AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings affirms its 'AA-' ratings on the following City of Santa Maria, CA (the city) bonds:
--$50.8 million water and wastewater subordinate lien revenue refunding bonds, series 2012A and 2012B (taxable).
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a subordinate lien of net revenues from the city's water and wastewater system (the system). The city has $14.6 million of senior lien 1997 COPs outstanding (not rated by Fitch) with a final maturity in 2023. The senior lien is closed.
KEY RATING DRIVERS
WATER SUPPLY DIVERSITY: Despite the California drought and a very low 5% allocation on the State Water Project (SWP) this year that typically provides 50%-90% of the city's water supply, Santa Maria has sufficient water supply through its groundwater rights to meet total water demand, if necessary.
LIMITED OPERATIONAL RISK: The water system is entirely gravity-fed, reducing pumping needs and power costs. Water treatment of SWP water is provided by the Central Coast Water Authority (CCWA). The city's wastewater system collects wastewater and provides treatment at one central plant owned by the City.
CONSISTENT RATE INCREASES: The city has enacted 5% annual rate increases on both the water and wastewater systems for the past 34 and 23 years, respectively. This practice is expected to continue, subject to California's Prop 218 notification requirements.
DEBT RESTRUCTURING AIDED MARGINS: Debt restructuring implemented by the series 2012 bonds reduced debt service to a level $4.6 million annually by extending the debt amortization to 2036 from 2028. This reduced pressure on financial margins and rates being driven by an escalating debt service schedule.
HEALTHY FINANCIAL PROFILE: Santa Maria's utility financial performance has been relatively stable other than the pressure from increasing debt service prior to the restructuring. All in debt service coverage is projected to stabilize around 1.7x in fiscal 2015. Liquidity is strong at 330 days operating cash.
STABLE CUSTOMER BASE: The customer base is a stable credit factor even though the local economy exhibits vulnerability associated with a concentration in agriculture. The city's customer base does not include agricultural production; agricultural entities have their own groundwater sources. Flat growth presents minimal capital investment needs.
RATING SENSITIVITIES
IMPROVED FINANCIAL MARGINS: Stronger all-in debt service coverage could improve the rating.
CREDIT PROFILE
MODERATE SERVICE AREA CHARACTERISTICS; STABLE CUSTOMER BASE
The City of Santa Maria (Fitch implied general obligation rating of 'AA+') is located on the California central coast in northern Santa Barbara County with a population of 101,500. The economy's historic concentration in agriculture has diversified somewhat in recent years. The customer base for the water and wastewater systems includes around 21,000 customers and has been stable, with average annual growth of 0.6% over the past five years. The customer base exhibits no concentration, with the top 10 customers accounting for 11% of combined revenues. Further, customer levels do not include agricultural load. Residential customers provide 68% of combined revenues.
AMPLE WATER AND WASTEWATER TREATMENT CAPACITY
Drought conditions in California are serious but are not a credit concern for the utility given the redundancy in its water supplies that protect against shortages in the SWP supply. The city has ample groundwater rights of 33,000 acre-feet (af) per year, in relation to the city's total water sales of between 13,000 af and 14,400 af annually. The groundwater basin is adjudicated, which provides a high degree of certainty to water availability and protection from over-drafting of the basin.
The city began purchasing SWP water in 1997 to alleviate pressure on the groundwater basin and now uses as much SWP water as is made available by the California Department of Water Resources (DWR) and supplements this imported supply with its groundwater. The city targets to use SWP water for at least 50% of its water supply but actual use has ranged between 62% and 91% in 2011-2013.
Actual SWP water received varies to a high degree with statewide hydrological conditions, but 2014 has been one of the worst. With the statewide drought, DWR initially indicated that no water would be made available but has since increased the SWP allocation to 5%. Although the city has an allocation of SWP water equal to 17,820 af, actual deliveries in 2014 based on a 5% allocation will be 891 af. Typically, the city can rely on around 60% allocation in average water conditions; the 2014 allocation is considered unusually low.
The wastewater system consists of the collection system and a 13.5 million gallon per day (mgd) treatment plant. A plant expansion was completed in 2009 and funded from cash on hand. Effluent discharge consists of secondary treatment and percolation ponds. Wastewater percolation helps recharge the groundwater basin, so the city receives credit for groundwater rights to 65% of SWP water used on a five-year rolling basis.
HEALTHY FINANCIAL MARGINS; HIGH DEBT
The system's revenues exhibit stability from annual 5% water and wastewater increases and a rate structure that partially limits the revenue impact of declining water sales. Moderate rate increases for both systems are expected to continue in the 5% range (approved by city council through fiscal 2015), and rates are competitive in the region.
Debt service coverage of the remaining senior lien bonds (lien closed) is projected above 2.0x and all-in debt service coverage is expected to range between 1.5x-1.8x in fiscals 2014-2018. Debt service coverage in fiscal 2013 was unusually high given that the restructuring delayed any principal repayment in this year.
Liquidity levels are strong with $25.9 million in unrestricted reserves (330 days operating cash). Balances may come down to still healthy levels of at least $10 million as the city's modest capital needs are funded from cash reserves and rates. No additional debt is anticipated.
Much of the city's outstanding debt relates to infrastructure put in place in 1997 to take delivery and blend SWP treated water with its groundwater supply. Debt levels are above average with debt to net assets of 66% as compared to Fitch's median for 'AA' category water utilities of 47%. Debt amortization is somewhat slow with only 27% of debt retired in the next 10 years. Debt levels per customer are average at $1,421 per customer.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Water and Sewer Revenue Bond Rating Criteria', dated July 31, 2013;
--'California Drought Impact on Utilities', dated March 28, 2014;
--'Peer Review: California Water and Sewer Credits', Dec. 3, 2014;
--'2014 Water and Sewer Medians', dated Dec. 12, 2013;
--'2014 Outlook: Water and Sewer Sector', dated Dec. 12, 2013.
Applicable Criteria and Related Research:
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275
California Drought Impact on Utilities (Water and Public Power Utilities: Built to Last)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742416
Peer Review: California Water and Sewer Credits
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724493
2014 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358
2014 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357
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