OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' rating to the following Clackamas River Water, Oregon debt:

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

The bonds are scheduled to sell by negotiation on or about Jan. 28, 2016. The proceeds will fund the first phase of the district's north-south pipeline project and pay costs of issuance.

The Rating Outlook is Stable.

SECURITY
The bonds are payable from net water revenues after payment of operations and maintenance expenses.

KEY RATING DRIVERS

SOLID SERVICE AREA: The utility is the monopoly provider of essential retail water service to Clackamas County, Oregon, a healthy suburban service area south of Portland, as well as wholesale water to a fast-growing neighboring community.

ELEVATED DEBT BURDEN: The rating reflects the utility's plan to issue approximately $40 million of debt to fund a major construction project that will connect the utility's south service area to its water treatment plant in its north service area. Debt ratios will be significantly above average at about $3,300 per customer after a second planned borrowing to complete the project.

SOUND FINANCIAL PERFORMANCE: All-in debt service coverage is projected to be sound at about 1.9x after debt issuance, but has varied widely in the past. Liquidity is sound with 474 days cash on hand at the end of fiscal 2015.

HEALTHY SUPPLY POSITION: The utility has rights to significant supplies of Clackamas River water and adequate treatment capacity. The utility could be forced to curtail production during droughts, but has no history of rationing or supply shortages.

RATING SENSITIVITIES

DOWNSIDE RISK FROM FINANCES: The rating on the Clackamas River Water bonds could come under downward pressure if approved rate increases prove insufficient to support the proposed debt and actual financial performance is significantly weaker than forecast.

LIMITED UPSIDE POTENTIAL: The rating is unlikely to move higher in the near term due to expected increases in the debt burden.

CREDIT PROFILE
The utility provides retail water service to about 12,000 customer accounts in suburban Clackamas County, Oregon, south of Portland. It also provides wholesale water to the neighboring Sunrise Water Authority. The combined wholesale and retail service areas are home to about 80,000 people.

ADEQUATE FINANCIAL PERFORMANCE
Financial performance has been somewhat erratic historically, but approved rate increases are forecast to provide adequate debt service coverage. DSC on an existing small debt burden has ranged widely. The utility undertook a series of significant rate increases, beginning in fiscal 2014, to improve financial performance and to prepare for major investments in its infrastructure. The rate increases pushed coverage to an extraordinarily high 10.3x in fiscal 2015, up from a low of 1.3x in fiscal 2011 reflecting a several year period without rate increases.

The utility's financial forecast shows coverage averaging a healthy 1.9x beginning in fiscal 2017, when full debt service payments begin on the current issue. The forecast appears reasonable with no increase in demand forecast and minimal reliance on development-related charges. Board-approved rate increases are the main driver of forecast revenue gains. Expense assumptions are conservative with projected increases exceeding historical gains.

While Fitch believes the forecast is reasonable, forecasts are inherently subject to some uncertainty. A sustained deviation from the expected results (due to changes in water use, failure to implement adopted rates or other unexpected events) would put downward pressure on the rating.

STABLE REVENUES, SOLID LIQUIDITY
The utility's rate structure provides a reasonable degree of revenue stability. About half of Fitch's standard 10 hundred cubic feet (HCF) bill is provided by fixed meter fees, which is high for the sector.
Liquidity is sound, allowing the utility to weather normal, weather-relate fluctuations in water usage and unexpected expenses. The utility had $7.9 million of available reserve, or 474 days cash, on hand at the end of fiscal 2015. Fitch's liquidity measure includes both unrestricted cash and investments and board-restricted reserves that can be unrestricted at policymaker discretion (rate stabilization and capital reserve funds).

ELEVATED DEBT BURDEN
The utility is issuing a significant amount of debt to fund a major construction project to fund its north-south connector project. The project will allow the district to sell its own lower cost water supplies in the south service area and to make greater use of its underutilized water treatment plant.

Current debt levels are very low, but the $38.8 million north-south connector project will push debt to levels significantly above average. In addition to the current offering, the district plans to issue about $15 million of additional bonds before project completion. Debt is projected to rise to about $2,090 per customer after the current offering and to about $3,300 over the course of construction. The amortization schedule is typical with level DS, but amortization is slow because the new issue is the bulk of the debt burden.

Bond covenants are typical. The rate covenant is strong at 1.25x, and the additional bonds test is solid at 1.1x excluding connection fees. The district may cash fund a debt service reserve fund or fund it with a surety.

HEALTHY SUPPLY POSITION
The utility's supply position is strong. The utility has ample rights to a reasonably reliable supply of surface water. The utility has certified water rights to 31.2 MGD of water from the Clackamas River, more than three-times recent usage. Treatment capacity is also significantly in excess of recent sales. The river is fed by runoff from a large drainage basin the nearby Mt. Hood National Forest. Surface water supplies can be limited by drought, but the utility has never experienced a curtailment of diversions.

SOLID SERVICE AREA
The utility serves unincorporated suburban areas in Clackamas County, Oregon. Most customers are residential. The customer base is only moderately concentrated with the top 10 retail customers providing about 12% of revenues. The top customer list includes a healthy mix of home owners associations, one government and industrial/commercial users.

The regional economy is solid with ratepayers having access to employment throughout the Portland metropolitan area. Clackamas County incomes are strong at about 121% of U.S. median household income. The individual poverty is low at less than 10%. The non-seasonally adjusted unemployment rate was just below the national average at 4.7% in November 2015.