As part of its continuous surveillance effort, Fitch Ratings has affirmed its 'AA-' ratings on the following Los Angeles County Sanitation Districts Financing Authority, California sewer revenue bonds:
--$170.9 million, series 2005B, district No. 14, subordinate lien.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by net wastewater revenues, including connection fees.
KEY RATING DRIVERS
ADEQUATE FINANCIAL PERFORMANCE: The district's financial performance has weakened due to a sharp decline in connection fee revenues but remained adequate with debt service coverage excluding connection fees averaging 1.5 times (x) over last three audited fiscal years. Liquidity remained extraordinarily strong with 1,980 days cash on hand at the end of fiscal 2010.
DISCIPLINED RATE SETTING: The district's board has approved a series of large rate increases, averaging 18% annually over the past five years, to provide adequate financial coverage as the district invested heavily to improve and expand treatment capacity. Rates remain affordable as a percentage of median household income.
STRONG, CENTRALIZED MANGEMENT: The district is managed by the Los Angeles County Sanitation Districts' centralized staff, which oversees 23 sewer agencies providing services to more than 5 million Los Angeles County residents, giving the district access to significant financial and operational management expertise.
HIGH DEBT BURDEN: The debt burden is high at $5,783 per customer and $2,198 per capita, but likely to slowly decrease with amortization. The district has no further debt issuance plans and quite manageable capital needs after its recent treatment plant upgrades.
STRAINED LOCAL ECONOMY: Northern Los Angeles County has been hard hit by the housing downturn, and the district's limited local economic base remains under significant stress with unemployment rate at 16.6% in October.
CREDIT PROFILE
District 14 provides wastewater treatment services a diverse residential, commercial and industrial customer base centered on the city of Lancaster in eastern Los Angeles County. The district owns the area's treatment plant and sewer trunk lines, and local governments own the collection system. The district is nearing completion of a major sewerage treatment plant upgrade that will provide a very high level of treatment and provide adequate capacity for growth.
The district has performed well financially through a period of intense economic stress that reduced flows and connection fee revenues. All-in debt service coverage has been strong at about 2.0x over the past three audited fiscal years, though results are bolstered by the booking of connection fee revenues that are not expected to continue. The district prudently budgets to achieve adequate debt service coverage without connection fee revenue. With debt service rising due to borrowing for its new treatment plant, the district projects all-in coverage of just 1.2x over the next five years.
The forecast appears reasonably conservative with significant upside potential if an economic recovery takes hold. While Fitch believes the district's ample reserves offset any concerns about coverage over the near term, coverage at this level could put downward pressure on the rating if it were sustained over a longer period of time. The district's very strong liquidity position, which includes substantial rate stabilization reserves, offsets this concern over the near term.
The district has built up a large cash cushion while raising rates in a disciplined manner to prepare for the increased debt service for the new treatment plant. While rates have more than doubled in recent years, they remain reasonably affordable at 0.7% of median household income in 2012. Sewer fees are collected on local property tax bills, providing a high degree of compliance. The district expects to impose another significant rate increase of about 27% in 2013, and an increase on that scale will be necessary to maintain the current rating due to increasing debt service requirements.
The district's main credit weakness is its very high debt burden related to the recent treatment plant improvements. The district's debt burden is among the highest among rated water and sewer credits. While debt levels weigh on the rating, the recent capital improvements provide a solid basis for future operations and growth, and the district has implemented adequate rate increases to afford the new debt service. Completion of the treatment plant upgrades will leave the district with very manageable future capital needs and no further debt issuance plans.
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 the Revenue-Supported Rating Criteria, this action was informed by information from CreditScope and IHS Global Insights.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 20, 2011;
--'U.S. Water and Sewer Revenue Bond Rating Criteria', dated Aug. 10, 2011;
--'2012 Water and Sewer Medians', dated Dec. 8, 2011;
--'2011 Outlook: Water and Wastewater Sector', dated Jan. 18, 2011.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647331
2012 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657111
2011 Outlook: Water and Wastewater Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=593286
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