Fitch Rates Orange County Sanitation District, CA's Revs 'AAA'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has assigned an 'AAA' rating to the following Orange County Sanitation District, California (OCSD) debt:

--Approximately $145.1 million wastewater revenue refunding obligations series 2016A.

The obligations are scheduled to sell via competitive sale on or about March 2, 2016. Proceeds will refund a portion of the district's outstanding 2009A certificates of participation (COPs) and pay cost of issuance.

In addition, Fitch affirms the following ratings at 'AAA':

--$1 billion outstanding obligations and certificates of participation (COPs);

--$120 million certificate anticipation notes (CANs).

The Rating Outlook is Stable.

SECURITY

The obligations and COPS are parity debt payable from a pledge of net wastewater revenues.

KEY RATING DRIVERS

LARGE, AFFLUENT SERVICE AREA: The district's essential role as the wastewater service provider to a large and wealthy service area of 2.5 million people and flat rate structure provide a high degree of revenue stability.

STRONG FINANCIAL PERFORMANCE: Debt service coverage averaged a healthy 2.9x over the three fiscal years ended June 30, 2015. Liquidity remained very strong with 1,281 days of operating cash on hand.

DISCIPLINED RATE SETTING: The district's board has raised rates consistently to preserve financial margins as the district undertook a major capital program to upgrade its plants to full secondary sewerage treatment standards. Rates remain low at just 0.4% of the county's median household income (MHI).

AFFORDABLE DEBT BURDEN: The long-term debt burden is moderate at $452 per capita and declining. The district has no additional borrowing plans.

STRONG MANAGEMENT PRACTICES: Sound reserve policies, a robust strategic planning process and long-term capital planning drive long-term financial and rate planning processes that have consistently delivered strong financial results.

RATING SENSITIVITIES

LOW RATING TRANSITION RISK: The rating on the Orange County Sanitation District's debt is sensitive to shifts in fundamental economic, financial, debt and management credit factors, particularly any erosion of the district's historically strong rate discipline. Fitch believes such shifts are unlikely.

CREDIT PROFILE

OCSD provides wastewater treatment services to the northern and central portions of Orange County and about 80% of county residents. The district's affluent suburban service area provides a strong underlying economic basis for bond repayment. The district benefits from its desirable coastal location, and residents have good access to employment opportunities in the diverse Los Angeles metropolitan economy. Orange County's non-seasonally adjusted unemployment rate was low at 4.1% in December 2014 (compared with 5.8% for the state and 4.8% for the nation). MHI is solid at 124% of state and 142% of national levels. The customer base is largely residential, and the top 10 payers provide a very low 2.2% of revenues.

CONSISTENTLY STRONG FINANCIAL PERFORMANCE

The district's financial performance has been strong and stable throughout economic cycles. All-in DSC was 3.1 in fiscal 2015 and has generally been on an increasing trajectory with service stabilizing after completion of major treatment upgrades and rates set to provide ongoing maintenance of the system from cash flows. Free cash to depreciation is very strong at an average of 207% over the past three years. The district's forecasts roughly steady DSC averaging 2.9x over the next five years with inflation-like rate increases and no further debt issuance. The forecast appears conservative with very little growth assumed in the customer base and modest rate increases.

Liquidity remains very strong with $523.9 million of unrestricted cash and investments on hand at the end of fiscal 2015. Unrestricted cash and investments have averaged 1,393 days of operating expenses over the past five years, well in excess of the 764 days cash median for 'AAA' rated water and sewer utilities. Strong reserve policies and planning targets suggest the district will maintain very robust liquidity levels. Draws on liquidity are expected as the district makes planned drawdowns for capital spending and to comply with reserve policies. For instance, the district has used $200 million of excess fund balance to make unscheduled pension contributions to fully fund its unfunded pension liabilities in recent years.

The district's primary revenue streams are quite stable, with property taxes providing about 20% of revenues and sewer fees providing 70%. Property taxes were little changed during the housing downturn and have grown over the past six years. The district's service area includes relatively built-out and well-established communities such as Anaheim, Huntington Beach, Irvine and Santa Ana, insulating the district from the sharp declines in assessed value (AV) that have hit newly developed areas. The district's AV rose a strong 6.4% in fiscal 2015.

GOOD RATE DISCIPLINE AND FLEXIBILITY

The district's board has been quite disciplined in raising rates to support the district's shift to full secondary treatment of sewerage discharges. Rate increases have averaged 6.7% over the five years ended 2014. Rate increases have declined to more moderate inflationary increases now that major treatment level upgrades have been completed. Even after years of large rate increases, rates remain very affordable at $322 per year ($26.83 per month or 0.4% of MHI) for a single family residence in fiscal 2016. Treatment rates are in addition to collection fees charged by local governments in the district, but even assuming the high end of collection fees in the service area, rates remain well below Fitch's 1% of MHI affordability metric at about 0.6% of MHI.

DECREASING REGULATORY RISK, CAPITAL DEMANDS

OCSD has managed significant regulatory and capital burdens well. In 2002, the district's board decided to upgrade its treatment wastewater effluent discharged into the ocean to full secondary treatment. The district historically operated under a 301(h) waiver, allowing for less than full secondary treatment. The district voluntarily entered into a consent decree concurrently with the issuance of a new ocean discharge permit. The consent decree required full secondary treatment by December 2012.

The district completed the required treatment upgrades ahead of schedule and received a standard National Pollutant Discharge Elimination System permit with no treatment waiver in 2012. The consent decree was lifted in August 2013. The completion of the treatment level upgrades decreases regulatory risk, while meeting longstanding community goals of protecting water quality at the region's beaches. About half of the district's wastewater is recycled for potable reuse.

MODERATE DEBT BURDEN

The completed treatment plant upgrades position the district well vis-a-vis its capital spending cycle. The district's $755.7 million fiscal 2016 - 2020 capital improvement plan is moderate at $187 per customer annually and will require no additional debt. Debt is scheduled to decline to $387 per capita over the next five years, compared with a median projected debt per capita of $526 for rated water and sewer utilities. Amortization is somewhat slow with 28% of debt scheduled to be repaid in 10 years and 69% in 20 years, assuming the district continues to rollover the CANs indefinitely. Amortization rates will improve with the anticipated lull in borrowing over the next few years.

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, Norton Rose Fulbright US LLP and the Public Resources Advisory Group

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=1000116

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000116

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 94108
Secondary Analyst
Shannon Groff
Director
+1-415-732-5628
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations:
Elizabeth Fogerty, New York, +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 94108
Secondary Analyst
Shannon Groff
Director
+1-415-732-5628
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com