Fitch Affirms Alisal Water Corp. (CA) Senior Secured Debt at 'BB+'; IDR at 'BB-'
OREANDA-NEWS. Fitch Ratings has affirmed the following ratings for Alisal Water Corporation (Alco):
--Approximately $6.4 million of outstanding 2007A senior secured taxable bonds at 'BB+';
--Issuer Default Rating at 'BB-'.
The Rating Outlook is Stable.
The bonds are secured by a security interest in pledged collateral, which consists of all tangible and intangible assets owned by Alco.
KEY RATING DRIVERS
FINANCIALS NARROW BUT ADEQUATE: Alco's ratings reflect the utility's adequate but relatively weak financial metrics, including low all-in debt service coverage (DSC) and very low liquidity levels. All-in DSC and days cash on hand finished at 1.6x and 14, respectively, in fiscal 2015.
FAVORABLE REGULATORY ENVIRONMENT: The California regulatory environment is relatively predictable and the utility has achieved rate relief as needed, although customer charges are somewhat high.
LIMITED SERVICE AREA AND MANAGEMENT: The customer base is limited and the service area is characterized as having a weak economic profile. Reflective of the size of operations, the number of employees is relatively small, although the executive team is well qualified.
CAPITAL STRUCTURE TO CONTINUE: Capital needs are manageable, which should help to improve Alco's elevated debt-to-equity mix over time.
LONG-TERM SUPPLY ADEQUACY: The utility provides an essential service and water supplies are sufficient to meet long-term demands. Drought conditions affecting the state have had limited impact on Alco's own supplies despite conservation plans.
CAPITAL STRUCTURE: Improvement in Alisal Water Corporation's capital structure would alleviate leverage concerns.
RATE-BASE FLEXIBILITY: Unfavorable changes in California's regulatory environment that make it more difficult to achieve sufficient rate-base adjustments or other impediments to increasing rates as necessary could pressure the rating.
ADEQUATE BUT WEAK FINANCIAL PERFORMANCE; NEAR-TERM CHALLENGES
Operating revenues were down nearly 2% for calendar 2015 as a result of a lower sales environment spurred by the mandatory state-wide conservation requirements put into effect last year (these requirements were lifted in February 2016 but Alco expects to manage to these lower consumption levels). However, other non-operating revenues (such as surcharges and late fees) combined with a $100,000 decrease in operating expenses led to an overall improvement in net income which, in turn, resulted in all-in DSC of 1.6x (up from 1.3x in 2014) and EBITDA coverage of 1.9x (same level as realized in 2014).
Cash flows from operations were also improved in 2015, finishing up $382,000 from the prior year. As a result, Alco's return on equity (ROE) - per Fitch's calculation which includes interest costs - improved to 4.6% from around 2.4% in 2014. At just 14 days cash on hand, liquidity ended 2015 at basically the same below-average level attained in 2014.
Alco provided an updated forecast through 2020, which includes assumptions of a continued 20% reduction in sales, although much of Alco's lost sales revenues are expected to be recovered through various surcharges. On the expense side, Alco is forecasting inflationary adjustments to operating expenses and no additional borrowings. Based on these assumptions, financial margins will remain tight but adequate at the current rating level, with EBITDA coverage of interest expected to be above 1.9x and all-in DSC anticipated to approach or exceed 1.5x.
IMPROVING DEBT PROFILE
Alco's debt relative to equity continues to improve marginally as a result of amortization of existing debt and lack of new borrowings. Debt-to-EBITDA improved to 6% from 6.6% the year prior while debt-to-equity improved to 71% from 73%. Debt-per-customer is a bit more favorable at $1,155.
The system's elevated debt profile continues to be a credit factor. However, incremental improvement in the system's debt profile is expected over the near term given no additional borrowings are planned through the forecast period and amortization of existing debt will continue to occur. Overall, Alco's capital needs are expected to be limited through the fiscal 2020 forecast and consist basically of ongoing renewal and repair of assets as they become necessary, with such costs paid from surplus net revenues. Alco's free-cash-to-depreciation ratio is favorable, which should allow for such funding of capital.
FAVORABLE, STABLE REGULATORY ENVIRONMENT; ELEVATED RATES
Alco is regulated by the California Public Utilities Commission (CPUC) but regulations are fairly well-defined and Alco historically has received timely rate relief. Fitch expects the CPUC will continue to allow future adjustments to cover necessary operating and capital expenditures and to generate an ROE commensurate with other similarly sized private water utilities in the state (currently in the 10% range). Having said this, user rates are elevated and will remain somewhat high based on Alco's 2011 rate case. Currently, residential charges equal 1.1% of median household income based on 1,000 cubic feet of water usage per month.
LIMITED SERVICE TERRITORY AND MANAGEMENT
Alco is a private retail water company in Monterey County, CA, serving a portion of the city of Salinas and a population of around 29,000. Part of Alco's certificated service area includes undeveloped land within the city's extra-territorial jurisdiction. Water supplies are derived exclusively from groundwater sources. Supplies are estimated to be sufficient to meet customer demands for the foreseeable future and are essentially unaffected by the severe drought conditions that have plagued the state in recent years.
Given the scope of operations, the number of company personnel is limited, including the executive team. Largely offsetting this concern are the sound experience and qualifications associated with Alco's executive management team.