2010-02-09 23:12:13 -
Fitch Ratings has assigned the following ratings to Jurupa Community Services District, California (the district).
--$8 million certificates of participation (COPs) (2010 sewer facilities financing), series A (tax exempt) AA-;
--$29 million COPs (2010 sewer facilities financing), series B (federally taxable-Build America Bonds-direct payment) 'AA-'.
The Rating Outlook is Stable.
The bonds are expected to sell via negotiation on Feb. 18. Proceeds from the series A COPs will be used to refund a portion of the district's outstanding COPs, finance improvements to the district's system for collection, transmission, treatment and disposal of wastewater and sewage, fund a debt service reserve and pay costs of issuance. Proceeds from the series B COPs will be used to fund improvements to the sewer system, fund
a debt service reserve and pay costs of issuance.
RATING RATIONALE.
--Financial performance in terms of debt service and liquidity has been very strong; margins are expected to decline slightly as a result of rising fixed costs.
--Sizeable rate increases have been implemented and approved to support additional debt; despite recent adjustments, the district maintains rate flexibility.
--Exposure to growth-related capital facility fees is a credit concern, given the large portion of the district's revenues provided from this revenue stream.
--Capital needs are manageable although are expected to increase over the long term.
--Debt ratios are favorable though amortization is slow.
--The service area has experienced rapid growth; significant softening has also occurred with the recession with unemployment rates above state and national levels.
KEY RATING DRIVERS.
--The district's strong financial metrics are a key credit driver.
--A rapidly growing customer population could place operational, and consequently, financial pressure on the system.
--Rising capital and operating costs could pressure rate affordability.
SECURITY.
The COPs are payable from net sewer system revenues after payment of operations and maintenance expenses and from tax revenues or 50% of the property tax revenues paid to the district beginning in fiscal 2011.
CREDIT SUMMARY.
The district is located in northwestern Riverside County and serves approximately 24,000 sewer customers in the unincorporated areas of Jurupa, Mira Loma, Eastvale, Glen Avon, Pedley, Sunnyslope, Sky Country and Indian Hills. The district has taken on a regional approach as a cost effective way to treat its wastewater. It does not own or operate its own treatment facilities but has instead purchased capacity rights at the following three wastewater treatment facilities: 4.0 million gallons per day (MGD) at the City of Riverside Regional Wastewater Treatment plant (the Riverside plant), 3.5 MGD at the Santa Ana Regional Interceptor (SARI) and 3.3 MGD at the Western Riverside County Regional Wastewater Authority (WRCRWA) plant. The service area is divided into three zones. Zone 1 is primarily residential and discharges to the Riverside plant. Zone 2 is comprised primarily of the residential Eastvale area and discharges to WRCRWA and Zone 3 is primarily industrial and discharges to SARI. Approximately, 49% of the district's flows were discharged to the Riverside plant, 15% were discharged into the SARI, and 36% were discharged to the WRCRWA plant in fiscal 2009.
Sewer customer growth averaged a rapid 6.6% annually over the last five years. While growth was a much slower 2.1% from fiscal 2008 to 2009, the district does face some growth pressures. Growth-induced costs are projected to rise at the latter end of the decade for the purchase of additional treatment capacity, though the size and timing of the capital needs is dependent on the rate and amount of future growth. Fitch views the exposure to growth-related capital facility fees as a credit concern, given that the fees have represented 117% of the district's sewer operating revenues on average over the last five years.
Nevertheless, a five-year rate package was adopted and implemented in fiscal 2009, with rate hikes averaging 11% annually over the fiscal 2009 to 2013 period (based on usage of 6,000 gallons per month). The district also adjusted the rates to now not only include a flow charge, but also a repair and replacement charge of $4.00 per equivalent dwelling unit (EDU) for customers in Zone 1 and $3.00 per EDU for customers in Zones 3 & 4. The rate adjustments and increases will continue to help reduce the district's historical reliance on capital facility fees to fund operations. Furthermore, the district is conservatively projecting that capital facility fees will average 11% of operating revenues annually over the next five years. The district also benefits from its share of the county's 1% property tax collections. While the revenues apportioned to the sewer fund have historically accounted for approximately 11% of gross revenues, they are projected to account for 7% of total revenues going forward as the tax revenues will be evenly split between the water and sewer funds.
Debt service coverage in fiscal 2009 was a strong 12.3 times (x), and 4.6x excluding capital facility fees. Projected debt service coverage is expected to fall but remain healthy at over 2.1x including capital facility fees and approved rate increases. Given the district's recent rate adjustments and conservative growth projections, senior annual debt service (ADS) is projected to average 2.1x annually over the next five years excluding capital facility fees. The district's five-year capital plan is estimated at $43 million, including this debt issuance, though there is room to defer projects if the growth does not rebound.
Liquidity is very strong with unrestricted cash of $19.7 million or 837 days operating cash. Future reserve levels are expected to lower given that 53% of the district's capital projects are anticipated to be cash-funded, though they should remain appropriate for the rating category.
The regional economy is diversified among manufacturing, retail, educational and health and social services. However, economic conditions are currently weak as evidenced by high county unemployment rates; the December 2009 county unemployment rate stood at 14.3%, well above state (12.1%) and national (9.7%) levels. Wealth levels are below the state, although they remain above the U.S. average.
Considerations for Taxable/Build America Bonds Investors
The following sector credit profile is provided as background for investors new to the municipal market.
Water and Sewer Utility Revenue Bonds.
Municipal water and sewer utilities in the U.S. are enduring natural monopolies that typically have autonomous rate setting ability and provide highly essential services. The bonds are secured by a pledge of net revenues generated by the water and/or sewer system; and typically include structural legal protections such as rate covenants, debt service reserve requirements, and anti-dilution tests. As such, the sector exhibits extremely strong credit characteristics with minimal defaults. Reflective of this strong performance, the average water and sewer revenue bond rating is 'A+' with 53% at or above 'AA-' and approximately 6% rated 'BBB+' or below. Those with low investment-grade or below-investment-grade ratings generally have substantial capital programs, a high degree of leverage or weak financial flexibility as reflected in low cash levels, narrow debt service coverage and/or limited rate-raising flexibility.
Applicable criteria available on Fitch's website at www.fitchratings.com :
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--'Revenue-Supported Rating Criteria' (Dec. 29, 2009);
--'Water and Sewer Revenue Bond Rating Guidelines' (Aug. 6, 2008).
Additional information is available at www.fitchratings.com :
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Fitch RatingsJulie Seebach, +1-512-215-3740 (Austin)Karen
Ribble, +1-415-732-5611 (San Francisco)orCindy Stoller,
+1-212-908-0526(Media Relations, New York)
cindy.stoller@fitchratings.com : mailto:cindy.stoller@fitchratings.com
