OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to the following Western Municipal Water District Facilities Authority, California debt:

--Approximately $52.1 million series 2016A adjustable-rate water revenue refunding bonds.

The bonds will be sold via negotiation during the week of Jan. 11, 2016. The proceeds will be used to refund and restructure the district's outstanding 2009B bonds and to pay costs of issuance. Principal will be restructured into later years.

In addition, Fitch affirms the following ratings:

--$99.1 million water revenue bonds series 2009B, 2010A and 2010B;
--$43.8 million series 2012A bonds (underlying long-term rating) and associated bank bonds should they ever be held by the letter of credit provider.

The Rating Outlook is Stable.

SECURITY
The bonds are payable from net revenues of the district's water and sewer utilities.

KEY RATING DRIVERS
SOLID FINANCIAL PERFORMANCE: Financial performance has been strong through recent periods of drought and economic stress. All-in debt service coverage (DSC) averaged a strong 2.6x over the three fiscal years ended June 30, 2015. Liquidity remained sound with 326 days unrestricted cash and investments on hand at the end of fiscal 2015.

IMPORTED WATER SUPPLY DEPENDENCE: The district is dependent on an imported water supply, as is much of the region, which is subject to availability challenges and cost pressures.

DEMAND REDUCED BY DROUGHT: State water regulators have ordered mandatory conservation measures that have sharply reduced the district's water sales volumes. Declines in sales are partially offset by expense reductions in water purchases, keeping the financial impact of drought manageable so far. The district's board has raised rates as needed to maintain solid financial performance and to pass through increases in imported water costs.
MODEST DEBT BURDEN: The debt burden is low, and future borrowing plans are modest. Investment in the system has been strong and proactive.

DEBT RESTRUCTURING TRANSACTION: The current transaction is designed to delay principal repayment on certain growth-related projects until connection fees fully recover from the recent housing downturn. The delay is not a material credit concern so long as it is temporary.

LARGE SUBURBAN SERVICE AREA: The district provides essential water and sewer services to a significant Riverside County service area that is growing again after a deep economic slump. Growth pressures remain manageable.

RATING SENSITIVITIES

DECLINES IN FINANCIAL PERFORMANCE: The rating could come under downward pressure if sustained declines in financial performance occur. The Stable Outlook reflects Fitch's expectation that margins will remain healthy, even with lower water sales mandated by the state.

CREDIT PROFILE
Western Municipal provides essential water and sewer services to a population of 920,800 residents of a 527-square-mile service area in western Riverside County. It provides retail water services to 23,636 customers, retail sewer services to 8,303, and wholesale water to eight water retailers. The district is part of a broad and diverse suburban economy that has largely recovered from the deep housing downturn that hit the region in the last decade. The county's unemployment rate trends somewhat higher than the nation, but has declined sharply to 6.5% with four years of rapid job growth. The district's assessed value is growing at a rapid pace again (7.7% in 2015) with recovery in home prices and a nascent resumption in development.

SOLID FINANCIAL PERFORMANCE THROUGH STRESSFUL PERIOD
The district's financial performance has continued at strong levels despite significant revenue impacts of California's severe four-year drought. All-in DSC was very strong at 3.4x in 2014 and still solid at 2.3x with significant cuts in water use in fiscal 2015. Free cash-to-depreciation averaged a solid 140.5% over the period, providing significant funds for investment in the system.

Revenues are reasonably diverse with significant property tax, sewer and fixed water meter fees providing a stable base underlying the district's variable water and connection fee revenues. All-in DSC excluding volatile connection fees averaged a sound 2.2x over the past two years.

The utility's five-year financial forecast shows all-in DSC without connection fees averaging better than 2.5x over the next five years. The increase in coverage is largely driven by a reduction in debt service related to the current restructuring and not a reflection of significantly improved underlying financial performance. Still, margins are sufficiently strong that coverage would remain above 2x even without debt restructuring and would be unlikely to pressure the rating without a significant and sustained decline in revenues that was not offset with reductions in expenditures or rate adjustments.

The district's revenue structure provides a healthy matching between variable expenses and revenues, particularly in its wholesale business. The district sells imported water to eight wholesale customers (providing about 70% of water sales in acre feet) and passes the cost of purchased water from the Metropolitan Water District of Southern California (Metropolitan, revenue bonds rated 'AA+'/Stable Outlook) directly through to those customers. Rates include an administrative fee for the district's costs. The cost-based nature of the wholesale water business provides stability to the district's overall financial performance. Retail rates also include surcharges that allow the district to pass along imported water costs, albeit with less precise matching than wholesale charges.

Liquidity has been consistently solid with $92.3 million of unrestricted cash and investments, or 326 days of operating expenses, on hand at the end of fiscal 2015.

SOLID RATE DISCIPLINE
The district's elected board of directors has raised rates as necessary to maintain strong financial performance, passing through large rate increases related to imported water costs in a disciplined and formulaic manner. The utility increased retail water and sewer rates by an average of 8.9% annually over the five years ended 2015 to offset rising debt service and imported water costs. Retail water and sewer rates are somewhat elevated at 2.1% of Riverside County's median household income, but appear comparable to other local providers of imported water in this arid region.

IMPORT DEPENDENCE, REGULATORY PRESSURE
The district imports about 83% of its water from the Colorado River and the California State Water Project (SWP) via Metropolitan. Metropolitan's significant investments in water storage capacity have somewhat reduced concerns about import dependence and provided a solid buffer during the current drought. Actual supply constraints have required fairly manageable reductions in water sales with Metropolitan requiring a 15% reduction in sales this year. However, state regulatory action has forced much deeper conservation. The California State Water Resources Control Board has ordered the district to reduce water usage by 32% from 2013 levels in its retail service area. The district's wholesale customers have faced similar mandates. The district forecasts a $6.6 million decline in wholesale and retail water revenues and a $6.7 million decline in related water expenses in fiscal 2016, as purchases of imported water and pumping costs decline with water sales.

DEBT TO REMAIN MODERATE
The district's debt burden of $155 million was quite low on a per capita basis at $168 and moderate as a percent of net plant assets at 41% at the end of 2015. The district's $81.6 million five-year capital improvement plan will require modest additional borrowing of about $24 million. Debt is projected to hold steady at $175 per capita in five years.

BOND RESTUCTURING IS CREDIT NEUTRAL
The current transaction will refund the district's series 2009B bonds and is designed to delay principal amortization for five years until connection fees recover enough to fully support the growth-related project initially financed by the debt. The district plans to issue multi-modal bonds with a five-year put in 2020 and no principal payments during the initial five years outstanding. It plans to remarket the bonds as fully amortizing fixed-rate debt in five years.

The restructuring appears to be driven by a policy decision to pay for growth with connection fee revenues, not by financial necessity. The district will use connection fee revenues while the bonds are in the initial five-year interest-only mode to reimburse itself for debt service incurred for growth-related projects during the housing downturn. It plans to resume normal principal payments thereafter. While delays in amortization are generally negative for credit quality, the district's low debt burden and strong underlying financial performance offset any impact on the rating.