Fitch Rates Western Muni Water District (CA) Rev Bonds 'AA'; Outlook Stable

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SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AA' rating to the following Western Municipal Water District Facilities Authority, CA, water revenue bonds:

--Approximately $7.2 million series 2010A (federally tax-exempt);

--Approximately $45 million series 2010B (federally taxable - Build America Bonds).

In addition, Fitch affirmed the following ratings:

--$46.3 million of outstanding water revenue bonds at 'AA'.

The Rating Outlook is Stable.

The bonds are expected to sell on a negotiated basis on or about Oct. 19, 2010. The district will use the bond proceeds to fund its ongoing capital improvement program and to reimburse itself for prior capital expenditures.

RATING RATIONALE:

--Despite a deep economic downturn and a drought, the district has performed well financially, as reflected by healthy liquidity and strong debt service coverage that is projected to remain at or above 1.7 times (x) under conservative assumptions.

--The district's wholesale business provides a high degree of revenue stability.

--Rate increases on the district's retail water and wastewater business lines are making progress in bringing operating revenues and costs into balance, reducing the district's dependence on fluctuating tax revenues.

--The district has limited operating risk because it is primarily a distribution system.

--Exposure to growth-related impact fees is not a credit concern given the small portion of the district's revenues that is provided by this revenue stream.

--Debt burden remains manageable with modest capital needs and additional debt issuance.

--The district's economy has been hard hit by the current recession with above-average joblessness and home foreclosures.

KEY RATING DRIVERS:

--Implementation of the district's plan for full cost recovery through rates, with property tax revenues reserved for capital needs.

--Maintenance of strong coverage ratios.

SECURITY:

The bonds are secured by installment payments from the Western Municipal Water District to the Western Municipal Water District Facilities Authority, the issuer of the bonds. The district's obligation to make installment payments from its net revenues, after paying operations and maintenance expenses, are absolute and unconditional.

CREDIT SUMMARY:

System revenues are diverse and stable provided by the district's sizable wholesale business, timely rate recovery of purchased water costs from wholesale customers, rate actions for retail water and wastewater service to reflect true service costs, and reduced exposure to variability in tax receipts.

Western Municipal Water District's (Western) service territory consists of a 527-square-mile area located in western Riverside County in southern California with a population of 880,600. The district is primarily a wholesale provider of water to eight customers (accounting for 63% of water sales revenues in fiscal 2010). The wholesale cost of purchased water from the Metropolitan Water District of Southern California (MWD; water revenue bonds rated 'AAA' by Fitch) is directly passed through to the wholesale customers. MWD is the regional water provider for southern California. The cost-based nature of the wholesale water business line provides a high degree of stability to the district's overall financial performance.

The district also provides retail water and wastewater service to about 23,300 and 8,000 customers, respectively. Retail water and wastewater revenues accounted for 19% and 10%, respectively, of total revenues in fiscal 2010. The majority of water for the retail system is purchased from MWD, which imposed supply reductions of 10% on member agencies in fiscal 2010 and a rate increase of 21%. Despite improved hydrologic conditions in the state, restrictions remain in place at the current time. Western has increased retail water rates an average of 11% annually over the past five years, and passed the full 21% MWD rate hike through to both retail and wholesale customers in fiscal 2010, despite significant economic stresses affecting its service areas.

The district has undertaken a multi-year series of retail rate increases to fund planned capital investment and to reduce reliance on property tax revenues for operations. Even after the rate increases, the district's retail water rates remain competitive with other local water agencies. The district increased retail sewer rates an average of 7% a year over the past five years.

The district's economy is part of the broader Riverside-San Bernardino metropolitan statistical area, which was among the hardest hit in the United States during the recession. A magnet for homeowners seeking cheaper housing in Southern California, the region benefited heavily from the housing boom. Western's service area population rose 13% from 2004 to 2008, but population growth has since flattened out. Assessed values nearly doubled between 2004 and 2008, but have fallen 12.3% since peaking in 2008. While home foreclosure rates remain above the state and national average in Riverside County, the rate is declining. Single-family home prices have begun to rise again in the Riverside-San Bernardino metropolitan area, according to data from the National Association of Realtors. The slowdown in construction of new homes pushed construction industry employment sharply lower. Riverside County's unemployment rate was well above the national average at 15.3% in July, and the rate has not yet begun to improve.

The district's financial performance has remained healthy with strong coverage ratios throughout the drought and the economic downturn. Revenues available for debt service on the rated debt averaged 2.7x from fiscal 2008 through fiscal 2010. While connection fees and income taxes came under pressure due to the economic downturn, overall revenues continued to rise during the period due to aggressive retail rate hikes and the district's ability to pass on cost increases directly to wholesale customers. Timely rate increases on both wholesale and retail customers resulted in a 1.4% increase in water sales revenue in fiscal 2010 despite a 17% decline in water sales volume due to mandatory water rationing by MWD.

Connection fees are a small percentage of the district's total revenues, accounting for just 2.2% in fiscal 2009. The district has conservatively forecast no connection fee revenue in the current fiscal year. The district's liquidity remains strong with cash on hand estimated to equal 294 days of operating expenses at the end of fiscal 2010. Debt service coverage is expected to decline with the issuance of future bonds, but remain solid. Furthermore, the district's conservative revenue forecasts, which include no gains in property tax collections and very gradual gains in connection fees, suggest Western could perform better than forecast if the economy recovers.

Additional information is available at 'www.fitchratings.com'

In addition to the sources of information identified in the Water and Sewer Revenue Bond Rating Guidelines, this action was additionally informed by information from Creditscope, University Financial Associates, LoanPerformance, Inc., IHS Global Insight, Underwriter, Financial Advisor, Bond Counsel and Underwriter Counsel.

Applicable Criteria and Related Research:

'Revenue-Supported Rating Criteria', Aug. 16, 2010;

'Water and Sewer Revenue Bond Rating Guidelines', Aug. 6, 2008;

'2009 Median Ratios for Water and Sewer Revenue Bonds--Retail Systems', Jan. 28, 2009;

'2010 Water and Sewer Sector Outlook', Feb. 10, 2010.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:

Water and Sewer Revenue Bond Rating Guidelines

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=395918

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548606

2007 Water and Sewer Revenue Bond Peer Study - Wholesale Systems

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=347842

2009 Median Ratios for Water and Sewer Revenue Bonds - Retail Systems

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=423066

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