Fitch Affirms Mesa Consolidated Water District, CA's Revs at 'AAA'; Outlook
SAN FRANCISCO -- October 22, 2012
Fitch Ratings affirms the following Mesa Consolidated Water District, CA
--$10.1 million water revenue certificates of participation (COPs) series 2009
--$21.5 million subordinate lien water revenue COPs series 2010 at 'AAA'.
The Rating Outlook is Stable.
The COPs are secured by purchase payments made by the district (the obligor)
to the Mesa Consolidated Water District Improvement Corp. (the issuer) in
accordance with the installment purchase agreement. Payments from the district
are an absolute and unconditional obligation of the district and are backed by
a pledge of net water revenues.
KEY RATING DRIVERS
VERY STRONG FINANCIAL PERFORMANCE: Debt service coverage (DSC) has remained
very strong during a period when California water utilities faced a severe
recession, a drought and a period of very wet weather. Liquidity is
substantial and increasing.
GOOD RATE DISCIPLINE: The district's board has raised rates as needed to
ensure strong financial performance, increasing charges an average of 5.7%
annually in its 2010-2014 rate package. Rates are somewhat high at 1.4% of
median household income but are not out of line for Southern California.
AMPLE WATER SUPPLY: The district recently completed a water treatment plant
investment that largely eliminates its reliance on imported water supplies.
The new plant allows the district to access a relatively abundant supply of
groundwater that is more reliable than imports and can be produced at more
LOW DEBT LEVELS: Debt levels are low, and the district currently has no
SOUND MANAGEMENT PRACTICES: Management practices are sound, as evidenced by
the use of long-term financial and capital planning, a willingness to raise
rates when necessary, and the implementation of a strong financial policy
SOLID SERVICE AREA: The service area is economically strong, stable and
LIENS RATED ON PARITY: The senior and subordinate liens carry the same rating
because the senior lien is small and closed, and all-in DSC is high enough to
support the 'AAA' rating on the subordinate lien COPs.
Mesa Consolidated Water District is an independent water district that serves
the city of Costa Mesa and adjacent areas in Orange County, California. The
district has performed very well financially in recent years, despite weather
extremes and a deep recession. As a built-out Orange County community, the
district's population and largely residential customer base have been stable.
STRONG FINANCES, LOW DEBT
Financial performance is strong and improving due to very conservative
board-approved financial policies. All-in debt service coverage averaged 2.5x
over the last three audited fiscal years (2009 to 2011). Senior-lien coverage
was 3.8x over the same period. All-in coverage is forecast to rise to an
average of 3.5x over the 2012 to 2017 forecast horizon. Water usage declined
significantly from 2007 to 2011 due to recession, drought-related conservation
efforts, and a very rainy 2011. The forecast assumes very little growth from
this subdued usage level, which appears conservative. The forecast also
assumes no meaningful connection fee revenue. Rates have been approved through
2014, and the district's board has been disciplined in imposing rate increases
to meet financial policies; annual rate increases averaged 5.7% in the last
five-year rate package. While rates are somewhat high compared to national
benchmarks, the comparison to other Southern California utilities is more
favorable because the district does not levy a property tax, which allows
other districts to offer at a lower cost than they would if water rates
covered all capital and operating costs.
Liquidity is solid, with $18.4 million of unrestricted cash and investments on
hand at the end of fiscal 2011 (the equivalent of nearly 300 days of operating
expenses). The board has set a goal of increasing the utility's cash position
to equal 600 days of operating expenses, and the utility is on track to meet
this goal by the end of the current forecast horizon. A significant capital
reserve that will provide for future system maintenance is a key driver of the
reserve buildup. Debt levels are low at $1,389 per customer, or $292 per
capita. Amortization is very rapid, with 100% of debt repaid in less than 20
years. The district has no debt issuance plans currently.
STRONG SUPPLY POSITION, IMPORT INDEPENDENCE
The district benefits from access to an ample supply of ground water, and it
recently completed construction of an advanced treatment plant to tap a
deeper, colored water supply that will eliminate dependence on imported
supplies. With completion of its Mesa Water Reliability Facility this month,
the district expects to produce about 60% of its water from clear water wells
that require minimal treatment and 35% from wells that pump amber, 'colored'
water that requires well-head treatment to remove color and odor.
The colored water is plentiful, and pumping is not limited by local
groundwater management agreements. The balance of supplies comes from water
recycling. While the cost of treating colored water is close to the cost of
imported water, the project increases the reliability of the district's water
supply and insulates the district from the unpredictable imported water price
increases. Fitch views the district's water supply position as a significant
SOLID SERVICE AREA
The district's suburban service area weathered the recession better than most
of California. Its unemployment rate was below the state and national averages
in July 2012 at 7.1% and has dropped a percentage point over the past year.
The district benefits from its location in the large and diverse Orange County
employment market. Income levels are solid, with median household income at
121% of the national median in the city of Costa Mesa.
The customer base is reasonably diverse, with residential properties providing
60% of revenues. The top 10 customers purchased 14.4% of water by volume in
2011, which is somewhat elevated. However, concentration concerns are
mitigated because seven of the top 10 customers are governmental agencies.
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 the Revenue-Supported
Rating Criteria, this action was informed by information from CreditScope and
IHS Global Insights.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 12, 2012;
--'U.S. Water and Sewer Revenue Bond Rating Criteria', dated Aug. 3, 2012;
--'2012 Water and Sewer Medians', dated Dec. 8, 2011;
--'2012 Outlook: Water and Sewer Sector', dated Dec. 8, 2011.
Applicable Criteria and Related Research:
2012 Water and Sewer Medians
2012 Outlook: Water and Sewer Sector
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
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Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
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