story posted at www.thecapistranodispatch.com
Fitch Downgrades San Juan Capistrano Pub Fin Auth, California's Rev COPs to 'A'; Outlook Stable
AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings downgrades the following San Juan Capistrano Public Financing Authority, CA's (the authority) outstanding revenue certificates of participation (COPs):
--$36.5 million revenue COPs to 'A' from 'AA'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The downgrade to 'A' from 'AA' reflects a dramatic weakening of the city of San Juan Capistrano's (the city) financial profile including the depletion of unrestricted cash reserves, costly and delayed remediation of water contamination, and insufficient net system revenues to meet annual debt service requirements.
--Liquidity is expected to remain negligible for at least the next several years, providing limited operating and capital flexibility.
--The Rating Outlook is Stable because debt service coverage is projected to improve with approved rate hikes, reduced operating expenses from decreased imported water purchases, and a receipt of the first installment of a disbursement pursuant to a settlement agreement related to water contamination.
--The debt profile is elevated and likely to increase further.
--Rates are affordable, providing room for projected increases.
--Demographics are healthy with high wealth levels and unemployment below state and national averages.
KEY RATING DRIVERS:
--Ability of the city's groundwater recovery plant (GWRP, or the plant) to operate at or near full production, alleviating costly imported water purchases.
--Improvement in debt service coverage and financial flexibility.
SECURITY:
The certificates are secured by installment payments made by the city to the authority. Installment payments are a special obligation by the city, secured by a pledge of and first lien on the net water system revenues.
CREDIT SUMMARY:
A number of factors contributed to the rapid deterioration in the system's financial position. The city completed construction of a GWRP in fiscal 2005, which was built to reduce the city's reliance on imported water to meet area needs. The plant has been operating at only one-half production for over two years due to various factors, including methyl tertiary butyl ether (MTBE) contamination at plant wells. Consequently, operating expenses, which had been projected to decline with decreased water purchases, actually increased by 8% and by another 5% in fiscal 2009 and 2010 respectively. The operating expense increases were not counterbalanced by increased water sales. Instead, two years of wet weather, when water sales were reportedly at a 20-year low, led to a 13% and 4% decline in operating revenues in fiscal 2009 and 2010, respectively.
The housing collapse compounded the decline in system revenues, resulting in a 25% drop in developer fees from fiscal 2009 to 2010. Thus, debt service coverage (DSC) levels, which had averaged 3.2 times (x) over the fiscal 2006 to 2008 period, fell to 1.8x in fiscal 2009 and dropped precipitously to 0.2x in fiscal 2010. Unrestricted cash was also drawn upon in fiscal 2009 and entirely depleted by fiscal 2010 to cover capital expenditures and debt service payments.
Fiscal 2009 rates were kept in place for most of fiscal 2010 (i.e. rate hike was 0%), but were raised by 13% in February 2010 with the adoption of a five-year rate package (overall fiscal 2010 rate increase was 5.4%). Rates were increased by an additional 18% for fiscal 2011 (effective in July 2010), resulting in a cumulative rate increase of 27% for fiscal 2011. In conjunction with the rate package, council approved future automatic rate adjustments to pass-through any rate increases imposed by the Metropolitan Water District of Southern California (MWD). The city currently purchases 70% of its water from MWD, in contrast to planned purchases of about 50% with full GWRP operating production.
A settlement agreement between Chevron Corporation (rated 'AA' by Fitch) and the city to address the cleanup of groundwater contamination that contributed to the poor performance of the GWRP was reached on March 7, 2011 after long delays. The city has received $1.5 million in disbursements from the company, and expects to receive an additional $50,000 in fiscal 2011. While the city's forecast assumes no disbursements from Chevron beyond fiscal 2011, successful and timely completion and proven effective operation of a granulated active carbon (GAC) facility at the contaminated well site entitles the city to an additional $1.6 million in settlement funds. The city expects to complete construction of the GAC treatment system in July 2011. The GAC facility is expected to remove the MTBE contaminant, thus allowing the GWRP to operate at full production and help reduce purchases of costly water from MWD to historical levels.
The rate hikes and settlement monies are expected to improve the system's financial profile for fiscal 2011 and beyond, with DSC currently projected at 1.7x in fiscal 2011 and similar levels over the five-year forecast period. However, delays that prevent the city's GWRP from operating at full production to alleviate costly imported water purchases could negatively affect results beyond the current fiscal year. The level of adopted rate hikes is not expected to replenish reserves for at least several years, affording the system little operating flexibility.
The city's current five-year capital improvement plan (CIP) totals $29.3 million. However, given the system has no cash reserves available and surplus revenues will not be sufficient to meet projected annual capital costs, projects will need to be deferred until cash reserves have been restored and/or debt will need to be issued to meet current five-year capital needs. Issuance of additional debt will cause already high debt ratios to escalate further. Debt amortization is average.
The water system serves approximately 11,000 customers, including about 1,000 users outside of the city limits. Customer growth has been modest at 1.0% annually over the past five years. San Juan Capistrano (general obligations rated 'AAA' with a Stable Outlook) is located 60 miles north of San Diego, within one mile of the Pacific Ocean and 60 miles south of Los Angeles. The city is largely a residential, suburban community with residents commuting to jobs in the Orange County, San Diego, and Los Angeles areas. Area wealth levels are 50% and 70% above state and national levels, respectively, and the 8.1% unemployment rate as of January 2011 is below state, county, and national levels.
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