate package that provides larger increases through 2019.
Rate flexibility is judged to be adequate, but somewhat limited, due to recent history of rate controversy. The utility's elected board has independent rate-setting authority without outside regulatory oversight. Rate flexibility is limited by both the politics of rate setting and California's Prop. 218 - under which ratepayers may reject rates if a majority submits written protests. Such protests have been rare across the state, and Jurupa ratepayers did not reject its rates even during its recent period of rate controversy. Rates remain affordable at 0.8% of median household income for 7,500 gallons of water per month.
CHALLENGING OPERATING ENVIRONMENT
The water utility has an adequate, albeit limited, supply of groundwater that positions it well to provide service in periods like the current drought, but supplies may be insufficient to accommodate expected growth. The community's build-out population is likely to require major debt-financed supply investments in the years ahead, given very narrow margin between supplies and demand.
Current water supplies are derived primarily from the Chino Basin aquifer via 23 wells. The aquifer is an adjudicated groundwater supply managed by the Chino Basin Watermaster. The district also purchases water from the Chino Desalter Authority and treated water from the Rubidoux Community Services District. The district's supplies are just adequate for its current customer base with water rights of about 30,500 acre feet per year and recent demand at about 24,000 acre feet. The utility also keeps a modest amount of stored carryover water in a groundwater basin, allowing for some temporary misalignments between supply and demand.
DROUGHT REGULATION LIMITS SALES
The California Water Resource Control Board ordered Jurupa to cut water use by 28% from 2013 levels beginning in June 2015 in response to a severe statewide drought. The utility has made substantial cuts to usage, but has missed the state's order by about 4 percentage points. The state is in the process of adopting regulatory updates that should ease the utility's conservation order enough to bring it into compliance with the regulations.
The utility's financial performance is likely to dip in 2016 and possibly beyond in reaction to drought pressures, but very strong margins suggest drought conservation is unlikely to meaningfully affect the rating unless the drought continues for a significant period and worsens.
MODEST DEBT BURDEN
The water enterprise debt burden of $28.7 million is low at $967 per customer or 2.8x funds available for debt service. Debt levels are expected to decline slowly with no additional borrowing planned over the next five years, though long-term water supply needs could require significant borrowing at some point. Amortization is slow with just 26% of principal repaid in 10 years and 66% repaid in 20. The district's growth-driven 2016-2020 capital improvement plan is large at $83.9 million, yielding annual per customer spending of $566, which is almost twice the median for rated systems.
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.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
Dodd-Frank Rating Information Disclosure Form