Fitch Rates Western Municipal Water District (California) BANs 'F1+'

SAN FRANCISCO--(BUSINESS WIRE)--Fitch rates the Western Municipal Water District of Riverside County, California's 2008 Refunding Bond Anticipation Notes (BANs) 'F1+'. The note proceeds will refund the Series 2002 Adjustable Rate revenue bonds, currently outstanding as auction rate securities. The notes are secured by a net revenue pledge of the district's water and wastewater systems. The notes are expected to have a maturity date of less than one year. The notes are scheduled to price the week of October 27th, depending on market conditions.

The 'F1+' rating reflects the district's strong credit fundamentals, healthy unrestricted cash levels as compared to Fitch medians, and Fitch's expectation that the district will be able to access the bond market to refinance the bonds with long-term debt at maturity. Credit fundamentals include the revenue diversity provided by both wholesale and retail customers, automatic revenue and expenditure balance in the district's wholesale system that results from cost-based rates, limited operational risk as a primarily distribution system, recent Board actions to increase retail rates to reduce the district's dependence on property tax revenues, and debt service coverage that is projected to remain around 2.0x for bondholders. Credit concerns center on the need for additional rate increases to eliminate reliance on property tax revenues for operations and to fund planned capital investment, although the district continues to be in the process of determining its level of future capital investment. While housing starts and resulting connection fees have cooled dramatically over the last year, the district only received 4% of total revenues from connection fees in fiscal 2007 and it is conservatively projecting connection fee revenues in future years.

The district's service territory consists of a 527 square mile area located in western Riverside County in southern California with a population of 853,000. The district is primarily a wholesale provider of water. It sells water to eight wholesale customers and passes the wholesale cost of that water (purchased from the Metropolitan Water District of Southern California, MWD)) directly through to those customers, including an additional administrative fee. The cost-based nature of this system provides a high degree of revenues and expenditure balance in its financial performance. Wholesale customers accounted for 51% of operating revenues in fiscal 2007.

The district also provides retail water and wastewater service to 23,405 and 7,764 customers, respectively. Retail water and wastewater revenues accounted for 31% and 12%, respectively, of operating revenues in fiscal 2007. The majority of water for the retail system is also purchased from the MWD, the regional water provider for southern California, whose water revenue bonds Fitch rates 'AA+'. MWD faces some uncertainty regarding its water supply given various environmental and political challenges surrounding the State Water Project.

The district has limited operational risk in its water system. The retail system had not historically experienced rate increases that kept pace with cost increases. Instead, growth in the district's share of the county's 1% property tax collections were used to fund increased costs. Two rate actions in the past twelve months for retail water and wastewater customers are beginning to reverse this trend; the full impact of these increases won't be seen until fiscal 2009. Additional rate increases are expected in order to completely eliminate the district's historical reliance on property taxes to fund operations. Following the state's reduction of these revenues in fiscal 2005 and 2006, it is the district's goal to use property tax revenues for capital investment and not rely on these revenues for operations.

The district's five year capital plan is estimated at $285 million. This total includes around $80 million for a regional water storage project that may not be undertaken unless new revenues are secured, such as grant funds or additional commitments from other regional entities. Other large projects include an expansion of the district's wastewater treatment plant and a new headquarters building. The district is estimating the issuance of an additional $115 million in debt.

Debt service coverage of all debt, including state loans, in fiscal 2007 was strong at 5.7x, reflecting the recovery of property tax revenues. However, projected debt service coverage are expected to fall but remain healthy at around 2.0x, including additional debt issuance of $115 million over the next five years and sizable annual rate increases. Liquidity was healthy with unrestricted cash of $71 million, or 362 days operating cash. Reserve levels are expected to remain around this level or higher.

Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework'.) At this time, Fitch is deferring its final determination on municipal recalibration. Fitch will continue to monitor market and credit conditions, and plans to revisit the recalibration in the first quarter of 2009.

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