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FITCH AFFIRMS ANAHEIM, CA'S WATER REVS AT 'AAA'; OUTLOOK STABLE Fitch Ratings-San Francisco-19 September 2012: Fitch Ratings affirms the following ratings on Anaheim Public Financing Authority, CA (the authority): --$86.7 million outstanding water revenue bonds at 'AAA'. The Rating Outlook is Stable. SECURITY The bonds are issued by the authority and secured by purchase payments made by the city of Anaheim (the city) in accordance with the installment purchase agreement. Payments from the city to the authority are absolute and unconditional. Payments are only required to be made from net revenues of the city's water system (the system), although the city is not precluded from making payments from any available funds. The rating reflects the credit quality of the system. KEY RATING DRIVERS STABLE SOURCE OF SUPPLY: Water supply is primarily provided by the Orange County Water District (OCWD; revenue certificates of participation rated 'AAA' by Fitch), which has no significant capital needs or anticipated cost increases, providing the city with relative cost stability compared with much of Southern California. FAVORABLE RATE STRUCTURE: The water rate structure includes a unique direct pass-through of purchased water costs and debt costs, providing strong and timely cost recovery from ratepayers. RATE FLEXIBILITY: The city's advantageous water supply is reflected in its very low water rates for the region. STRONG FINANCIAL PERFORMANCE: The water system enjoys a strong financial position, with debt service coverage expected to remain above 2.2x and adequate liquidity levels given revenue stability. STABLE CUSTOMER BASE: The customer base is stable in a service territory that is largely developed. Limited growth pressure is a positive credit factor given the scarcity of new water supplies in California. EXPOSURE TO WATER COST PRESSURE: There is uncertainty as to the availability and price of the portion of water supply provided by the Metropolitan Water District of Southern California (MWD; revenue bonds rated 'AA+' by Fitch) which accounts for over 30% of water supply. WHAT COULD TRIGGER A RATING CHANGE EROSION OF KEY METRICS: Further decline in liquidity levels and/or ongoing escalation of debt levels without offsetting improvement of other credit factors could erode credit quality. CREDIT PROFILE STABLE CUSTOMER BASE The water system serves the city as well as a small portion of the unincorporated area outside the city. The system currently serves a population of approximately 350,000 and has sufficient supply to serve the city's anticipated build-out population of 400,000. The system has a diverse mix of customers, with 60% of revenues provided by residential users. No single customer accounts for more than 4% of revenues. Customer growth has been moderate, averaging 1% annually over the past five years, which is a credit positive given the scarcity of additional water supplies in Southern California. ---PAGE BREAK--- STABLE SOURCE OF SUPPLY; EXPOSURE TO MWD COSTS The city of Anaheim's water supply is derived primarily from the OCWD, which despite fluctuations in availability is a strong credit positive given its low cost. Anaheim received between 64%-80% of its water supply from OCWD over the five years ending fiscal 2011. The amounts have been lower in recent years, as OCWD has restricted pumping to allow the groundwater basin to recharge after some dry weather years. Anaheim pays OCWD a per acre-foot charge that covers the cost of capital improvements at the district and the purchases of replenishment water. OCWD has limited future capital needs, and its rate increases are expected to be moderate. The city's remaining supply - about 35% in fiscal 2011 - is provided by the MWD. The cost of untreated MWD water is more than double that of what the city receives from OCWD and there is ongoing cost pressure related to the MWD's water supply. FAVORABLE RATE STRUCTURE AND RATE FLEXIBILITY Fitch views the system's rate structure, which provides for automatic increases to recover capital and debt service costs as well as direct pass-through of purchased water costs, as a strong credit positive. The system has three rate components: a base charge, a water commodity adjustment to recover actual cost of purchased water from MWD and OCWD along with electricity charges for pumping, and a water system reliability adjustment for capital cost recovery. Anaheim's water rates are low for the region, reflecting its access to OCWD's water supply in a region predominately served by the MWD. The average bill is $43.90, up about $10 over the last five years. The increase reflects the higher imported water costs from MWD as well as an additional surcharge to fund capital needs. STRONG FINANCIAL PERFORMANCE Fitch views the system's financial profile as strong. Coverage levels of all obligations have been greater than or equal to 2.4x over the past five years, including unaudited financial results for fiscal 2012. Projected debt service coverage is anticipated to remain above 2.2x. Liquidity is adequate with $22.8 million in cash, or 187 days cash on hand at the end of fiscal 2011. Liquidity declined in fiscal 2010 by around 30% as cash was spent on capital projects. However, Fitch views reserves as adequate given the revenue stability provided by the system's rate structure. Furthermore, cash levels are not expected to decline further through the forecast period. MANAGEABLE CAPITAL NEEDS While the system has historically had very little debt, recent issuances have been used to fund the majority of the system's capital needs. The city has a five-year capital plan with an estimated cost of $74.2 million. The capital plan will be funded with a $30 million anticipated bond issuance in fiscal 2013 and an additional $30 million in 2015. With these bond issues, debt per customer is projected to increase to $2,750 in the next five years (compared with a median of $1,224 for Fitch's 'AAA' rated water utilities). While the rising debt burden is a concern, Fitch views the leverage as acceptable. However, continued escalation in the system's debt profile beyond the capital plan period could erode credit quality without commensurate improvement in other credit factors. Contact: Primary Analyst Shannon Groff Director +1-[PHONE REDACTED] Fitch, Inc. 650 California Street, 4th Floor ---PAGE BREAK--- San Francisco, CA 94108 Secondary Analyst Andrew Ward Associate Director +1-[PHONE REDACTED] Committee Chairperson Doug Scott Managing Director +1-[PHONE REDACTED] Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: [EMAIL REDACTED]. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. In addition to the sources of information identified in Fitch's U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope. Applicable Criteria and Related Research: --'Revenue-Supported Rating Criteria' (June 12, 2012); Water and Sewer Revenue Bond Rating Criteria' (Aug. 3, 2012); --'2012 Water and Sewer Medians' (Dec. 8, 2011); --'2012 Sector Outlook: Water and Sewer' (Dec. 8, 2011). Applicable Criteria and Related Research: 2012 Outlook: Water and Sewer Sector http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=[PHONE REDACTED] Water and Sewer Medians http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657111 U.S. Water and Sewer Revenue Bond Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684901 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. 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