Fitch Rates Western Municipal Water District, CA’s Revs ‘AA’; Outlook Stable

December 31, 2015 - Essential Water

SAN FRANCISCO–(BUSINESS WIRE)–Fitch Ratings has reserved an ‘AA’ rating to a following Western
Municipal Water District Facilities Authority, California debt:

–Approximately $52.1 million array 2016A adjustable-rate H2O revenue
refunding bonds.

The holds will be sole around traffic during a week of Jan. 11, 2016.
The deduction will be used to reinstate and restructure a district’s
superb 2009B holds and to compensate costs of issuance. Principal will be
restructured into after years.

In addition, Fitch affirms a following ratings:

–$99.1 million H2O income holds array 2009B, 2010A and 2010B;

–$43.8 million array 2012A holds (underlying long-term rating) and
compared bank holds should they ever be reason by a minute of credit
provider.

The Rating Outlook is Stable.

SECURITY

The holds are payable from net revenues of a district’s H2O and
cesspool utilities.

KEY RATING DRIVERS

SOLID FINANCIAL PERFORMANCE: Financial opening has been strong
by new durations of drought and mercantile stress. All-in debt
use coverage (DSC) averaged a clever 2.6x over a 3 fiscal
years finished Jun 30, 2015. Liquidity remained sound with 326 days
unlimited money and investments on palm during a finish of mercantile 2015.

IMPORTED WATER SUPPLY DEPENDENCE: The district is contingent on an
alien H2O supply, as is most of a region, that is theme to
accessibility hurdles and cost pressures.

DEMAND REDUCED BY DROUGHT: State H2O regulators have systematic mandatory
charge measures that have neatly reduced a district’s water
sales volumes. Declines in sales are partially equivalent by expense
reductions in H2O purchases, gripping a financial impact of drought
docile so far. The district’s house has lifted rates as indispensable to
say plain financial opening and to pass by increases in
alien H2O costs.

MODEST DEBT BURDEN: The debt weight is low, and destiny borrowing plans
are modest. Investment in a complement has been clever and proactive.

DEBT RESTRUCTURING TRANSACTION: The stream transaction is designed to
check principal amends on certain growth-related projects until
tie fees entirely redeem from a new housing downturn. The
check is not a element credit regard so prolonged as it is temporary.

LARGE SUBURBAN SERVICE AREA: The district provides essential H2O and
cesspool services to a poignant Riverside County use area that is
flourishing again after a low mercantile slump. Growth pressures remain
manageable.

RATING SENSITIVITIES

DECLINES IN FINANCIAL PERFORMANCE: The rating could come underneath downward
vigour if postulated declines in financial opening occur. The
Stable Outlook reflects Fitch’s expectancy that margins will remain
healthy, even with revoke H2O sales mandated by a state.

CREDIT PROFILE

Western Municipal provides essential H2O and cesspool services to a
race of 920,800 residents of a 527-square-mile use area in
western Riverside County. It provides sell H2O services to 23,636
customers, sell cesspool services to 8,303, and indiscriminate H2O to eight
H2O retailers. The district is partial of a extended and different suburban
economy that has mostly recovered from a low housing downturn that
strike a segment in a final decade. The county’s stagnation rate trends
rather aloft than a nation, though has declined neatly to 6.5% with
4 years of fast pursuit growth. The district’s assessed value is growing
during a fast gait again (7.7% in 2015) with liberation in home prices and a
nascent resumption in development.

SOLID FINANCIAL PERFORMANCE THROUGH STRESSFUL PERIOD

The district’s financial opening has continued during clever levels
notwithstanding poignant income impacts of California’s serious four-year
drought. All-in DSC was really clever during 3.4x in 2014 and still plain at
2.3x with poignant cuts in H2O use in mercantile 2015. Free
cash-to-depreciation averaged a plain 140.5% over a period, providing
poignant supports for investment in a system.

Revenues are pretty different with poignant skill tax, cesspool and
bound H2O scale fees providing a fast bottom underlying a district’s
non-static H2O and tie price revenues. All-in DSC excluding
flighty tie fees averaged a sound 2.2x over a past dual years.

The utility’s five-year financial foresee shows all-in DSC without
tie fees averaging softened than 2.5x over a subsequent 5 years. The
boost in coverage is mostly driven by a rebate in debt service
associated to a stream restructuring and not a thoughtfulness of
significantly softened underlying financial performance. Still, margins
are amply clever that coverage would sojourn above 2x even without
debt restructuring and would be doubtful to vigour a rating without
a poignant and postulated decrease in revenues that was not equivalent with
reductions in expenditures or rate adjustments.

The district’s income structure provides a healthy relating between
non-static losses and revenues, utterly in a indiscriminate business.
The district sells alien H2O to 8 indiscriminate customers
(providing about 70% of H2O sales in hactare feet) and passes a cost of
purchased H2O from a Metropolitan Water District of Southern
California (Metropolitan, income holds rated ‘AA+’/Stable Outlook)
directly by to those customers. Rates embody an executive fee
for a district’s costs. The cost-based inlet of a indiscriminate water
business provides fortitude to a district’s altogether financial
performance. Retail rates also embody surcharges that concede the
district to pass along alien H2O costs, despite with rebate precise
relating than indiscriminate charges.

Liquidity has been consistently plain with $92.3 million of unrestricted
money and investments, or 326 days of handling expenses, on palm during the
finish of mercantile 2015.

SOLID RATE DISCIPLINE

The district’s inaugurated house of directors has lifted rates as necessary
to say clever financial performance, flitting by vast rate
increases associated to alien H2O costs in a trained and formulaic
manner. The application increasing sell H2O and cesspool rates by an average
of 8.9% annually over a 5 years finished 2015 to equivalent rising debt
use and alien H2O costs. Retail H2O and cesspool rates are
rather towering during 2.1% of Riverside County’s median domicile income,
though seem allied to other internal providers of alien H2O in this
dull region.

IMPORT DEPENDENCE, REGULATORY PRESSURE

The district imports about 83% of a H2O from a Colorado River and
a California State Water Project (SWP) around Metropolitan.
Metropolitan’s poignant investments in H2O storage ability have
rather reduced concerns about import coherence and supposing a solid
aegis during a stream drought. Actual supply constraints have
compulsory sincerely docile reductions in H2O sales with Metropolitan
requiring a 15% rebate in sales this year. However, state regulatory
movement has forced most deeper conservation. The California State Water
Resources Control Board has systematic a district to revoke H2O usage
by 32% from 2013 levels in a sell use area. The district’s
indiscriminate business have faced identical mandates. The district forecasts
a $6.6 million decrease in indiscriminate and sell H2O revenues and a $6.7
million decrease in associated H2O losses in mercantile 2016, as purchases
of alien H2O and pumping costs decrease with H2O sales.

DEBT TO REMAIN MODERATE

The district’s debt weight of $155 million was utterly low on a per capita
basement during $168 and assuage as a percent of net plant resources during 41% at
a finish of 2015. The district’s $81.6 million five-year capital
alleviation devise will need medium additional borrowing of about $24
million. Debt is projected to reason solid during $175 per capita in five
years.

BOND RESTUCTURING IS CREDIT NEUTRAL

The stream transaction will reinstate a district’s array 2009B bonds
and is designed to check principal amortization for 5 years until
tie fees redeem adequate to entirely support a growth-related
plan primarily financed by a debt. The district skeleton to issue
multi-modal holds with a five-year put in 2020 and no principal payments
during a initial 5 years outstanding. It skeleton to remarket the
holds as entirely amortizing fixed-rate debt in 5 years.

The restructuring appears to be driven by a process preference to compensate for
expansion with tie price revenues, not by financial necessity. The
district will use tie price revenues while a holds are in the
initial five-year interest-only mode to repay itself for debt
use incurred for growth-related projects during a housing
downturn. It skeleton to resume normal principal payments thereafter. While
delays in amortization are generally disastrous for credit quality, the
district’s low debt weight and clever underlying financial performance
equivalent any impact on a rating.

Additional information is accessible during ‘www.fitchratings.com‘.

In further to a sources of information identified in Fitch’s
Revenue-Supported Rating Criteria, this movement was additionally informed
by information from Creditscope.

Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun
2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S.
Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869223

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
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Solicitation
Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997443
Endorsement
Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2detail=31

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