OREANDA-NEWS. Fitch Ratings assigns an 'AA-' rating to the following bonds issued by the Yucaipa Valley Water District, California (the district):

--Approximately \$31.6 million water system revenue refunding bonds, series 2015A.

Proceeds will be used to refund all of the district's water system revenue certificates of participation (COPs), series 2004A for a present value savings of \$7.5 million and to pay for the cost of issuance. The bonds are scheduled to sell via negotiation the week of Feb. 9.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first lien pledge on the revenues of the district's water system (the system) and a 1% ad valorem property tax levied in the district.

KEY RATING DRIVERS

ADEQUATE FINANCIAL PROFILE: The financial profile of the system is viewed by Fitch as adequate for the rating level. All-in debt service coverage (DSC) finished fiscal 2014 at a sufficient 1.7x. The financial profile should strengthen in the years to follow, with DSC rising somewhat in subsequent years from savings associated with this transaction; other financial metrics should also post incremental gains.

MANAGEABLE CAPITAL, DEBT PROFILE: While currently somewhat elevated, the district's debt profile will improve from a manageable and entirely pay-go capital improvement plan (CIP) along with rapid debt amortization.

DIVERSE WATER SUPPLY: Extensive planning by a proactive management team has resulted in a sufficient and diverse water supply for medium- to long-term needs.

STABLE LOCAL ECONOMY: The local economy has performed comparatively well post-recession. The unemployment rate, median household income (MHI) and poverty levels generally are in line with or better than state and national averages.

RATING SENSITIVITIES

WEAKENING IN FINANCIAL AND DEBT PROFILES: The rating is sensitive to deterioration in the district's financial and debt profiles. The Stable Outlook reflects Fitch's expectations that such changes are unlikely over at least the next few years.

CREDIT PROFILE

The district is located 70 miles east of Los Angeles in the foothills of the San Bernardino Mountains, with portions of the service area encompassing Riverside and San Bernardino counties. The district provides water, wastewater and recycled water to a primarily residential population of approximately 44,900 through 12,300 connections in the cities of Calimesa and Yucaipa.

ADEQUATE FINANCIAL PROFILE EXPECTED TO IMPROVE
All-in DSC has been stable at 1.6x over the past three years, while liquidity, measured as days cash on hand, finished fiscal 2014 at a generally robust 287 days (the strongest level over the past five years). The district's financial profile is expected to brighten going forward as savings associated with this transaction - coupled with the lack of future borrowing plans - boosts DSC. Management's forecast points to all-in DSC climbing above 3.0x by fiscal 2019, aided by refunding savings as well as significantly strong connection fees.

Fitch notes that historical connection fees have been much lower than those currently being projected by management. Nevertheless, based on the five-year average of connection fees (around \$620,000 per year), total DSC still rises to the 1.8x-1.9x range by the end of the forecast with savings from this transaction included. With the stronger expected DSC, liquidity and cash flow, metrics should also experience gains through the fiscal 2019 forecast period from current levels.

IMPROVING DEBT PROFILE
The district's debt profile is somewhat elevated but improving. Total debt per customer finished fiscal 2014 at \$3,083, above Fitch's 'AA' category median of \$1,934. However, benefiting from ongoing amortization and the present-value savings associated with this refunding, debt per customer is expected to drop to a manageable \$2,050 in five years - in line with similarly-rated utilities.

The district's five-year CIP totals \$8.75 million, with nearly all funding tied to a new 6 million gallon reservoir scheduled to be completed in 2016. Further system needs are minimal given the recent completion of the Yucaipa Valley Drinking Water Filtration Facility in 2007, which was financed with the series 2004 COPs. Capital projects are expected to be funded by cash and therefore should not have an effect on overall district debt.

DIVERSE WATER SUPPLY
The district has a wide array of water resources available for its customers, which places it in a favorable position versus other regional peers. Approximately 60% of the district's potable water supply is derived from the Yucaipa and Beaumont groundwater basins. The remaining 40% is derived from surface water sources, including water from the Oak Glen Plant and imported water from the State Water Project (SWP; purchased from the San Bernardino Valley Municipal Water District and San Gorgonio Pass Water Agency), which is treated at the Yucaipa Filtration Facility. Proactive water supply management practices, including purchasing water from the SWP to recharge previously over-drafted local groundwater basins, are expected to keep water supply sufficient through 2035.

RATES REMAIN COMPETITIVE
Rates include a fixed-charge component and a usage-based component. An additional 1% property tax charge is assessed on service area residents, the large majority of which is allocated to the district. Under Fitch's standard usage assumption of 7,500 gallons per month, rates are affordable at approximately 0.7% of MHI. Although actual usage is much higher in the region, customer bills are competitive with other regional providers. No significant rate increases are projected over the forecast period as new growth is expected to drive revenue increases. However, management retains the ability to increase rates if necessary.

STABLE ECONOMIC PROFILE
The city of Yucaipa's economy has generally performed as well or better than the state and country coming out of the recession caused by the 2009 financial crisis. As such, measured at 6.1% in October 2014, the city's unemployment rate ranked below the state average (7%) but slightly above national (5.5%) levels. MHI is mostly consistent with the state average and better than the national average. Individual poverty rates are below state and national averages. The service area is approximately 50% built out, allowing for room to meet projected growth.