OREANDA-NEWS. Fitch Ratings has affirmed Yuba City, California's (the city) obligations as listed below:

--\$20.9 million water revenue refunding bonds, series 2013 at 'AA-'.

The Rating Outlook is Stable.

SECURITY
The bonds are secured by net revenues of the city's water system (the system), excluding ad valorem property taxes and special assessments or taxes levied on property within any improvement district. The bonds are on parity with state loan obligations and do not carry a debt service reserve fund.

KEY RATING DRIVERS

ADEQUATE FINANCIAL PERFORMANCE: Debt service coverage (DSC) and cash levels are currently solid but varied significantly over the past several years. Cash is likely to decline and then stabilize given plans to cash-fund a portion of the system's capital improvement plan (CIP).

SUPPLY CONSTRAINTS, MANDATORY RESTRICTIONS: The system's water supply allotments have been cut substantially in recent years and the state recently imposed significant mandatory water use restrictions. Projected revenue losses are mitigated by already significant conservation achieved in the past year, a high fixed rate pricing component, offsetting expenditure reductions, and other avenues under exploration.

HIGH DEBT LEVELS: The system's debt levels currently are high, but are projected to fall moderately as management does not expect to issue any further debt. The system's manageable CIP is expected to be paid fully from grant funding, reserve drawdowns, and pay-as-you-go funding.

GOOD RATE FLEXIBILITY: The city council has consistently and unanimously approved prudent rate increases over the past several years and is approaching the fifth and final year of a multi-year rate hike. The system's affordable rates include a significant fixed component and could be increased substantially from current levels before breaching Fitch's affordability threshold.

STABLE, CONCENTRATED SERVICE AREA: The system serves a relatively stable customer base that is somewhat concentrated, with the top 10 customers generating 14% of revenues.

RATING SENSITIVITIES

PRESSURE FROM STATEWIDE DROUGHT: Pressure on financial margins could occur if water sales fall below assumed levels as a result of even more severe multi-year water rationing being implemented. The Stable Outlook reflects Yuba City's substantial rate flexibility that could offset the impacts of such a scenario.

CREDIT PROFILE
Yuba City, located 40 miles north of Sacramento in California's central valley, is the seat of Sutter County. The city, with a population of about 65,000, is a largely agricultural economy with the largest employers consisting of fruit processors, government, medical services, and retail outlets.

ADEQUATE FINANCIAL PERFORMANCE

The system's financial performance was sound in fiscal 2014, with strong DSC of 3.4x. However, DSC drops to a sound 2.0x net of transfers to the city and one-time intergovernmental transfers in. DSC net of these items has ranged from adequate to good over the past several years. Solid operating revenues have been supported by several years of consistent moderate rate hikes and solid water sales.

Liquidity currently is very strong, with fiscal year end 2014 cash of \$11.7 million, or 887 days cash on hand (DCOH). However, liquidity has fluctuated abruptly through the years based on the varied timing of capital project expenditures and the receipt of related grant funding. Cash at fiscal year end 2010, for example, was zero. Fitch expects cash levels to decline from current levels to fund capital and to stabilize thereafter.

Operating revenues in fiscal 2015 are expected to be significantly lower than the year prior based on mandatory water use restrictions imposed by the city and designed to achieve a 20% reduction. Recent mandatory cutbacks imposed by the state are ultimately expected to result in additional cutbacks for the city but at this point are not expected to materially affect operations.

The ultimate impact on revenues from the water use restrictions will be mitigated by a 2.8% rate hike in fiscal 2016 with significant flexibility to raise rates further, coupled with expenditure reductions and a significant fixed rate water pricing component. About 61% of typical residents' water bill reflects a fixed charge. As a result, water sales revenues for the last seven months of 2014 were down 6.6% year-over-year while water usage declined by a more substantial 15.8%.

ELEVATED DEBT LEVELS BALANCED BY MANAGEABLE CIP; NO DEBT PLANS

Debt levels currently are high at \$2,397 per customer and \$652 per capita. This weakness is mitigated by two factors. First, management has no plans for further debt issuances and amortization is rapid, with nearly all debt maturing within 20 years. Second, the system's CIP is quite manageable and is expected to be fully funded with cash drawdowns, grant funding, and pay-as-you-go funding. The five-year CIP totals \$16.3 million and consists largely of a backwash recovery system to reduce water usage, security improvements, and water line replacements.

AFFORDABLE WATER RATES

The city will enter its final year of a five-year rate hike in fiscal 2016. The rate package included annual moderate rate increases, ranging from 2.8% to 5.9% and was unanimously supported by the city council. Despite years of increases, rates are quite affordable, equivalent to just 0.5% of median household income, well below Fitch's 1% affordability threshold. Rate hikes beyond fiscal 2016 will be informed by an upcoming rate study with the possibility of introducing a drought pricing component.

CONSTRAINED CAPACITY

The system obtains its surface water supply from the Feather River under four water supply contracts. Its primary permits from the State Water Resources Control Board allow it to obtain up to 15,500 acre feet (AF) per year. The city's base summer water supply is provided through a contract with the North Yuba Water District, which provides up to 4,500 AF of water to the city. Additionally, the city has a water supply contract for State Water Project (SWP) water with the California Department of Water Resources that entitles the city to divert up to 9,600 AF per year. However, the average allocation from these contracts is projected to fall to just 31%-37% of contract levels in 2015 compared with 60% two years ago. The city also has access to 2,100 AF from a backup groundwater well and 2,700 AF as a carryover SWP allotment.

The severe curtailment of water allotments has resulted in mandatory water usage curtailments, as noted above. Management additionally is considering re-commissioning three groundwater wells, purchasing other agencies' short-term water rights, and implementation of a drought rate structure.

The city's water treatment plant has a design capacity of 36 million gallons per day (mgd) and storage capacity of 20.6 million gallons. The plant has ample capacity, with current average demand of 23 mgd during summer months.

STABLE, SOMEWHAT CONCENTRATED CUSTOMER BASE

Yuba City provides water service to 18,200 connections, of which about 85% are residential. The city's income levels trail the state and nation, which is typical for a community with a significant agriculture presence. Population growth has averaged just 0.3% annually over the last five years. The system's top 10 customers represent an elevated 14% of operating revenues, with Sunsweet Growers accounting for the majority of the concentration.