Fitch Rates Lake Arrowhead Community Service District, CA's Water & Wastewater Revs 'AA+' AustinFitch Takes Various Actions on Four Banks Controlled by Brazilian Subnationals
--Approximately $16.3 million water and wastewater refunding revenue bonds, series 2016.
The series 2016 bond proceeds will be used to refund the district's outstanding water and wastewater COPs, series 2009, for debt service savings. The bonds are scheduled to price via negotiation the week of Aug. 29.
In addition, Fitch affirms its 'AA+' rating on the following obligations:
--Approximately $17.6 million (pre-refunding) in outstanding certificates of participation (COPs), series 2009.
The Rating Outlook is Stable.
The bonds and COPs are secured by a pledge of net water and wastewater system (the system) revenues.
KEY RATING DRIVERS
STRONG FINANCIALS: System financial results, which have been historically sound, continue to improve due to lowering debt service carrying costs. Fiscal 2015 finished with all-in debt service coverage (DSC) of a very strong 3.2x. This compares favorably to Fitch's 'AA' median of 2.0x. System liquidity also finished fiscal 2015 at a very strong level of 791 days of cash on hand.
LIMITED DEBT NEEDS: Infrastructure-related capital spending funded in part by the series 2009 certificates of participation have greatly reduced the system's near - and intermediate-term capital needs. Finishing fiscal 2015 at just $1,250, debt-per-customer levels are low and continue to fall.
ADEQUATE SUPPLY: Although drought pressures remain, the district's access to a variety of water sources is expected to keep water supply adequate.
RATE FLEXIBILITY LIMITED: Rate increases have pushed combined customer bills higher, although some flexibility remains. However, factoring in fees and charges collected on customers' tax roll, rates are likely above Fitch's affordability threshold.
LIMITED SEASONAL SERVICE AREA: Fitch believes that the current rating is likely capped given the limited size and seasonal volatility of the service area, which encompasses a number of resort communities east of Los Angeles.
CONTINUED SOUND FINANCIAL PERFORMANCE: Lake Arrowhead Community Services District's financial forecasts point to sustained liquidity levels and strong all-in debt service coverage (DSC). Given lack of capital pressures, rating stability is expected.
The district provides service to 8,500 water customers and 10,600 wastewater customers to a number of unincorporated communities surrounding Lake Arrowhead. The Lake Arrowhead area is a resort community primarily serving residents of Los Angeles, Orange, San Bernardino, and Riverside counties. More than one-half of the homes in the service area are second homes.
CONTINUED STRONG FINANCIAL PERFORMANCE EXPECTED
The system finished fiscal 2015 with all-in DSC of 3.2x, which was an improvement over the previous several years and higher than Fitch's equivalent median of 2.0x. The cumulative effect of multi-year rate increases combined with the maturity of the series 2002 revenue bonds have led to these strong results. Unaudited results for fiscal 2016 project all-in DSC improving to 3.7x and forecasts for 2017-2020 show coverage at 4.3-4.9x.
The system's available liquidity has also been very strong over the past several years. Inclusive of restricted cash reserves available for certain operational costs, fiscal 2015 finished with the cash equivalent of 791 days of operational costs, which is well above Fitch's 'AA' median. Management's forecasts demonstrate cash remaining very strong through the forecast period, as the minimum expected cash over this timeframe is approximately 550 days.
COMBINED RATES AND FEES NEAR AFFORDABILITY THRESHOLD
After a sizeable rate hike in 2011, subsequent increases have since been moderate and are expected to remain so going forward. Assuming Fitch's standard usage assumption of 7,500 and 6,000 for water and wastewater, respectively, combined customer bills are approximately $100 per month. In addition to rate revenues, pledged revenues include an ad-valorem tax and a 15-year supplemental water supply fee that was enacted in August 2004, both of which are collected on the County of San Bernardino's tax rolls. The tax and supplemental water supply fee represented 17% and 11% of revenues, respectively, in fiscal 2015. Factoring in these fees and charges, all-in rates are likely above Fitch's affordability threshold. Projected future rate increases are expected to be necessary given the probable need for the purchasing of more imported water, as explained below.
MODEST CAPITAL IMPROVEMENT PLAN, MANAGEABLE DEBT RATIOS
The district's five-year CIP is predominantly allocated for repair, maintenance, and replacement projects. The total cost is expected to be approximately $31.5 million. Leverage ratios are fairly low, with debt per customer at $1,250, which is measurably below Fitch's 'AA' category median of $2,050. However, due to a back-loaded debt service schedule, amortization is slow at 69% in 20 years (versus a 'AA' median of 84%). Favorably, management has indicated to Fitch that near-and intermediate-term capital expenditures will be paid with cash, eliminating the need for new debt and supporting the likelihood of continued strong DSC levels.
ADEQUATE WATER SUPPLY
The district's primary water source is provided by Lake Arrowhead (77%), but also utilizes recycled (13%), well (8%) and imported water (2%). Due to severe drought conditions at the time, the State Water Resources Control Board (SWRCB) issued an order in 2006 that limits lake withdrawals to 1,566 acre-feet per year. The district also entered into a memorandum of understanding (MOU) with the Lake Arrowhead Association to maintain lake levels at no lower than 5,100 feet. Since the MOU took effect, conservation and availability of other water sources have reduced the district's lake draw by approximately 41%.
Current drought conditions and the state-mandated water reductions in 2015 continue to pressure lake supply, forcing the district to purchase more imported water (the district has budgeted for increased water costs). With the expected rate increases, Fitch believes that the district is financially positioned to absorb most costs associated with increased purchases of imported water. However, if drought conditions continue, further rate increases may be necessary to keep DSC strong.
The district benefits from its proximity to San Bernardino and Los Angeles, which are about 23 and 75 miles away, respectively. Tourism is the main economic driver in the area, with populations nearly tripling during holiday weekends. Economic prospects for the district appear favorable due to above average wealth levels and low poverty rates of the area's permanent residents. Additionally, although small, there is no significant user concentration in the service area.