Fitch Affirms Jurupa Community Services District, CA's Sewer Revs at 'AA'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed the 'AA' rating on the following Jurupa Community Services District, CA debt:

--$6.9 million sewer revenue certificates of participation series (COPs) 2010A;

--$27.5 million sewer revenue COPs series 2010B.

The Rating Outlook is Stable.

SECURITY

The COPs are payable from net sewer 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.

STRONG FINANCIAL PERFORMANCE All-in debt service coverage (DSC) averaged 3.5x over the three years ended June 30, 2015. Unrestricted cash and investments equaled 719 days of operating expense at year end.

RISING DEBT LEVELS: Sewer debt is low at $1,468 per customer but expected to rise to about average with an expected $30 million of state revolving fund borrowing over the next five years. Funds will be used to finance the acquisition of additional sewer treatment capacity.

STRONG RATE DISCIPLINE: The board of directors has raised rates as necessary to provide strong financial performance. Inflation-like rate increases are approved through 2019.

RATING SENSITIVITIES

SUSTAINED STRONG PERFORMANCE: Sustained strong financial performance by the Jurupa Community Services District sewer system after the issuance of planned debt could warrant consideration of an upward rating action if metric remain significantly in excess of categorical medians.

CREDIT PROFILE

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.

LIMITED OPERATING RISK

The sewer enterprise is a collection-only retail sewer system with limited operational complexity. The utility sends sewage flows to three neighboring jurisdictions for treatment and has adequate capacity to meet near-term growth expectations once current expansions are completed. The utility is likely to need additional capacity to meet ongoing growth demands.

STRONG FINANCIAL PERFORMANCE

Financial performance is very strong. Total revenues vary with economically cyclical connection fee revenues, but underlying operating revenues are very stable. Fixed monthly service charges provide about two-thirds of operating revenues, delivering a solid baseline level of financial performance. All-in DSC rose to 7.6x in fiscal 2015 from 2.8x in fiscal 2014, driven by a tripling in connection fee revenue. All-in coverage excluding connection fees was more stable, but still strong, at 2.0x in fiscal 2014 and 1.9x in fiscal 2015. Free cash to depreciation averaged 315% over the past three fiscal years, providing ample funds for investment in the system.

Liquidity is also very strong. The enterprise had $24.5 million of unrestricted cash and investments, or 719 days cash, on hand at the end of fiscal 2015. It also maintains large restricted connection fee reserves of about $31.5 million that can be used to fund capital investments.

SOLID RATE FLEXIBILITY

The utility's elected board has independent rate-setting authority without outside regulatory oversight and has exhibited solid rate discipline. The board raised rates an average of 7.1% over the five years through fiscal 2016, and it has approved inflation-like rate increases through fiscal 2019. Rate flexibility is limited by 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 the utility has not experienced significant rate controversy on the sewer side of its business. Rates remain affordable a 0.8% of median household income, suggesting that rate flexibility remains solid.

RISING, MANAGEABLE DEBT BURDEN

The sewer enterprise debt burden of $41.8 million is low at $1,468 per customer or 2.6x funds available for debt service. Debt levels are expected to rise to more typical levels with a planned $30 million state revolving fund loan to finance the acquisition of additional sewer treatment capacity. Amortization is slow with just 30% of principal repaid in 10 years and 72% repaid in 20. The district's growth-driven 2016-2020 capital improvement plan is large at $89.9 million, yielding annual per customer spending of $631, which is about twice the median for rated systems. The utility plans to pay a healthy 66% of the cost on a pay-go basis.

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

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. 03 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869223

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998841

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998841

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Andrew Ward
Director
+1-415-732-5617
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94103
or
Secondary Analyst
Teri Wenck
Director
+1-212-215-3742
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Andrew Ward
Director
+1-415-732-5617
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94103
or
Secondary Analyst
Teri Wenck
Director
+1-212-215-3742
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com