Fitch Ratings assigns us a 'AAA' rating
Fitch Ratings has assigned an 'AAA' rating to the following Orange County Sanitation District, CA (the district) debt:
--Approximately $92.3 million of wastewater refunding revenue obligations, series 2012A.
The bonds are scheduled to price via competitive sale on or about Feb. 28. The proceeds will refund the district's series 2003.
In addition, Fitch has affirmed the following ratings:
--$1.2 billion of wastewater revenue obligations (certificates of participation) at 'AAA';
--$143.2 million of wastewater certificate anticipation notes at 'F1+'.
The Rating Outlook is Stable.
The notes and certificates are secured by installment purchase payments from the district to the Orange County Sanitation District Financing Corp. The payments are payable from net wastewater revenues after operations and maintenance expenses.
KEY RATING DRIVERS
Large, Affluent Service Area: The district's essential role as the wastewater service provider to a large and wealthy service area of 2.5 million people and flat rate structure provide a high degree of revenue stability.
Strong Financial Performance: Debt service coverage averaged a healthy 2.2 times (x) over the three years ended in fiscal 2011, and liquidity was strong with 1,236 days cash on hand at the end of fiscal 2011.
Disciplined Rate Setting: The district's board has raised rates consistently and significantly to preserve financial margins as the district undertook a major capital program to upgrade its plants to full secondary sewerage treatment standards.
Good Rate Flexibility: Rates remain very affordable at just 0.3% of the county's median household income due to significant property tax revenues.
Moderate Debt Burden: The long-term debt burden is moderate at $541 per capita and forecast to remain moderate over the next five years.
Manageable Borrowing Plans: The district's capital plan is large but manageable, requiring $120 million of additional debt over the next five years.
Strong Management Practices: Sound reserve policies, a robust strategic planning process and long-term capital planning drive long-term financial and rate planning processes.
Short-Term Debt Strategy: The 'F1+' rating reflects OCSD's long-term credit quality and implied market access to remarket the notes.
The 'AAA' rating reflects the district's essential role as the wastewater service supplier to a large and wealthy service area of 2.5 million people, strong financial performance, good rate flexibility and a large but manageable capital plan. The rating also reflects the district's continued successful implementation of its upgrade to full secondary treatment, which is ahead of schedule for the December 2012 requirement under its consent decree. The district provides wastewater service to the northern and central portions of Orange County and about 80% of county residents.
FINANCES REMAIN HEALTHY
Financial metrics remained strong with 2.2x debt service coverage in 2010 and 2011. Coverage is forecast to remain above 2.0x through 2014. Liquidity remains very strong with $470.3 million of unrestricted cash and investments at the end of FY 2011 (equal to 1,236 days cash). The cash reserves included $175 million that has been designated for capital spending. With strong reserve policies and planning targets, Fitch expects the district to maintain robust liquidity levels.
The district's board has been very disciplined in raising rates to support a shift to full secondary treatment of sewerage discharges. Rate increases have averaged 10% over the past five years and are scheduled to continue near that pace through 2013 before easing somewhat. Still, rates are very affordable at $267 a year for a single family residential home in fiscal 2012.
The district's primary revenue streams are quite stable, with property taxes providing about 20% of revenues and sewer fees providing 70%. Property taxes have declined very little despite the housing downturn. The district's service area includes relatively built-out and well-established communities such as Anaheim, Huntington Beach, Irvine and Santa Ana, which has insulated it from the sharp declines in assessed value (AV) that have hit newly developed areas. AV fell 1% in 2010 and 0.3% in 2011 before recovering in fiscal 2012 with a 1.4% gain.
DEBT REMAINS MODERATE AMID SIGNIFICANT INVESTMENTS
The district has managed its significant regulatory and capital burdens well. In 2002, the district's board decided to upgrade its treatment wastewater effluent discharged into the ocean to full secondary treatment. The district historically operated under a 301(h) waiver, allowing for less than full secondary treatment. The district voluntarily entered into a consent decree concurrently with the issuance of a new ocean discharge permit. The consent decree called for implementation of full secondary treatment by December 2012. The district has essentially met this broad requirement and expects to complete all of the detailed construction milestones in the consent decree by the end of this year.
The district's debt burden is moderate and likely to remain moderate for the foreseeable future. Total outstanding long-term debt per equivalent dwelling unit (a proxy for customer count used by the district) was very close to the median for all rated credits at $1,444 at the end of fiscal 2011 but above the $977 median for 'AAA'-rated water and sewer utilities. Debt ratios are projected to fall somewhat over the next five years, as borrowing slows and the district slowly amortizes debt (24% repaid in 10 years and 60% in 20 years). The district's capital improvement plan (CIP) for the current and next five years (FY 2012-2017) is large but manageable, totaling about $900 million and requiring $120 million of additional debt. In addition to building further capacity for secondary treatment, the CIP includes significant investments in replacement and renewal of collection system and treatment plant facilities.
EXCEPTIONALLY STRONG SERVICE AREA
The district's affluent suburban service area continues to provide strong fundamental base for its operations despite a deep cyclical downturn. The county's unemployment rate has decreased significantly over the past year, falling to 7.8% in December from 9% a year earlier. While the rate remains cyclically elevated, it is declining and remains well below statewide average of 10.9% for California. Orange County's unemployment rate has traditionally tracked lower than state and national levels. Long-term employment prospects for the county appear solid, given the large and diverse economy and high education and wealth levels. The district benefits from its desirable coastal location and residents have good access to employment opportunities in the massive Los Angeles metropolitan economy. Median household incomes are 123% of state and 143?% of national levels.
Legal provisions are adequate with a 1.25x rate covenant and 1.25x maximum annual debt service additional bonds test.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was informed by information from CreditScope, IHS Global Insights, bond counsel and the financial advisor.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 20, 2011);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug. 10, 2011);
--'2012 Water and Sewer Medians' (Dec. 8, 2011);
--'2012 Outlook: Water and Sewer Sector' (Dec. 8, 2011).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2012 Water and Sewer Medians
2012 Outlook: Water and Sewer Sector