OREANDA-NEWS. Fitch Ratings has affirmed the 'AA+' rating on the following Helix Water District, California (the district) outstanding obligations:

--$13.9 million outstanding water revenue refunding bonds series 2009.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first pledge of net revenues from the district's water system. In addition, the bonds are secured by a pledge of all moneys (including earned interest) in the bond service fund and reserve fund.

KEY RATING DRIVERS

STRONG COVERAGE, ADEQUATE LIQUIDITY: The district's debt service coverage (DSC) is strong and projections indicate DSC will remain favorable while liquidity is expected to remain adequate.

LOW DEBT LEVELS: Leverage ratios are very low and should remain low for the foreseeable future as capital needs are manageable and can be deferred, if needed.

RELIANCE ON IMPORTED WATER: The district purchases anywhere from 65% - 98% of its water supply from the San Diego County Water Authority (SDCWA; water revenue bonds rated 'AA+' by Fitch Ratings). Its reliance on imported water is a vulnerability and has subjected the district to rapid cost escalation but also provides expenditure relief in years of declining water sales since purchased water costs can be curtailed as well.

CONTINUED RATE HIKES: Revenue raising flexibility has been demonstrated by the district's actions to raise rates by an average of 7.1% annually over the last five years. The district is planning a five-year rate package with the inclusion of a pass through of imported water costs. District rates are above Fitch's affordability threshold but remain competitive for the region.

MATURE, STABLE SERVICE AREA: The service area is nearly built-out, limiting growth pressures.

RATING SENSITIVITIES

DROUGHT PRESSURES: The district appears poised to withstand the effects of a decrease in water sales over the short term, but further cuts beyond those currently expected could pressure operational revenues. Reduction in expenditures and/or additional rate increases may be necessary to maintain current DSC margins and thereby maintain rating stability.

CREDIT PROFILE

The district comprises about 49 square miles in southern San Diego County, and serves a population of approximately 271,617 in the cities of La Mesa, Lemon Grove and El Cajon, the unincorporated area of Spring Valley and other surrounding unincorporated areas.

STRONG COVERAGE, ADEQUATE LIQUIDITY DESPITE CONSERVATION
Financial performance in terms of DSC remained strong and better than expected at 5.9x in fiscal 2013 and 6.0x in fiscal 2014x. DSC is estimated at 4.3x in fiscal 2015 and projected at 4.2x in fiscal 2016 due to water conservation. DSC is expected to increase thereafter through fiscal 2019 with the aid of projected rate hikes as well as the inclusion of an automatic pass through for imported water increases.

Liquidity is just adequate, with an estimated 140 days cash on hand at fiscal year-end 2014. Given the district's plans to entirely fund its capital improvement plan (CIP) from pay-go cash balances are projected to remain at about the same level going forward.

In response to the Governor's recent executive order to reduce annual water usage by 25% over 2013 levels, the State Water Resource Control Board (SWRCB) issued a revised plan for mandatory water cuts for all of California's public water providers. The district's required reduction is 20% over 2013 levels; the district achieved 25% as of June 2015.

To achieve the conservation, the district's board adopted an Emergency Drought Response Plan on May 20, 2015 that included increased public outreach, education, and restrictions. The district plans to use $1 million in fiscal 2016 from a legal settlement received in fiscal 2015 and $1.5 million of its $3.8 million rate stabilization fund in fiscal 2017 to help offset lower consumption. Usage reductions are further offset by reductions in imported water purchases, which are expected to decrease by $4 million in fiscal 2016. The district also reduced its capital spending, which primarily consists of ongoing repair and replacement, for fiscal 2016 by $4.3 million to $14.5 million.

VERY LOW AND DECLINING DEBT BURDEN

Leverage ratios are very low with debt per customer at $273 and debt to plant at 7% as of fiscal-year end 2014. Debt levels are projected to decline further given the district has no future debt issuance plans. The district's five-year CIP through 2020 totals a manageable $63 million, of which the largest project ongoing pipeline replacement. The focus of the CIP on renewal of existing system assets affords the district a significant degree of flexibility relating to timing of CIP expenditures.

CONTINUED RATE HIKES

The district's largest expense is purchased water from SDCWA (49% of the district's fiscal 2014 budget). Reflecting ongoing SDCWA increases, the district has raised rates annually, most recently 3% in fiscal 2015 and 9% in fiscal 2016 based on usage of 7,500 gallons per month. It plans to implement a five-year rate package through fiscal 2020, with base increases of 4%-6% per year along with annual pass-through charges of imported water costs. Rates assuming 7,500 gallons of usage currently are equal to about 1.4% of median household income, above Fitch's affordability threshold of 1.0%. Nevertheless, the district's water rates are in the bottom third when compared to other service providers in the area, effectively mitigating affordability concerns.

RELIANCE ON IMPORTED WATER

Anywhere from 65%-98% of the district's raw water supply is derived from SDCWA, which obtains water from the Metropolitan Water District of Southern California (MWD; revenue bonds rated 'AA+' by Fitch). The remainder of its supplies comes from local water from El Capitan (storage rights of 10,000 acre-feet [af]) as well as the Cuyamaca reservoir (8,192 af capacity) and Lake Jennings (9,790 af capacity), both of which the district owns.

The district owns and operates the 106 million gallon per day (mgd) R.M. Levy Water Treatment Plant (WTP) and has the ability to increase capacity to 120 mgd, though it does not expect to do so for 15 to 20 years as current average production is 50-60 mgd. The WTP supplies potable water to the district and, through agreements with SDCWA, to Otay Water District, Padre Dam Water District, and Lakeside Water District.

MATURE RESIDENTIAL SERVICE AREA

San Diego County (implied general obligation rating of 'AAA' by Fitch Ratings) has a diverse economy centered on manufacturing, military and related defense industries, and tourism. The service area is primarily residential and about 95% built out. The top ten customers comprise less than 5% of operating revenues. County unemployment at 5.1% as of March 2015 was below state (6.5%) and national (5.6%) levels and income and wealth indicators remain above average.