SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AAA' long-term rating and 'F1+' short-term rating to the following Orange County Sanitation District, CA (OCSD) debt:
--Approximately $107.4 million revenue refunding certificate anticipation notes (CANs) series 2016B.
The obligations are scheduled to sell via competitive sale on or about Oct. 20, 2016. Proceeds will refund the district's outstanding series 2014B CANs and pay cost of issuance.
The Rating Outlook is Stable.
SECURITY
The notes and outstanding parity certificates of participation and revenue obligations are secured by a pledge of OCSD net wastewater revenues.
KEY RATING DRIVERS
STRONG FINANCIAL PERFORMANCE: Debt service coverage (DSC) 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.
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 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.
SHORT-TERM DEBT STRATEGY: The 'F1+' rating reflects OCSD's high long-term credit quality and implied market access to remarket the notes. The district has used the CAN structure since 2008 and refinanced the notes without complications. The current note offering matures in two years.
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 4.4% in August 2016 (compared with 5.6% for the state and 5% 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. Fitch calculated all-in DSC was 3.1x in fiscal 2015 and about 3.4x in fiscal 2016 (unaudited estimated actuals). Coverage has generally been on an increasing trajectory after completion of major treatment upgrades and rates that are 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 forecasts DSC to average 3.3x 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 relatively stable during the housing downturn and have grown over the past six years. The district's service area includes largely 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 6.2% in fiscal 2016 and 4.3% in 2017.
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 5.8% over the five years ended 2016. 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 $327 per year ($27.25 per month or 0.4% of MHI) for a single family residence in fiscal 2017. 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.
DESCREASING 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 $900.6 million fiscal 2017 - 2021 capital improvement plan is moderate at $223 per customer annually and will require no additional debt. Debt is scheduled to decline to $365 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 30% of debt scheduled to be repaid in 10 years and 82% in 20 years. The amortization numbers conservative, reflecting currently scheduled amortization of the short-term CANs beginning in 2024, but the district has been paying them down at a much more rapid pace by reducing the amount of principal refunded at each roll over. Amortization rates will improve with the anticipated lull in borrowing over the next few years.
Date of Relevant Committee: Feb. 26, 2016
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
Rating U.S. Public Finance Short-Term Debt (pub. 17 Nov 2015)
https://www.fitchratings.com/site/re/873508
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
https://www.fitchratings.com/site/re/869223
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013087
Endorsement Policy
https://www.fitchratings.com/regulatory
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