Fitch Affirms San Juan Water District, CA's Revs at 'AA'; Outlook Stable.
--$10.6 million series 2012A San Juan and Citrus Heights Project revenue certificates of participation at 'AA'.
The Rating Outlook is Stable.
In addition, Fitch has withdrawn its ratings for the following bonds due to pre-refunding activity:
--San Juan Water District (CA) revenue certificates of participation series 2009A (pre-refunded maturities only - 798330BJ4, 798330BK1, 798330BL9, 798330BM7, 798330BN5, 798330BP0, 798330BQ8, 798330BR6, 798330BS4), which were previously rated 'AA'/Stable.
The updated rating history for the above maturities is now reflected on Fitch's website at www.fitchratings.com.
The COPs are secured by payments to the San Juan Suburban Water District Financing Corp. from the San Juan Water District (on parity with its other COPs) and the Citrus Heights Water District on a joint and several basis; there are no step-up provisions between the two. Each district's payments to the Financing Corp. are secured by an absolute and unconditional pledge of its respective net water revenues.
KEY RATING DRIVERS
STRONG REVENUE DEFENSIBILITY: SJWD provides essential retail and wholesale water services to an economically sound suburban service area. The affluent, largely residential retail customer base is diverse in terms of payers. The district also provides wholesale water to four retail water agencies under take-and-pay contracts with significant fixed charges. The district's board has the independent legal ability to raise rates as needed to recover costs. The board has approved sizeable rate increases through 2021, increasing fixed retail and wholesale charges in reaction to recent drought pressures and reducing its vulnerability to shifts in water usage. Water rates remain low despite recent increases.
MANAGEABLE OPERATING RISKS: SJWD has ample, high-priority rights to American River water. Both total supplies and treatment capacity are well in excess of recent water demand. The district's costs are largely fixed. The debt burden is low at about $781 per underlying retail customer. Leverage is in line with rating medians but is expected to trend upward with $38.5 million of additional borrowing over the next five years
ADEQUATE FINANCIAL PERFORMANCE: SJWD's financial performance has begun to recover after a period of weakness during California's recent drought. Fitch-calculated debt service coverage (DSC) rose to a strong 2.4x in 2017 as state-mandated drought conservation measures expired and water rates increased. Free cash to depreciation improved to 124%. Debt to funds available for debt service (FADS) improved to a moderate 5.3x. All three ratios had deteriorated significantly through the drought, reflecting sharp declines in water revenues that were not fully offset by rate increases until 2017. Liquidity continued to weaken in 2017 but remained strong with 425 days cash on hand.
WEAKEST LINK APPROACH: The San Juan and Citrus Heights Project rating is based on a weakest-link analysis because the COPs are secured a joint but not several obligation of the two water districts. The rating is based on the credit quality of San Juan Water District, which is responsible for about 90% of debt service payments. Fitch judges SJWD to have the lower credit quality of the two obligors. While the Citrus Heights Water District serves a smaller, less affluent service area, its stronger credit quality reflects an extraordinarily low debt burden, very stable revenue structure, strong DSC ratios and solid liquidity.
OBLIGOR CREDIT QUALITY: The rating on the San Juan and Citrus Heights Project revenue certificates of participation is sensitive to changes in the credit quality of either San Juan Water District (SJWD) or Citrus Heights Water District, but particularly the credit quality of the SJWD.
SAN JUAN FINANCIAL PERFORMANCE: The rating could come under downward pressure if SJWD's liquidity continues to deteriorate or if recent revenue gains are not sustained. The rating could rise if SJWD maintains recent improvements in DSC and leverage shows a sustained trend of stabilization relative to cash flows.
The San Juan Water District provides retail and wholesale water services to about 183,000 residents in a 46-square-mile suburban service area about 25 miles northeast of downtown Sacramento. It provides retail services to 10,617 accounts and wholesale services to the Citrus Heights Water District, Fair Oaks Water District, Orange Vale Water Co., and the city of Folsom.
STRONG REVENUE DEFENSIBILITY
The SJWD service area has solid economic fundamentals. The residential customer base is growing slowly and largely built out. Concentration is not a concern. The top 10 retail customers provide less than 1% of operating revenues, and the four wholesale customers serve suburban residential areas with a diversity of underlying customers.
SJWD's retail service area is centered on the affluent community of Granite Bay. Residents are within commuting distance of downtown Sacramento, providing access to the state capital's large government-dominated employment market. Median household income is about 216% of the national level. The individual poverty rate is less than a quarter of the national rate, and the Placer County unemployment rate was a full percentage point below the national average at 3.5% in January 2018. Wholesale customers serve less affluent, but also solid retail service areas.
The SJWD board of directors has strong control over rates and has adjusted rates significantly to offset recent financial stresses. The board may adjust rates as needed without outside regulatory approval. Retail rates are subject to the limitations of California's Proposition 218, which allows ratepayers to reject rate increases if a majority of ratepayers submit a written protest. The district received just 196 formal protests to its last rate package, which included rate increases of 6% to 9% annually from 2017 to 2021. The increases will all be applied to fixed meter charges, increasing revenue stability. About 60% of a typical residential customer's bill was fixed in 2017; the proportion will increase to just over 70% in 2021. The board also approved similarly sized rate increases for wholesale customers, which are not subject to the Proposition 218 requirements. Wholesale rates include significant fixed charges for capital and debt service costs that are attributable to the wholesale customers.
Rate flexibility appears solid. Retail water rates were low at just 0.5% of median household income in fiscal 2017 for Fitch's standard 7,500 gallon water bill. Water usage is much higher in the service area, reflecting the suburban nature of the customer base and hot, dry summers. But even at higher local usage levels, rates remain affordable at less than 1% of MHI. Wholesale rates are also very low.
MANAGEABLE OPERATING RISKS
SJWD's supply position is strong. The district has access to 82,200 acre feet (AF) of relatively low cost water annually, including significant pre-1914 water rights on the American River. Water deliveries have averaged about half that amount over the past five years. Precipitation is highly variable in the American River's Sierra Nevada watershed, and supply shortages are possible. The district draws its supplies from U.S. Bureau of Reclamation's Folsom Lake, California's ninth-largest reservoir. The district's water rights are senior to the bureau's customers, and the district's supplies would only be interrupted in a very unusual depletion of the reservoir. The state's record-breaking 2012 to 2016 drought depleted the reservoir to levels that briefly threatened to eat into SJWD supplies, but timely rains and conservation by customers allowed the district to withstand the crisis without interruption of deliveries from the lake. Some of the district's wholesale customers also have access to groundwater and can reduce usage of surface water in droughts to help stretch regional supplies. The district's water treatment capacity is about 3x recent demand.
Like most water agencies, the district's costs are overwhelmingly fixed. Management estimates that about 90% of costs are relatively fixed regardless of demand, including the cost of 12,500 AF of supply purchased from Placer County Water Agency, debt service, and salaries and benefits. SJWD's recent shift to greater reliance on fixed rates helps mitigate this risk. Debt service costs are relatively manageable about 18% of gross revenues.
The debt burden is low as measured by $781 per underlying retail customer. Debt per customer is projected to rise to a more moderate $1,346 per customer in five years with $38.5 million of additional borrowing included in the district's $63.3 million capital improvement plan. The capital plan is driven by replacement of the district's aging infrastructure. Leverage, as measured by debt to FADS was 5.3x in fiscal 2017, which is in line with the rating median of 5.5x. Leverage is projected to trend upwards with the planned debt issuance and approved rate increases.
ADEQUATE FINANCIAL PERFORMANCE
SJWD's financial performance has begun to recover after a period of weakness during the recent drought. State-mandated water conservation and concerns about Folsom Lake levels reduced volumetric water sales by more than a third compared to pre-drought levels at the depths of the drought. Fitch-calculated coverage fell to just 1.2x in fiscal 2015, the worst year of the drought. It recovered to 1.6x in 2016 and 2.4x in 2017 as water use rebounded and rate increases boosted revenues. Free cash to depreciation improved to 124% in 2017 after dropping as low as just 20% in 2015. Debt to FADS peaked at 10.9x but fell to about half that level in 2017 as net revenues recovered.
Liquidity weakened over the drought period as the district continued to spend on capital investments as net revenues declined. While net revenues recovered strongly in 2017, liquidity continued to drop. Unrestricted cash and investments fell to $18.1 million, or 425 days cash, in 2017, down from a very strong $30.3 million, 823 days cash, in 2015. Current reserves remain strong, but significant continued declines in liquidity could put downward pressure on the rating.
SMALLER, STRONGER OBLIGOR
The Citrus Heights Water District (obligor for about 10% of the San Juan and Citrus Heights Project COPs) is the largest of San Juan's wholesale water customers. CHWD serves the suburb of Citrus Heights and small areas of adjacent communities. All key coverage and financial performance metrics were very strong in 2016, with debt to FADS below 1x, debt service coverage above 7x and free cash to depreciation above 200%. Liquidity was also strong with over 500 days cash on hand at the end 2016. The district's debt burden was well below all rating category medians at just $217 per customer. Debt levels are expected to decline rapidly because the district has no further borrowing plans and amortization of outstanding debt is rapid with 76% of principal repaid in the next 10 years.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Jun 25, 2018|
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