OREANDA-NEWS. March 30, 2015. Fitch Ratings has assigned the following rating to Upper Santa Clara Valley Joint Powers Authority (JPA), CA revenue bonds issued for the benefit of the obligor, Castaic Lake Water Agency, CA (CLWA, or the agency):

--Approximately \\$79.6 million refunding revenue bonds, series 2015A, rated 'AA-'.

The bonds will be sold via negotiation the week of April 13. Proceeds of the bonds will be used to refund the agency's own parity lien 2006C certificates of participation (COPs) for debt service savings. The bonds will not have a debt service reserve fund.

In addition, Fitch affirms the following ratings of the agency:

--\\$54.9 million in outstanding senior lien COPs at 'AA';
--\\$234.9 million in outstanding parity lien COPs and revenue bonds at 'AA-' (pre-refunding);
--\\$45.9 million of bank notes corresponding to the agency's commercial paper notes at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from revenues pursuant to an installment purchase agreement (IPA) between the Santa Clara Valley JPA and the agency. The agency's payments under the IPA are absolute and unconditional and are on parity with the agency's own outstanding COPs and bonds payable subordinate to the agency's senior lien debt (series 1999). The senior lien is closed. Net revenues include facility capacity fees and the agency's share of the county's 1% ad valorem taxes but excluding property taxes levied for payment of State Water Project (SWP) obligations.

The agency owns the two largest retail water purveyors to which it sells water, which were acquired in 1999 and 2012. However, the revenues from the retail operations are not pledged to bondholders and have separately secured debt outstanding.

The bank notes are on parity with the agency's parity lien COPs (subordinate to the senior lien); there currently are no bank notes outstanding.

KEY RATING DRIVERS

SOUND FINANCIAL PERFORMANCE: The agency's financial position is solid with adequate debt service coverage and robust liquidity metrics. Increased water charges are projected to yield similar results over the five year forecast period.

ABOVE-AVERAGE DEBT PROFILE: Leverage ratios are above average. Principal payout is slightly below average, but capital needs appear manageable.

RELATIVELY STABLE REVENUE BASE: Recently adopted three year annual rate hikes and a change in the structure to collect a fixed component that comprises roughly 60% of debt service requirements during the forecast period are considered positive credit factors. Moreover, the agency receives a portion of the county's 1% property tax.

SLOW RETURN OF DEVELOPMENT: While economic indicators are sound, new area development has been modest resulting in lower than previously expected development-related facility capacity fees.

WATER SUPPLIES SUFFICIENT: Water supplies are sufficient to meet demands in the near and long term. The agency has water reserves in storage to buffer the impacts of California's ongoing multi-year drought.

RATING SENSITIVITIES

PRESSURE FROM STATEWIDE DROUGHT: Pressure on financial margins could occur if California's statewide drought continues to restrict supplies. Statewide drought messaging and mandatory use restrictions are likely to reduce the agency's water sales.

CONTINUED HEALTHY FINANCIAL METRICS: Maintenance of adequate all-in debt service coverage (DSC) and solid liquidity are key credit considerations.

CREDIT PROFILE

Located predominantly in Los Angeles County, approximately 35 miles northwest of downtown Los Angeles, CLWA provides supplemental wholesale water service to a population of approximately 287,000 through four retail purveyors. The agency provides around 50% of the region's water supplies (36,482 acre-feet [AF] in 2014), with the remainder derived from the four retail purveyors' own local sources. The agency's water supplies come mostly from Northern California's San Francisco Bay/Sacramento-San Joaquin River Delta via the SWP contract (expiration in 2038). SWP supplies have been significantly affected by the statewide drought in California in recent years but the agency has acquired other supplies and maintains sizable reserves of stored water. The retail water purveyors are not required to buy minimum amounts from the agency in any given year. As retail water sales decline, the retail water purveyors reduce the amount of water purchased from the agency. CLWA's rate change to recover a greater share of its fixed costs through the fixed portion of the water rate helps to mitigate the revenue impact of potentially lower water sales.

USING STORED WATER TO BUFFER DROUGHT IMPACTS

The SWP contract provides the agency with rights to 95,200 AF but actual deliveries are often less than this amount. In addition to its SWP contract, the agency has made investments in additional water supplies and storage agreements to buffer the highly variable nature of the SWP water allocation. The agency has five groundwater banking and exchange accounts in three separate programs and has accumulated 142,870 AF of banked and exchanged water as of February 2015. This is more than three years' worth of the projected 35,900 AF supplemental water demand in 2015 from the four retail purveyors in aggregate. To meet this demand, the agency expects to receive approximately 19,000 AF from the SWP contract (20% allocation) plus 5,000 SWP carryover from 2014. The agency also has secured acquisition of up to 11,000 AF annually for 30 years, through 2037, from the Buena Vista and Rosedale-Rio Bravo Water Storage District and projects balancing water demand through bank and exchange withdrawals.

Given the severity of the current drought and uncertainty with regards to SWP allocations in any year, the agency's water bank mitigates water supply risk in the short to medium term. The agency has also begun adding recycled water to its supply source. Although currently a minimal amount (about 400 AF annually), the agency projects that in could grow to 17,000 AF of recycled water annually in the future.

DIVERSE AND STABLE REVENUE BASE

Financial operations of the agency are stable, facilitated by diverse revenue sources comprised of wholesale water charges, a portion of the county's 1% property tax levy, and facility capacity fees (connection fees). Additional revenues that are not expected to be recurring include settlement agreements and sale of water in excess of storage capacity to non-member purveyors (fiscal years 2013 and 2014).

The agency's portion of the county's 1% property tax revenues comprised an average 40% of the agency's total revenues over the last five fiscal years. Although generally these are considered a stable revenue source, the state diverted a significant portion of these revenues in fiscal years 2005 and 2006. The agency absorbed the two-year loss with its ample cash and reserves to maintain DSC and to fund the capital budget. Future diversions by the state are now less likely and would require state repayment of the funds.

During fiscal years 2013 and 2014, the agency generated an aggregate \\$11.9 million in non-recurring revenue from sales of water it had acquired in excess of its storage capacity. Although all of the agency storage facilities and reservoirs are robust, the agency does not plan to sell excess water given the ongoing uncertainty of the statewide drought.

INCREASED FIXED CHARGE COMPONENT IN RATE STRUCTURE

The board adopted rate increases effective for fiscal years 2014 through 2016 and a new water rate structure to include a fixed component for the first time. The fixed charge component is around 75% of the total water charges and is projected to generate 60% of annual debt service. Although the agency is in litigation over the allocation method of the fixed costs with one of the retail purveyors, management does not expect any adverse financial impact from this litigation, since the allocations, not the amount of total allocated fixed costs, are the subject of the litigation. The agency has appealed a recent court ruling in favor of the plaintiff's claim against the fixed costs rate structure and has also begun a new rate study to revise its rate structure. The retail water purveyors are billed monthly and are required to pay within a 30 day term to remain eligible for future water deliveries.

SOUND FINANCIAL METRICS

For fiscal 2014 all-in debt service coverage was a healthy 1.7x, or 1.4x excluding facility capacity fees. However, these results were boosted by one-time sale of excess water that generated \\$7.8 million in non-recurring revenue to the agency. All-in debt service coverage without the \\$7.8 million would have still been adequate at 1.4x.

Management's projected operating results for fiscal years 2015 through 2020 show all-in DSC to range between a low 1.5x to a high 1.97x (1.1x to 1.4x net of facility capacity fees). These projections assume steady increases in facility capacity fees and the agency's share of the 1% property tax resulting from gradual improvement in area development.

Liquidity in fiscal 2014 was exceptionally strong. The agency reported \\$87.1 million, or 1,735 days of operating expenditures, in unrestricted cash and investments in fiscal 2014. This amount has declined in the past two years and further potential declines are possible for capital or water purchases, which would still allow liquidity levels to remain robust and in compliance with the agency's reserve policy.

SENIOR LIEN DEBT

The agency has one remaining series of senior lien bonds (series 1999) outstanding. These bonds were issued as capital appreciation bonds with no maturities until fiscal 2022. Although, the agency currently has no debt service associated with this senior lien, annual \\$10.4 million debt service payments will be made between fiscal years 2022 through 2031.

HIGH DEBT LOAD; MANAGEABLE CAPITAL PLAN

The agency's five-year fiscal 2016 through 2020 capital improvement plan (CIP) totals approximately \\$97.7 million of which 87% will is projected to be debt funded and the remainder with pay-go. The agency plans to return to market with a \\$32.3 million bond issuance in fiscal 2018 and another estimated \\$36.5 million in fiscal 2020. The projected debt amount could decline given the agency's strong cash levels.

Debt amortization has accelerated due to lack of new money bond issuance over the last few years. Principal payout is slightly below average at 47% in 10 years, but accelerates significantly when the senior lien bonds begin to mature in seven years. Debt per capita at just under \\$1,200 remains elevated compared to its wholesale peers. Debt per capita is projected to rise modestly to roughly \\$1,235 in five years, with issuance of the planned debt.