OREANDA-NEWS. January 26, 2016. Fitch Ratings assigns an 'AA' rating to the following Cucamonga Valley Water District Financing Authority, California debt:

--Approximately \\$25 million water revenue refunding bonds series 2016.

The bonds are scheduled to sell via negotiation on or about Jan. 28, 2016. The proceeds will refund the district's 2006 (all maturities) and 2009 (selected maturities) senior lien water revenue bonds and pay costs of issuance.

In addition, Fitch affirms the following:
--\\$48.6 million outstanding water revenue bonds series 2012 and series 2014.

The Rating Outlook is Stable.

SECURITY
The bonds are backed by a subordinate lien on net water revenues of the Cucamonga Valley Water District (the district).

KEY RATING DRIVERS
STRONG SERVICE AREA: The district is the monopoly provider of essential water services to the affluent suburban community of Rancho Cucamonga in western San Bernardino County within close commuting distance of major southern California employment hubs.

HEALTHY FINANCIAL PERFORMANCE: All-in debt service coverage (DSC) has averaged a solid 1.9x over the three fiscal years (FY) ended June 30, 2015 and is likely to remain near that level over the next five years. Liquidity is strong with 320 days cash on hand at the end of 2015.

DISCIPLINED RATE-SETTING: The district's board of directors has exhibited good rate discipline, raising rates as needed to maintain strong financial performance. Automatic adjustments for imported water costs are an added strength. The board has imposed drought rates to offset state-required conservation due to a record California drought.

DIVERSE, ADEQUATE WATER SUPPLY: The district has adequate water supply for its eventual build-out population with a reasonably diverse mix of sources, including imported water, local surface water, local ground water and recycled water. It appears well positioned to withstand near-term drought pressures.

LARGE DEBT BURDEN: Debt levels are well above average due to the purchase of significant water rights that helped create the district's healthy supply portfolio. High debt levels are the district's primary credit weakness, but are somewhat offset by strong financial and operating profiles.

STRONG MANAGEMENT PRACTICES: The district's debt and financial policies are strong, and board oversight appears quite good with regular financial updates to policymakers and strong policymaker expertise in water issues.

RATING SENSITIVITIES

FINANCES, DEBT DRIVE RATING: The rating of the Cucamonga Valley Water District is sensitive to shifts in fundamental credit factors, particularly rate-setting behavior and financial performance. The rating is unlikely to move higher in the near term due to the elevated debt burden.

STATEWIDE DROUGHT PRESSURES: The rating could come under downward pressure if policymakers fail to adjust rates to maintain financial performance in the face of a prolonged drought.

CREDIT PROFILE
The utility provides retail water services to a significant suburban service area with a population of about 188,000 residents in western Riverside County, California.

HEALTHY FINANCES DESPITE DROUGHT
Financial performance has remained strong through a stressful period of deep drought. All-in DSC was strong and unchanged at 1.9x in fiscal 2015 despite an 11% decline in the volume of water sold. The district's net revenues have proven fairly stable in the current drought due to timely rate adjustments and offsetting reductions in water purchases. The utility benefits from a significant fixed meter fee that provides about 30% of revenues, but overall revenues remain somewhat volatile with water sales revenue varying with climatic and economic conditions.

The California State Water Resources Control Board ordered the utility to reduce water sales by 32% compared to 2013 levels beginning in June 2015 in reaction to the worst drought in modern California history and the depletion of state reservoirs. The utility is likely to see the fullest effect of the conservation order in fiscal 2016, but approved rate increases are likely to limit the decline in financial performance to manageable levels. The utility imposed drought rates to offset the near-term impact of conservation, and it raised underlying fixed water fees significantly to reduce ongoing dependence on volumetric water sales. The utility's reasonably conservative financial forecast shows coverage of 1.65x or better through 2019. Further debt issuance or unexpectedly large declines in water usage could push coverage lower, but Fitch expects coverage to remain solid across the period absent a reversal in rate discipline.

The district had \\$36.5 million of unrestricted cash and investments, or 320 days of operating cash, on hand at the end of 2015. Liquidity has been consistently strong, averaging 315 days over the past five years. The utility budgets to achieve a robust set of board reserve policies approved in 2012.

SOLID RATE DISCIPLINE
Cucamonga Valley's board has adjusted rates in a timely manner to maintain margins. The district raised fixed meter fees by about 15% a year and volumetric rates by about 4% a year in a four-year rate package approved in 2015. The rate plan also includes an escalator provision that protects against unexpected imported water cost increases, as well as additional drought rates that aim to stabilize net revenues at various drought stages.

Rates remain affordable compared to national benchmarks with 7,500 gallons of water costing 0.5% of median household income. Rates based on the arid region's much higher actual usage also appear affordable compared to neighboring providers. Recent rate increases have been uncontroversial.

HIGH DEBT LEVELS
The district's \\$203.8 million debt burden at the end of fiscal 2015 was high at \\$4,070 per customer and 56% of net plant assets. Debt is expected to decrease slowly over the next five years to about \\$3,400 per customer, given limited future borrowing plans.

The district's debt structure is uncomplicated. The utility's outstanding bonds are all fully amortizing, fixed-rate debt. Amortization is somewhat slow with just 35% of debt repaid in 10 years and 83% in 20 years. The district is issuing the current bonds under its subordinate working lien. Covenants are typical with a 1.25x rate covenant and additional bonds test and no debt service reserve fund. The district will have about \\$112.1 million of senior obligations outstanding in the closed senior lien after the refunding.

Concern about elevated debt levels is partially offset by the utility's solid financial performance and the positive impact that the financed assets are likely to have on the utility over the long term. About half of the utility's debt is related to the acquisition of significant water rights that amortize over the next 20 years, but will provide substantial benefits to the utility over the longer term.

HEALTHY SUPPLY PORTFOLIO
The utility's supply position is stronger than many southern California water suppliers as a result of its proactive acquisition of local water rights and investments in treatment capacity over the years. The district produces 50% to 60% of its water from local supplies. Cucamonga has further reduced its exposure to near-term drought pressures through the acquisition of more than a year's supply in banked local ground water credits.

The utility remains dependent on imported supplies from the Colorado River and the State Water Project (SWP) via the Metropolitan Water District of Southern California (Met Water, revenue bonds rated 'AA+'/Stable Outlook) and the Inland Empire Utilities Agency. Imported water is both more expensive and less reliable than local ground water supplies, but the Met Water's significant investments in water storage capacity have somewhat reduced concerns about import dependence.

STRONG SERVICE AREA
The district's service area is strong. The high-income suburb of Rancho Cucamonga makes up 90% of the customer base. Median household income is 144% of the national level, while poverty is less than half of the national level. The district is located in foothills of the San Gabriel Mountains within commuting distance of major Southern California employment centers in Los Angeles, Orange and Riverside counties. The service area is primarily suburban and residential, but it also includes significant office parks, shopping centers, and educational institutions, as well as logistics and manufacturing enterprises. Rancho Cucamonga's unemployment rate trends somewhat lower than the national average and well below state and county levels. The jobless rate was low at 4.4% in November 2015.