SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings takes the following actions on Yuba City, CA's water revenue certificates of participation (COPs) as part of its continuous surveillance effort:
--$27.035 million water revenue COPs affirmed at 'AA-'.
The Rating Outlook is Stable.
RATING RATIONALE:
--Maintenance of sound financial profile;
--Successful conversion of all users to surface water from groundwater;
--Planning efforts, including proposed automatic annual rate increases over the next five years;
--Manageable capital needs, which will allow the system to renew permits and greatly increase capacity.
KEY RATING DRIVER:
--Maintenance of adequate debt service coverage and improved liquidity levels;
--Successful passage of the five-year rate increases deemed essential by the city to completion of the fish screens project necessary to obtain state permit and increase capacity.
SECURITY:
The COPs are secured by a first lien on the net revenues of the water enterprise (the system).
CREDIT SUMMARY:
Yuba City, located 40 miles north of Sacramento in California's central valley, is the seat of Sutter County. The city has a population of about 65,000 and is a largely agricultural economy with the largest employers being fruit processors, government, medical services, and retail outlets. Indicative of agricultural-based economies, the area's unemployment rate of 21.7 % is well above state and national averages. Wealth levels are also lower than state and national averages.
The primary source of water for city's water system, which serves 18,094 connections, is the Feather River. Yuba City's base summer water supply is provided through a contract with the North Yuba Water District (NYWD). Under this contract, expiring in 2035, NYWD provides up to 4,500 acre-feet 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 (DWR). This contract entitles the City to divert up to 9,600 acre-feet per year. Based on these two sources, the city has sufficient supplies to meet current customer demands.
Debt service coverage is good, though it declined slightly to 2.3 times (x) in fiscal 2010 from 2.4x and 2.6x the prior two years. Connection fees have declined significantly over the last few years, although fiscal 2010 coverage less connection fees was still above 2x. Liquidity as of the end of fiscal 2010 was greatly diminished from prior years. Cash declined from a high of $17.8 million in fiscal 2007 to $0 in audited fiscal 2010. However, liquidity reported has rebounded significantly from $4.9 million in reimbursement proceeds from two loan agreements from the state which were spent in fiscal 2010 but not received until early fiscal 2011. Based on these funds, the cash position would equal about 370 days cash on hand for fiscal 2010, although this is still much lower than the 731 days cash in fiscal 2009. The city has spent down cash reserves to construct improvements related to conversion from groundwater to surface water. The project was funded by local revenues as well as state revolving loan funds and two federal stimulus grants.
Rates, which have not increased since October 2007, are expected to increase by about 5% annually for fiscals 2012-2016, subject to a proposition 218 hearing expected spring 2011. Based on these rate hikes, the city believes revenues will be sufficient to support operations and capital needs over the next several years. The average monthly water bill in fiscal 2010 was $36.86 per month, equal to around 0.9% of median household income; affordability levels are not expected to be materially impacted by the proposed rate hikes.
Debt per customer of $1,459 is in line with the rating category and is expected to increase slightly to $1,658 over the next five years with implementation of a $19.7 million capital improvement plan. According the city, these will be funded through rate increases and increased developer fees. The city committed to construction of fish screens at its intake pipeline as part of its renewal process with the state for its two water supply contracts. Upon construction of the fish screens, permitted pumping/treating capacity will be increased to 48 million gallons per day (mgd) from 30 mgd; maximum summer demand has been about 25 mgd. At a total cost of about $5 million, the project is dependent upon the rate increases, although some funding is expected to come from grants.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
'Revenue-Supported Rating Criteria', dated Aug. 13, 2010;
'Water and Sewer Revenue Bond Rating Guidelines', dated Aug. 6, 2008.
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
Water and Sewer Revenue Bond Rating Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=395918
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