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Summary: Anaheim Public Financing Authority, California Anaheim; Water/Sewer Primary Credit Analyst: Paul J Dyson, San Francisco [PHONE REDACTED]; [EMAIL REDACTED] Secondary Contact: Scott D Garrigan, Chicago [PHONE REDACTED]; [EMAIL REDACTED] Research Contributor: Rahul Dedhia, CRISIL Global Analytical Center, an S&P affiliate, Mumbai Table Of Contents Rationale Outlook Related Criteria And Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 30, 2014 1 1252606 I 300097587 ---PAGE BREAK--- Summary: Anaheim Public Financing Authority, California Anaheim; Water/Sewer Credit Profile Anaheim Pub Fincg Auth, California Anaheim, California Anaheim Pub Fincg Auth (Anaheim) wtr Long Term Rating AAA/Stable Affirmed Anaheim Pub Fincg Auth (Anaheim) wtr Unenhanced Rating AAA(SPUR)/Stable Current Many issues are enhanced by bond insurance. Rationale Standard & Poor's Ratings Services affirmed its 'AAA' long-term rating on the Anaheim Public Financing Authority, Calif.'s revenue bonds issued on behalf of Anaheim. The outlook is stable. The rating reflects our view of the system's: • Stable financial performance, with strong debt service coverage (DSC) and a strong liquidity position; • Stable, very diverse, and primarily residential customer base; • Ample water supply to meet current and future demand; and • Competitive water rates that include identified cost components. The bonds are secured by the city's water system net revenue, which the city pays to the authority under the 2010 installment purchase agreement. Although the city lacks a senior lien on its net revenue, the lien securing the bonds will rank subordinate to any future senior-lien obligations. Anaheim (population: 346,161) is located in northern Orange County and is the state's 10th-largest city in terms of population. The city covers 50 square miles and is centrally located about 28 miles southeast of downtown Los Angeles and about 90 miles north of San Diego. Major freeways in and through the city provide convenient access for commuters and tourists. The city is mature, with little vacant land for development, effectively limiting growth rates. The economic base is relatively well diversified, in our opinion, with a mix of services, manufacturing, and trade. In November 2013, the city's unemployment rate was 7.3%, which is lower than state's rate of 8.3% but higher than the national rate of 6.6%. Median household effective buying income (EBI) is what we consider to be strong, at 110% of the national average, and per capita EBI is adequate at 82% of the national average. In our opinion, the customer base is residential, stable, and very diverse. In fiscal 2013 the water system served 62,917 customers and management anticipates that future growth will be stable. We consider the system's top 10 customers to be very diverse in that they account for 12.7% of total water revenue in fiscal 2013, with no single customer WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 30, 2014 2 1252606 I 300097587 ---PAGE BREAK--- contributing more than 5% of total revenue. The residential rate structure consist of four components: a customer charge" based on the meter size, a "base commodity charge" covering the cost of operations and maintenance, a "commodity adjustment charge" that adjusts to cover the costs of imported and pumped groundwater, and a system "reliability adjustment charge" that is used to cover costs associated with capital expenditures and debt service. We calculate the current residential water rate for a usage of 1,000 cubic feet at $26.10, or 0.7% of median household EBI, which we consider affordable in the context of the service area's income levels. Management last increased the rates on June 1, 2013, by 6.7%, and the rate remained unchanged in fiscal 2014. Rates are forecast to increase by 4% to 5% annually during fiscal years 2015 through 2019. The water supply flows from two sources: groundwater from Orange County Water District (OCWD), which has historically supplied 64% to 69% of the city's water needs, and secondly through purchased Metropolitan Water District (MWD) water. The 18 active groundwater wells provide a maximum capacity of 86 million gallons per day (mgd), which, together with the eight MWD connections, provide a total combined capacity of 196 mgd of water. Management reports that the combined supply capacity is well above the average 58.9 mgd demand level. The system has maintained historically strong financials, in our view. Based on the audited financial statements, the DSC has remained strong in the past three years at 2.4x in fiscal 2011, 2.3x in fiscal 2012, and 2.8x in fiscal 2013 before transfers to general fund. We understand that management has a policy to transfer 4% of annual operating revenue to the general fund each year. After considering the transfers to general fund, we calculate the DSC for fiscal 2013 at 2.3x, a level we still consider as strong. In our opinion, the financial metrics remained strong during this period because of enhanced revenue resulting from implemented rate increases and because of only modest growth in operating expenses despite the increase in annual debt service requirements. Per management's projections for fiscal years 2014 through 2018, DSC before transfers to general fund will decline from current levels, as the debt service payments will increase as a result of proposed debt to be issued in fiscal 2015. However, DSC will be no less than 2x, which we still consider strong. Liquidity has been strong during the past three fiscal years. The unrestricted cash and investment balance stood at $15.6 million, or 129 days' cash in hand, at the end of fiscal 2013, down from $22.8 million, or 187 days' cash, in fiscal 2011. We understand the decline in liquidity is due to use of funds for capital improvements. Management reimbursed the cash used for capital expenditures from its line of credit in October 2013, and this will result in increased unrestricted cash reserves in fiscal 2014. Management projects to maintain at least a $22.7 million cash balance, or 176 days' cash in hand, during next five years (fiscal years 2014 through 2018). Management notes that its formal policy is to maintain a minimum of 120 days' cash on hand. We understand that capital improvement projects during the next five fiscal years will largely entail renewal and replacement projects of about $108.3 million that the city will fund through issuance of revenue bonds and available reserves. Management anticipates issuing $40 million to $50 million in additional debt in fiscal 2015. We calculate the debt-to-plant ratio for fiscal 2013 at about 29.7%, which we consider low. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 30, 2014 3 1252606 I 300097587 Summary: Anaheim Public Financing Authority, California Anaheim; Water/Sewer ---PAGE BREAK--- Outlook The stable outlook reflects our view of the system's limited operational risks and our anticipation that net available revenue will continue to provide strong DSC, including additional debt plans. Adding to the stability of the credit is our view of the city's diverse economic base. Although we anticipate no material changes during the two-year outlook period, we could take a negative rating action if the city's DSC materially diminishes from the current marginally acceptable levels for the rating, or if the city significantly draws down unrestricted liquidity. Related Criteria And Research Related Criteria • USPF Criteria: Key Water And Sewer Utility Credit Ratio Ranges, Sept. 15, 2008 • USPF Criteria: Standard & Poor’s Revises Criteria For Rating Water, Sewer, And Drainage Utility Revenue Bonds, Sept. 15, 2008 Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. 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