Fitch Rates Yuba City Water System COPs 'A+'.

SAN FRANCISCO -- Fitch assigns an 'A+' rating to Yuba City, California's $25.9 million water revenue certificates of participation (COPs), series 2005. In addition, Fitch affirms the 'A+' rating on the city's outstanding $4.6 million COPs on parity with the city's obligation to pay the debt service on the 2005 certificates. The Rating Outlook is Stable.

The 2005 certificates are scheduled to sell competitively on Oct. 4. The city's financial advisor is Northcross, Hill & Ach. The certificates are secured by a first lien on and pledge of the net revenues of Yuba City's (the city) water system (the system).

The 'A+' rating reflects the strong historic financial performance and liquidity margins, sound planning efforts including an automatic annual rate increase, balanced with a rapidly growing population requiring significant future capital investment in the system. The city's economy is largely agricultural, but is diversifying to include growing energy, health care, wholesale and retail trade, and service components. The city is in the midst of an extensive capital improvement program (CIP) to develop additional treatment capacity in anticipation of growth demands and to ensure adequate capacity during drought periods. While the system's increasing dependence on connection charges to fund capital costs is a credit concern, Fitch views as mitigants the city's conservative projections for growth and the expansion plan's inherent flexibility.

Located 40 miles north of Sacramento in California's central valley, Yuba City is the county seat of Sutter County. The city is undergoing rapid growth, with population growth of almost 60% (including two annexations) since 2000. The majority of the city's water supply is derived from the nearby Feather River and is supplemented by groundwater wells acquired in 2001 when the City annexed the majority of the service area of the Hillcrest Water Company (the 2001 certificates were used to finance the acquisition of the water company). The city has four separate permits with various volume and seasonal restrictions which it estimates will provide ample water supply through 2020, or 2014 in third-year drought conditions.

Capital needs are relatively large, but linked to future growth; the system's fiscal 2006-2010 CIP totals around $44 million, or about $2,900 per customer. If necessary, another series of bonds would be issued for Phase II of the water treatment expansion, with excess revenues of the system, consisting primarily of connection fees, and reserves providing the balance of the CIP. The purpose of the 2005 certificates is to expand capacity at the water treatment plant from 24 MGD to 30 MGD, add 4 MGD in storage capacity along with other infrastructure improvements, including some provision for a potential future expansion to 48 MGD. Including this issuance, per customer debt burden will be above average at $1,718. Much of this expansion will be paid for by the new users through connection fees (due when building permits are issued), which are expected to increase regularly. Excess revenues to fund capital improvements will also result from the increasing water rates, which pursuant to a city ordinance will increase by at least 4.3% annually. In spite of these regular rate increases, average water rates in the city remain affordable at 1% of the median household income and below the regional average.

Financial performance is strong, resulting in high coverage and liquidity levels. Debt service coverage was 18.4 times (x) and 6.1x in fiscal 2004, with and without connection fees, respectively. Liquidity for the same period was substantial, with unrestricted cash and investments equal to over two-and-a-half years of operating expenses. Coverage and liquidity margins will decline as the city moves forward with its CIP.

While unemployment rates are consistently above state and national levels as is typical of an agricultural area, job growth has been positive the last five years, growing 5% since 2000. The economy is supported somewhat by its proximity to Sacramento as well as by the relatively large local government presence. Prospects for continued growth are positive, due to the city's affordability and location along major state highways.

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